Week 3 - 16/9/2024
CHAPTER 11
Maximizing profits requires knowing what to ignore and what to consider.
– Ignore what you can’t change/ focus on what you can change
Sunk cost = a cost that cannot be recovered
A fixed cost = does not vary with the quantity produced
Maximizing profit requires taking into account explicit and implicit costs
Explicit cost = a cost that requires a money outlay.
Implicit cost = a cost that doesn’t require an outlay of money
Accounting profit = total revenue minus explicit costs.
Economic profit = total revenue minus total costs, including implicit
opportunity costs.
1 Accountants typically don’t take into account all opportunity costs so
accounting profits are usually more than economic profits
Firms wants to maximise economic profit, not accounting profit
(Profit is a quadratic curve -> if you differentiate you get change in profit -> a
turning point the derivative is 0 so at profit maximising, change in profit is 0)
TO MAXIMISE PROFIT WE CONSIDER:
. WHAT PRICE SET
– Under certain conditions, the firm doesn’t set prices; it accepts the
price that is given by the market
– Can’t sell a product above the market price — can sell all your
product at the market price
– An industry is competitive when firms don’t have much influence
over the price of their product
– Conditions for this: the product sold is similar across sellers, there
are many buyers and sellers each small relative to the total market,
there are many potential sellers
– A firm can have a lot of influence on the price of their product if
there aren’t many others sellers or potential sellers.
, . WHAT QUANTITY TO PRODUCE
– Profit = π = Total Revenue − Total Cost
– Total revenue (TR) = price x quantity (PxQ)
– Total Cost ( TC ) = Fixed Costs ( FC ) + Variable Costs ( VC )
– Marginal revenue, MR, is the change in total revenue from selling
an additional unit. MR=ΔTR/ΔQ
– Marginal cost, MC, is the change in total cost from producing an
additional unit. MC=ΔTC/ΔQ
–
– For a firm in a competitive industry -> margin revenue = price
(MR=P)
– To maximize profit a firm in a competitive industry increases output
until P=MC
– Change in profit is the derivative of profit, so when it is 0 it means
profit is at max (the turning point)
CHAPTER 11
Maximizing profits requires knowing what to ignore and what to consider.
– Ignore what you can’t change/ focus on what you can change
Sunk cost = a cost that cannot be recovered
A fixed cost = does not vary with the quantity produced
Maximizing profit requires taking into account explicit and implicit costs
Explicit cost = a cost that requires a money outlay.
Implicit cost = a cost that doesn’t require an outlay of money
Accounting profit = total revenue minus explicit costs.
Economic profit = total revenue minus total costs, including implicit
opportunity costs.
1 Accountants typically don’t take into account all opportunity costs so
accounting profits are usually more than economic profits
Firms wants to maximise economic profit, not accounting profit
(Profit is a quadratic curve -> if you differentiate you get change in profit -> a
turning point the derivative is 0 so at profit maximising, change in profit is 0)
TO MAXIMISE PROFIT WE CONSIDER:
. WHAT PRICE SET
– Under certain conditions, the firm doesn’t set prices; it accepts the
price that is given by the market
– Can’t sell a product above the market price — can sell all your
product at the market price
– An industry is competitive when firms don’t have much influence
over the price of their product
– Conditions for this: the product sold is similar across sellers, there
are many buyers and sellers each small relative to the total market,
there are many potential sellers
– A firm can have a lot of influence on the price of their product if
there aren’t many others sellers or potential sellers.
, . WHAT QUANTITY TO PRODUCE
– Profit = π = Total Revenue − Total Cost
– Total revenue (TR) = price x quantity (PxQ)
– Total Cost ( TC ) = Fixed Costs ( FC ) + Variable Costs ( VC )
– Marginal revenue, MR, is the change in total revenue from selling
an additional unit. MR=ΔTR/ΔQ
– Marginal cost, MC, is the change in total cost from producing an
additional unit. MC=ΔTC/ΔQ
–
– For a firm in a competitive industry -> margin revenue = price
(MR=P)
– To maximize profit a firm in a competitive industry increases output
until P=MC
– Change in profit is the derivative of profit, so when it is 0 it means
profit is at max (the turning point)
