The total revenue can be derived by simply taking price and multiply with the

The total revenue can be derived by simply taking

This preview shows page 13 - 17 out of 62 pages.

The total revenue can be derived by simply taking price and multiply with the respective quantity. Thus total revenue is depicted in column 3 in table 7.3. When we include total cost in column 4 and calculate profit based on the formula Total profit = total revenue - total cost We derive values for profit as depicted in column 5. As seen from table 8.3, profit is maximized at output 7, when the highest profit attained is $5. We can also illustrate the profit maximizing output graphically, as shown in diagram 7.6. The profit maximizing output is attained when the vertical difference between TR and TC (total profit) is greatest.
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Chapter 7 Perfect Competition & Monopoly 270 Table 7.3 Total revenue, total cost and profit Quantity price total revenue total cost profit -------------------------------------------------------------------------------------------------- 0 5 0 4 -4 1 5 5 9 -4 2 5 10 13 -3 3 5 15 16 -1 4 5 20 18 2 5 5 25 21 4 6 5 30 25 5 7 5 35 30 5 8 5 40 36 4 ------------------------------------------------------------------------------------------------- TC TR TR,TC Quantity Diagram 7.6 Profit maximising output by the aggregate approach Profit Maximising by Calculus Graphical analysis using the MR-MC and TR-TC approaches are shown in diagram 7.5 and 7.6 respectively (employs data from table 7.2 and 7.3.) Profit maximisation can also be derived by calculus as shown in the example on the next page:
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Chapter 7 Perfect Competition & Monopoly 271 Example 1. The demand function for a product sold by a perfect competitor is given as: P = 20 and the marginal cost is MC = -10 +3Q Calculate profit maximising price and quantity. Suggested solution For profit maximisation to take place, MR=MC Given P = 20 Next, since P = MR = DD MR = 20 Finally equating MR = MC 20 = - 10 + 3Q 3Q = 30 Q = 10 hence when Q = 10 2. The demand for a product sold by a perfect competitor is P = 30. The firm’s marginal cost function is given as MC = 1.5Q Calculate the firm’s equilibrium quantity Suggested solution The solution requires us to equate MR =MC First, we have to derive the MR function. Given P = 30 since P = MR MR = 30 Equating MR=MC 30 = 1.5Q Q = 45
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Chapter 7 Perfect Competition & Monopoly 272 The case of supernormal, normal profit and losses in the short run Case 1: Supernormal profit The profit maximizing objective of the firm does not guarantee that the firm will definitely earn economic profit. The preceding profit maximizing example (diagram 7.5) assumed that the market price was high enough for the firm to earn an economic profit. Given the vagaries of demand and supply, there is no reason to expect the market price to be always high. It is just as likely that a firm will be faced with prices that result in the firm earning only normal profit or even worse, suffering losses. This could be due to over supply, poor management or high operational costs. Case 2: Normal profit Now, lets discuss the normal profit situation. A normal profit is defined as the rate of return just sufficient to attract the capital investment necessary to operate and develop a firm. In layman term – “cukup makan”. Diagram 7.7 illustrates a normal profit situation for a perfectly competitive firm. Given the horizontal demand curve, P = MR, and U-shaped cost curves, short run equilibrium occurs when P = MR = MC = AC. Here the firm produces Q* units of output and price equal average cost. The firm earns zero economic
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