Profit maximization
Profit decision is calculated by
Average condition
profit maximization
Determining the level of output a firm should produce to make profit as large as possible
Profit maximization based on mr and cost approach Graph control over the price and no control over price
Control- MR is slanting and going to the negative side No control- it is horizontally straight
How is TR drawn on a graph for control over price and no control
Control- curved first increase then at a certain point decrease No control-straight
What does it mean when MR>MC
The revenue for the additional unit is more then the cost of the additional unit hence it should produce more
What is profit maximization based on
Total revenue and cost approach Marginal revenue and cost approach
Profit max graph with AC and AR
AR is horizontally straight and AC is curved U shaped
Short run production decision
In the short run it will produce where is either greater or equal to average variable cost
Curve for long run production decision curve
Includes MC ATC AVC first draw the MC then on the MC AVC curve is below the ATC there should be 5 points on the MC to explain 1 point on the MC but above ATC -abnormal profit 2 point on the MC where MC and ATC meet normal profit 3point on MC but below ATC but above AVC-firm makes a loss but continues to produce 4 point on MC where MC meets AVC-firm is indifferent to producing at a loss or not producing 5point on MC below the AVC firm makes losses and shuts down
Output decision is calculated by
Marginal condition
Long run production decision
Will produce only if the revenue is greater or equal to the average cost