Download The total revenuetotal cost perspective and the marginal

The total revenue­total cost perspective and the marginal revenue­
marginal cost perspective are used to find profit maximizing quantities.
LEARNING OBJECTIVE [ edit ]
Use cost curves to find profit­maximizing quantities
KEY POINTS [ edit ]
In a free market economy, firms use cost curves to find the optimal point of production
(minimizing cost).
Profit maximization is the process that a firm uses to determine the price and output level that
returns the greatest profit when producing a good or service.
The total revenue­total cost perspective recognizes that profit is equal to the total revenue (TR)
minus the total cost (TC).
The marginal revenue­marginal cost perspective relies on the understanding that for each unit
sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
TERMS [ edit ]
marginal revenue
The additional profit that will be generated by increasing product sales by one unit. Total Revenue
The profit from each item multiplied by the number of items sold.
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Cost Curve
In economics, a cost curve is a graph that shows the costs of production as a function of total
quantity produced. In a free market economy, firms use cost curves to find the optimal point
of production (minimizing cost). By
locating the optimal point of production,
firms can decide what output quantities
are needed. The various types of cost
curves include total, average, marginal
curves. Some of the cost curves analyze
the short run, while others focus on the
long run.
Profit Maximization
Profit maximization is the short run or
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long run process that a firm uses to
determine the price and output level that returns the greatest profit when producing a good
or service.
Graphing Profit Maximization
There are two ways in which cost curves can be used to find profit maximizing quantities: the
total revenue­total cost perspective and the marginal revenue­marginal cost perspective.
The total revenue­total cost perspective recognizes that profit is equal to the total revenue
(TR) minus the total cost (TC). When a table of costs and revenues is available, a firm can
plot the data onto a profit curve. The profit maximizing output is the one at which the profit
reaches its maximum .
Costs
TC TR
C
B
A
0
Output
Profit
Total cost curve
This graph depicts profit maximization on a total cost curve.
The marginal revenue­marginal cost perspective relies on the understanding that for each
unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost
(MC). If the marginal revenue is greater than the marginal cost, then the marginal profit is
positive and a greater quantity of the good should be produced. Likewise, if the marginal
revenue is less than the marginal cost, the marginal profit is negative and a lesser quantity of
the good should be produced .
Price
MC
ATC
P
C
A
D=AR=MR
B
Q
Quantity
Marginal cost curve
This graph shows profit maximization using a marginal cost curve.
Profit maximization is directly impacts the supply anddemand of a product. Supply
curves are used to show an estimation of variables within a market economy, one of which is
the general price level of the product.