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Profits and Losses with the Average Cost Curve. Does maximizing profit (producing where MR = MC) imply an actual economic profit? The answer depends on firm’s profit margin (or average profit), which is the relationship between price and average total cost.
- Profit Maximization in a Perfectly Competitive Market
Based on its total revenue and total cost curves, a...
- Reading: Profits and Losses with the Average Cost Curve
Does maximizing profit (producing where MR = MC) imply an...
- Profit Maximization in a Perfectly Competitive Market
We have found the profit-maximizing price and quantity diagrammatically, in two ways: first by drawing isoprofit curves and finding the point of tangency with the demand curve, and secondly by drawing the MR and MC curves.
- How Perfectly Competitive Firms Make Output Decisions
- Determining The Highest Profit by Comparing Total Revenue and Total Cost
- Comparing Marginal Revenue and Marginal Costs
A perfectly competitive firm has only one major decision to make—namely, what quantity to produce. To understand why this is so, consider the basic definition of profit: Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. Rather, the ...
A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price. Total revenue is going to increase as the firm sells more, depending on the price of the product and the number of units sold. If you increase the number of units sold at a given price, then total revenue will increase. If the ...
The approach that we described in the previous section, using total revenue and total cost, is not the only approach to determining the profit maximizing level of output. In this section, we provide an alternative approach which uses marginal revenue and marginal cost. Firms often do not have the necessary data they need to draw a complete total co...
Does maximizing profit (producing where MR = MC) imply an actual economic profit? The answer depends on the relationship between price and average total cost. If the price that a firm charges is higher than its average cost of production for that quantity produced, then the firm will earn profits.
- Determining the Highest Profit by Comparing Total Revenue and Total Cost. A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price.
- Comparing Marginal Revenue and Marginal Costs. The approach that we described in the previous section, using total revenue and total cost, is not the only approach to determining the profit maximizing level of output.
- Profits and Losses with the Average Cost Curve. Does maximizing profit (producing where MR = MC) imply an actual economic profit? The answer depends on the relationship between price and average total cost, which is the average profit or profit margin.
- The Shutdown Point. The possibility that a firm may earn losses raises a question: Why can the firm not avoid losses by shutting down and not producing at all?
In order to make a profit, the firm at least has to meet the minimum of its average cost curve. So at any price below $17, we'll be profit maximizing at a point where price is equal to marginal cost, and notice that all of these prices are below average cost.
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In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short).
