And in the short run the firm has a fixed input plant Thus it can adjust its

# And in the short run the firm has a fixed input plant

This preview shows page 8 - 13 out of 37 pages.

And, in theshortrunthe firm has afixed input(plant). Thus it can adjust itsoutputonlythrough changes in the amount ofvariable inputs. In other words, it adjusts its variableinputs to achieve the output level that maximizes profitTwo Approachesto determine the level of output at which a firm will obtain maximumprofit or minimum loss:total revenuetotal cost approachililthmarginal revenuemarginal cost approachBoth approaches apply to all firms irrespective of the type of market structures.Total RevenueTotal Cost approachCft dith thk tithtitifiillkConfronted with the market price, the competitive firm will ask:Should I produce this product?If so, in what amount?Whifi (l)illli?What economic profit (or loss) will realize?•Profit = TRTC•Profit is maximized where the vertical distance between TR and TC is maximized•Profit is maximized where the vertical distance between TR and TC is maximized•Breakeven points are where TR=TC
QTFCTVCTCTRProfit or Lossp=\$131p=\$131Loss0\$100\$ 0\$ 100\$ 0\$-10011009019013159110090190131-592100170270262-83100240340393+ 533100240340393+ 534100300400524+1245100370470655+18551003704706551856100450550786+2367100540640917+27781006507501048+29891007808801179+2991010093010301310+280
Observe that TR is a straight line while total cost first increases at a decreasing rate thenincreases at an increasing rate (eventually diminishing returns)Break Even Point: an output where firm makes normal profit but zero economic profitProfit Maximization, Perfect Competition2,000BreakBreakeven pointeven point1,4001,6001,800TCTCTRTR8001,0001,2001,400\$TCTC400600800Maximum economic Maximum economic profit \$299profit \$299BreakBreakeven pointeven point(normal profit)(normal profit)020002468101214QuantityEconomic Loss: TR<TCEconomic Loss: TR<TCProfit max. outputProfit max. output
2ndApproach: Marginal RevenueMarginal Cost ApproachFirm compares the amounts that each additional unit of output would add to total revenue(MR) and total cost (MC) . Assuming that producing is preferable to shutting down, the firm willcontinue to produce as long as MR exceeds MC. Conversely, if MC exceeds MR, the firm will notproduce that unit.Thus, as long as producing preferable to shutting down, Short run profit maximization occurswhere MR=MC Note that both MR and MC are always stated as a function of outputwhere MR=MC. Note that both MR and MC are always stated as a function of outputirrespective of the type market structures. In perfect competition MR=P.1.MR=MCRule applies only if producing is preferable to shutting down2.MR=MCRule is an accurate guide to profit maximization for ALL firms3.MR=MCRule can be restated as P=MC for perfectly competitive firms, since MR=P (onlyunder Perfect competition)11LO 7.3
QTFCTVCTCShould the firm produce Should the firm produce the 1the 1ststunit?unit?What about the 2What about the 2ndndunit?unit?What about the 9What about the 9ththunit?unit?MCMR0\$100\$ 0\$ 100110090190]MCMR\$ 90\$1318013111009019021001702703100240340]]]801317013160131310024034041003004005100370470]]]60131701318013161004505507100540640]]]801319013181006507509100780880]]]110131130131101009301030]9 units will maximize profits the same profitmaximizing result as with the TRTC approach!

#### You've reached the end of your free preview.

Want to read all 37 pages?

• Winter '13