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An overview of profit maximization in perfectly competitive markets. It covers the concepts of total revenue, marginal revenue, marginal cost, and the relationship between them in determining the profit-maximizing level of output for a firm. It also discusses the firm's supply curve and the decision to stay open or shut down based on profitability.
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Econ Dept, UMR
Presents
vv The BreakThe Break--even point, andeven point, and vv (^) The Shut down pointThe Shut down point
vv MR =MR = ∆∆ in TR /in TR /∆∆ in Qin Q
vv MR = PMR = P
$
0
q/t
v v The input mix is such that MPThe input mix is such that MPii/P/Pii = MP= MPjj/P/Pjj for all variable inputs i and j used for all variable inputs i and j used v v The cost curves drawn are the lowestThe cost curves drawn are the lowest possiblepossible
q TFC TVC MC P=MR TR TC TR-TC 0 $55 $ 0 $-- $ 40 1 55 45 40 2 55 65 40 3 55 70 40 4 55 80 40 5 55 95 40 6 55 120 40 7 55 155 40 8 55 200 40
TC TR $
(^5555)
(^280280)
(^210210)
= 7= 7
q/t
$ MC
MR
q 1 q 2 q 3 q 4
uu^ Consider the quantity qConsider the quantity q 11
uu^ At qAt q 11 MR>MC. ThisMR>MC. This means that themeans that the additional revenue fromadditional revenue from selling one more isselling one more is greater than the cost ofgreater than the cost of making one more.making one more.
uu^ This means the firm willThis means the firm will make more profit bymake more profit by making one more, somaking one more, so they willthey will
uu^ The same is true at qThe same is true at q 22
q/t
$ (^) MC
MR
q 1 q 2 q 3 q 4
uu And at qAnd at q 44 , MR<MC., MR<MC. This means that itThis means that it costs more to makecosts more to make one more than it willone more than it will bring in when it isbring in when it is soldsold
uu^ This means the firmThis means the firm will lose moneywill lose money
uu^ So the firm wouldSo the firm would want to decreasewant to decrease production to bringproduction to bring MC downMC down
q/t
$ (^) MC
MR
q 1 q 2 q 3 q 4