Profit Maximisation by the Rational Producer
Total Revenue = Price x Quantity TR = P x Q
Total Revenue TR
Average Revenue = AR =
Quantity Q
- Average Revenue = Price , as it is revenue per each product
Change∈Total Revenue ∆ TR
Marginal Revenue = MR =
Change∈Quantity ∆Q
- Marginal revenue is the additional revenue arising from the sale of an additional unit of output
- Marginal and average costs tend to fall due to the law of diminishing returns which takes place
in the short run.
Revenue curve in perfect competition:
the firms cannot control the price and the price is constant as quantity (output) changes.
- Demand Curve = Average Revenue Curve = Marginal Curve
- Demand Curve = Average Revenue Curve – This Equation Is Satisfied For All The Market
Structures
- Demand Curve = Average Revenue Curve = Marginal Curve Is Satisfied Only For Perfect
Competition
- This is because firms in perfect competition do not have to reduce price to sell higher quantity.
At the same price ( taken from the whole industry) they can sell as much as they like.
Therefore their demand curve is perfectly elastic. At the industry price the firms can sell as
much as they like.
Revenue curves in other market structures:
firms can control the price. They make decisions on quantity – price. If they want to sell higher
quantity, they must reduce the price.
, Costs of Production:
= money paid to buy factors of production (resources)
- Labour >> wages
- Raw Materials (land) >> money to the seller
- Equipment (capital) >> money to the seller
- Explicit Costs = all costs of production which involve payment of money, these costs will
always be considered accountants
Implicit Costs:
= Lost/Sacrificed incomes from the resources which belong to a business
= Opportunity costs >> next best alternative given up when economic decision is made
- E.g.
The owner of the business (a factor of production - management or enterprise) has a
bachelor's degree in accounting. The owner could have worked as an accountant earning
80,000 per year. This is a lost income from enterprise.
The factory building (capital) could have been rented out and generate 35,000 rent per year.
Lost income from capital.
Economic costs = Explicit Costs + Implicit Costs
Costs of Production in the Short-run:
• Total cost (TC)= all costs of production incurred by a firm
• Marginal cost (MC) = the extra cost of producing one more unit of product MC =
∆ TC
∆Q
• Average cost (AC) = Cost per unit of output. AC
TC
=
Q
Average and marginal costs:
When MC< AC – average cost is falling
When MC > AC – average cost is increasing
The marginal costs curve intersects the average cost curve when average cost curve is at its
Total Revenue = Price x Quantity TR = P x Q
Total Revenue TR
Average Revenue = AR =
Quantity Q
- Average Revenue = Price , as it is revenue per each product
Change∈Total Revenue ∆ TR
Marginal Revenue = MR =
Change∈Quantity ∆Q
- Marginal revenue is the additional revenue arising from the sale of an additional unit of output
- Marginal and average costs tend to fall due to the law of diminishing returns which takes place
in the short run.
Revenue curve in perfect competition:
the firms cannot control the price and the price is constant as quantity (output) changes.
- Demand Curve = Average Revenue Curve = Marginal Curve
- Demand Curve = Average Revenue Curve – This Equation Is Satisfied For All The Market
Structures
- Demand Curve = Average Revenue Curve = Marginal Curve Is Satisfied Only For Perfect
Competition
- This is because firms in perfect competition do not have to reduce price to sell higher quantity.
At the same price ( taken from the whole industry) they can sell as much as they like.
Therefore their demand curve is perfectly elastic. At the industry price the firms can sell as
much as they like.
Revenue curves in other market structures:
firms can control the price. They make decisions on quantity – price. If they want to sell higher
quantity, they must reduce the price.
, Costs of Production:
= money paid to buy factors of production (resources)
- Labour >> wages
- Raw Materials (land) >> money to the seller
- Equipment (capital) >> money to the seller
- Explicit Costs = all costs of production which involve payment of money, these costs will
always be considered accountants
Implicit Costs:
= Lost/Sacrificed incomes from the resources which belong to a business
= Opportunity costs >> next best alternative given up when economic decision is made
- E.g.
The owner of the business (a factor of production - management or enterprise) has a
bachelor's degree in accounting. The owner could have worked as an accountant earning
80,000 per year. This is a lost income from enterprise.
The factory building (capital) could have been rented out and generate 35,000 rent per year.
Lost income from capital.
Economic costs = Explicit Costs + Implicit Costs
Costs of Production in the Short-run:
• Total cost (TC)= all costs of production incurred by a firm
• Marginal cost (MC) = the extra cost of producing one more unit of product MC =
∆ TC
∆Q
• Average cost (AC) = Cost per unit of output. AC
TC
=
Q
Average and marginal costs:
When MC< AC – average cost is falling
When MC > AC – average cost is increasing
The marginal costs curve intersects the average cost curve when average cost curve is at its
