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Joe Kim

Principles of Economics Shortrun Firm EquilibriumPROFIT MAXIMIZATIONProfitTotal Revenue PQTotal CostsAccountants calculate Profit as operating ProfitTotal RevenueOperating Costs Total RevenueVariable Costsin economic terminologyOperating ProfitProducer Surplus in economic terminology Accountants compare this operating profit with Capital to find the rate of return on capitalEconomics calculate Economic Profit from all costs including the cost of capital calculated as the opportunity cost of CapitalDefinition Economic ProfitTotal RevenueVariable CostsFixed CostsDefinition Normal ProfitOpportunity Cost of Capital 0 Economic ProfitNormal Profit since it includes the Opportunity Cost of CapitalEconomic LossEconomic Profit 0 less than the Opportunity Cost of Capital Economic ProfitEconomic Profit0 greater than the Opportunity Cost of CapitalShortrun Profit Maximization Find the output that maximizes Profit TRTC DTRTCDq0dTRTCdq0 DTRDqDTCDq0dTRdqdTCdq0 MRMCMore formally ProfitTRTCPQwLrK wwage rate and ropportunity cost of Capital Profit MaximizationDPQwLrK DQ0 PQDPDQwDLDQ01 Principles of Economics Shortrun Firm EquilibriumPQDPDQMCsince wDLDQMC MRMCfor all firmssince PQDPDQMRMarginal Revenue equal to Marginal Cost gives the profit maximizing output but this expression also includes the loss minimizing output if the price is below Average Cost There is one exception to this rule as we will seeEgSuppose that the following functions describe the Variable Cost and Fixed Cost of a 32competitive firm VCq59q1315q FC2000This cubic function gives the correct shape for the Marginal Cost function but we will eventually work only with more quadratic Variable Cost functionsNote that a change in quantity changes Variable Cost but has no effect on Fixed CostTotal Cost is the sum of both functions 2Suppose further that the firms Total Revenue function is TR1000q2q 322TCq59q1315q 2000 TR1000q2q00060 Max ProfitMax TRTC50TR40Slope TRSlope TC MRMCTC3020100q01020304050Max ProfitQuantityTotal Economic Profit is the difference between the Total Revenue and Total Cost functions as shown in the diagram belowTotal Economic Profit is greatest at the output where Total RevenueTotal Cost is greatestThis occurs where the slopes of the two functions are equal or2
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