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Lecture 12

ECON 2023 Lecture 12: ECON 10-2

4 Pages

Course Code
ECON 2023
Jeff Cooperstein

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Profit Maximization in the Short Run • Pure competition= price taker▯ can NOT max profit by raise/ lower price • ▯Maximize profit by adjusting the output o Change amount of variable resources (materials, labor) • 2 ways to determine level of output maximizing profit o [1] Compare Total Revenue (TR) & Total Cost (TC) o [2] Compare Marginal Revenue (MR) & Marginal Cost (MC) Total-Revenue-Total-Cost Approach • 3 questions of competitive producers o Should we produce this product? o If so, in what amount? o What economic profit (/ loss) will we realize? • Rate of increase in TC= varies w. efficiency of firm o Amount of inputs ▪ Current amount of capital • Cost data reflect law of diminishing returns • Each additional unit of input yields less output than the previous unit • Break-even point o The point of TR=TC ▪ (all cost including normal profit) o Output at which firm makes normal profit but NOT economic profit ▪ (TR covers all TC but NO economic profit) o 2 break-even points! When TR catch up w. TC ▪ When TC goes over TR ▪ • Any output between 2 break-even points= economic profit • Maximum profit: when vertical distance between TR and TC is the greatest Marginal-Revenue-Marginal-Cost Approach • Compare amounts that each additional unit of output would add to TR & TC • Firm should produce output when MR exceeds MC • In the short run, the firm will maximize profit/ minimize loss by producing the output at which MR=MC (as long as producing is preferable to shutting down) • 4 features oMR=MC Rule (profit-maximizing guide) o For most cases, MR & MC precisely equal at fractional level of output ▪ ▯ firm shoul
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