•And, in theshort‐runthe 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 profit•Two Approachesto determine the level of output at which a firm will obtain maximumprofit or minimum loss:‐total revenue‐total cost approachililth‐marginal revenue‐marginal cost approachBoth approaches apply to all firms irrespective of the type of market structures.Total Revenue‐Total 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 = TR‐TC•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•Break‐even points are where TR=TC
QTFCTVCTCTRProfit or Lossp=$131p=$131Loss0$100$ 0$ 100$ 0$-10011009019013159110090190131-592100170270262-83100240340393+ 533100240340393+ 534100300400524+1245100370470655+18551003704706551856100450550786+2367100540640917+27781006507501048+29891007808801179+2991010093010301310+280
Observe that TR is a straight line while total cost first increases at a decreasing rate thenincreases at an increasing rate (eventually diminishing returns)Break Even Point: an output where firm makes normal profit but zero economic profitProfit Maximization, Perfect Competition2,000BreakBreak‐even pointeven point1,4001,6001,800TCTCTRTR8001,0001,2001,400$TCTC400600800Maximum economic Maximum economic profit $299profit $299BreakBreak‐even pointeven point(normal profit)(normal profit)020002468101214QuantityEconomic Loss: TR<TCEconomic Loss: TR<TCProfit max. outputProfit max. output
2ndApproach: Marginal Revenue‐Marginal 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 profit‐maximizing result as with the TR‐TC approach!
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