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Chap10 Week 5 Profit
Chap10 Week 5 Profit
Revenue
Revenue
Price (£)
AR, MR (£)
S
Pe
D
O O
Q (millions) Q (hundreds)
Price (£)
AR, MR (£)
Any individual firm is forced to
S accept the dominant, single,
market price
D = AR
Pe
5 = MR
5 10 15 = TR
D
O O 1 2 3
Q (millions) Q (hundreds)
0
5000
200 5
400 5
600 5
4000
800 5
TR (£)
1000 5
1200 5
3000
2000
1000
0
0 200 400 600 800 1000 1200
Quantity
Total revenue for a price-taking firm
6000 Quantity Price = AR TR TR
(units) = MR (£) (£)
0 0
5000
200 5 1000
400 5 2000
600 5 3000
4000
800 5 4000
TR (£)
1000 5 5000
1200 5 6000
3000
2000
1000
0
0 200 400 600 800 1000 1200
Quantity
Revenue
4
0
5 4 20
-2
6 3 18
-4
2 7 2 14
AR
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 Quantity
-2
-4 MR
TR curve for a firm facing a downward-sloping D curve
20
16
Quantity P = AR TR TR
12 (units) (£) (£)
6
TR (£)
1 8 8
MR= 6
8 2 7 14
3 6 18
4 5 20
5 4 20
4
6 3 18
7 2 14
0
0 1 2 3 4 5 6 7
Quantity
AR and MR curves for a firm facing a downward-sloping demand curve
8
Elastic
Elasticity = -1
AR, MR (£) 6
4 Inelastic
2 AR
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 Quantity
-2
-4 MR
TR curve for a firm facing a downward-sloping D curve
24
Elasticity = -1
20 In
e la
s tic s tic
a
16
El
TR
12
TR (£)
0
0 1 2 3 4 5 6 7
Quantity
Revenue and Profit
Profit Maximisation
Profit Maximisation
20
16
TR, TC, TP (£)
12 TR
0
1 2 3 4 5 6 7
Quantity
-4
-8
Profit Maximisation
16
TR, TC, TP (£)
12 a TR
4
c d
0
1 2 3 4 5 6 7
Quantity
-4
Ω =Economic Profit
-8 TΠ
Finding maximum profit using total curves
24 TC
20
e
16
TR, TC, TP (£)
f TR
12
g
4
0
1 2 3 4 5 6 7
Quantity
-4
-8 TΠ
Profit Maximisation
We can also use marginal and average curves to find that profit
stage 1: we derive a rule
profit is maximised at the quantity where
MR = MC
Measuring the maximum profit using average curves
16
MC
Profits maximised at the
output where MC = MR
12
AR
0
1 2 3 4 5 6 7 Quantity
-4 MR
Finding the profit-maximising output using marginal curves
16
MC
The key to the rule
12 MC=MR
Costs and revenue (£)
Cumulative
Marginal Marginal
4 e
profits Losses Profit-maximising
output
0
1 2 3 4 5 6 7
Quantity
-4
MR
Profit Maximisation
Some qualifications
long-run profit maximisation
the meaning of ‘profit’( referred to previously as ‘economic profit’)
What if a loss is made?
loss minimising:
still produce where MR = MC
Loss-minimising output
MC
AC
Costs and revenue (£)
AC
LOSS
AR
AR
O Q Quantity
MR
The short-run shut-down point
variable costs.
If AVC is higher or
P= AC
AR lower than that
AVC
AVC shown, the firm will
shut down, it can’t
even pay wages.
AR
O Q
Quantity