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Lecture 7: revenue, profit
Contact
Revenue
Profit
Ing. Jiří Alina
Department of Economics– No. 13
Tel. 38777 2500
602 317 457
E-mail: [email protected]
http://www.ef.jcu.cz
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Profit Maximization
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Profit-Maximizing Level of
Output
The objective of a for-profit firm is to maximize
profit.
Profit is total revenue less the costs of the
resources (land, labor, capital) used.
Total revenue is the price of goods and services
multiplied by the quantity sold, PQ.
The goal of the firm is to maximize profits.
Profit is the difference between total
revenue and total cost.
Profit = PQ – Cost of land, labor and capital
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Total Revenue
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Total revenue
If price is fixed
TR
TR
Total Revenue = Price X Quantity
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q
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Average revenue
Total revenue
If price is fixed
If price is not fixed
AR
TR
TR
AR=MR=P=D
q
q
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Profit-Maximizing Level of
Output
Average revenue
If price is fixed
What happens to profit in response to a
change in output is determined by
marginal revenue (MR) and marginal cost
(MC).
AR
• A firm maximizes profit when MC = MR.
AR=P=D
q
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Marginal Revenue
and Marginal Cost
Profit-Maximizing Level of
Output
Marginal revenue (MR) – the change in
total revenue associated with a change in
quantity.
• Marginal cost (MC) – the change in total
cost associated with a change in quantity.
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The Profit maximizing quantity of output can be
determined by comparing marginal revenue and
marginal cost.
Marginal cost is the additional cost of producing one
more unit of output.
Marginal revenue is the additional revenue from selling
one more unit of output.
Profit is maximized at the output level where
marginal revenue and marginal cost are equal.
The supply rule is: Produce and offer for sale the
quantity at which MR=MC.
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MR and MC
Profit Maximization
Marginal Revenue = Change in Total Revenue/Change
in Total Output
MR = ∆TR/∆Q
Marginal Cost = Change in Total Cost/Change in Total
Output
MC = ∆TC/∆Q
Comparing marginal revenue and marginal cost
determines whether the firm needs to supply more or
less in order to maximize profit.
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How to Maximize Profit
Profit Maximization: MC = MR
To maximize profits, a firm should produce
where marginal cost equals marginal
revenue.
If marginal revenue does not equal
marginal cost, a firm can increase profit by
changing output.
The supplier will continue to produce as
long as marginal cost is less than marginal
revenue.
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The END
How to Maximize Profit
Sources:
Mankiw: Principles of Microeconomics
Website of OSWEGO University
Website of Rio Hondo Faculty
Microeconomics / Robert S. Pindyck, Daniel L. Rubinfeld
Understanding microeconomics / Russell S. Sobel a kol.
The supplier will cut back on production if
marginal cost is greater than marginal
revenue.
• Thus, the profit-maximizing condition of a
competitive firm is MC = MR
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