Download Profit and the Firm

Profit and the Firm
What is profit?
Profit = Total Revenue – Total Costs
Price. Q – Total Costs
Total Costs = Total Explicit Costs – Total Implicit costs
Business Profit = TR – T. Explicit Costs
• When economic profit is equal to zero, business profit is equal to
“normal” profit.
• When a firm is making less than a normal profit it may consider
leaving the industry in long run while it may continue operation
in the short run
Profit and the Firm
• A business firm’s primary objective is making
profits
• A firm that cannot remain profitable loses its value
and will eventually fail.
• Investors may tolerate or even accept temporary
losses in the hope of higher future profits, but there
is a limit to their patience.
» The demise of many internet and technology companies in recent
years is a good example of investors’ disappointment in companies
that fail to show a profit.
Profit: A Simple Case
=
TR - TC
TR = P. Q
;
P = Constant
TC = TFC + AVC . Q ;
AVC = MC
Or
TC = AFC . Q + AVC . Q
 = P.Q - AFC . Q - AVC .Q
Or we can write:
Profit = PQ - TFC - AVC.Q
=
Break-even Q: Profit
Zero
PQ -TFC -AVC.Q = 0, or Q(P-AVC) = TFC
TFC
Q b = ------------P -AVC
Break-Even Quantity
TR = P.Q
$
TC = TFC +AVC . Q
TFC’
TFC
0
Qb
Q’b
Q
Profit: The Case of Increasing
TC
Marginal Cost
Profit = P.Q - TC (Q)
TR
$
MR
MC
o
Q
Profit: The case increasing marginal
cost and downward-sloping demand
$
TC
MR
TR
MC
Q
o
Q1
Q2
Q3
$
The Profit Function
Marginal Profit = 0
Q
Q*
Profit
Profit-Maximizing Rule
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Set marginal profit = zero
Set MR = MC
Set Price = MC (Perfect Competition)
Set LMC = MR
Set LMC = Price (Perfect Competition)
Set MRPL = Wage
Set MRPK = Rent