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Marginal Revenue and Profit Maximization

This document discusses key concepts in microeconomics including: (1) Marginal revenue and how it is calculated, which is important for profit maximization. (2) The differences between accounting profit, economic profit, and break-even point. Economic profit considers opportunity costs. (3) Characteristics of pure competition in both the short run and long run, including how demand curves are determined and the role of entry and exit of firms.

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David Christian B. Jornala
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23 views4 pages

Marginal Revenue and Profit Maximization

This document discusses key concepts in microeconomics including: (1) Marginal revenue and how it is calculated, which is important for profit maximization. (2) The differences between accounting profit, economic profit, and break-even point. Economic profit considers opportunity costs. (3) Characteristics of pure competition in both the short run and long run, including how demand curves are determined and the role of entry and exit of firms.

Uploaded by

David Christian B. Jornala
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

MICROECONOMICS

Week 13: Marginal Revenue and Profit


Maximization and Loss Minimization

Profit Motive - what drives people to go into


business

Total Revenue - price multiplied by the output


sold (TR= PxQ)

Marginal Revenue - increase in total revenue


when output sold goes up by one unit

Additional Revenue - additional revenue derived


from selling one more unit of output

MR=(TR2-TR1)/(Q2-Q1)

Implicit

They are subtracted from accounting profits


because it represents alternatives

Economic Profit

Helps decide whether to stay in business or


proceed to alternative actions (opportunity cost)

(+) stick to status quo

(−)choose the alternative

(0) stick because you are the boss


MICROECONOMICS

Break-even= no gain, no loss influences which generally make the


demand curve positively sloped.
= zero profit
The Short Run
= TR-TC
• Referring to a time period in which a firm
= is the point at which total cost and total revenue
can vary its output but does not have time
are equal.
to change its plant size.
Pure competition
• The number of firms in an industry is fixed
Pure Competition because new firms in an industry is fixed
because new firms do not have time to
The market is said to be purely competitive if: enter and existing firms do not have time
1. There is large number of sellers and to leave.
buyers of the commodity each too small • Any change in production of the industry
to affect the price of the commodity; must come fro the fixed plant capacity of
2. The outputs of all firms in the market are existing firms.
homogeneous A Note on Profits
3. There is perfect mobility of resources. • ECONOMIC PROFIT- are a pure surplus or
an excess of total receipts over all costs of
production incurred by the firm.

• Assuming that corporate income taxes are


ignored, a corporate profits are
determined by the accountant as follows:

Gross Income

- Expenses (includes interest payments on


bonds, amortization expenses, depreciation
Pure and Perfect Competition expenses, etc.)

• Perfect knowledge means that a person __________________________________


knows the price of a commodity being = Net Income or “profits”
charged in the markets.
• The company has to make payments to
The Demand Curve capital owners in the form of dividends
• When the are large numbers of sellers from the corporation’s “profits”.
and buyers of a commodity, each would
be too small a unit to affect the price of
the commodity, each would be too small Gross Income
a unit to affect the price of the - Expenses ___________________
commodity.
= Net Income or Profit
• This means that both the producers and
sellers are price takers. - Average dividends
___________________
• The demand curve is still downward
sloping. The demand and supply curves in = Economic Profits
the industry are subject to various
MICROECONOMICS

Loss-Minimizing Case

This occur when a situation where the cost of


production is higher than the market price,
obviously, the firm would be occurring losses.

The marginal revenue equals marginal cost


principle would still be relevant in this case. Any
point before or after MR = MC would mean more
losses for the firm.

Long Run: Breakeven

• When enough firms go out of business,


industry supply declines, which pushes Barriers to entry
price up.
1. Legal- taxes, permits and licenses
The Shutdown Price
2. Natural- plant size
• Refers to the price that would force the
[Link] resources such as labor and capital
producer to stop production because of
losses.

• This would happen if the market price is


less than minimum average variable costs.
In this case, the firm would be minimize
losses by discontinuing production.

Price and Output in the Long-run

Refers to the situation toward which the market


price and output and the short-run equilibrium
price and output tend in a period of time long Pros
enough to allow following things;
1. Economies of Scale- good for large
1. The completing by firms of all desires companies
adjustments,
Cons
2. The entry of new firms, and
2. Inefficient- no competition, no incentive
3. The departure of old ones. to control costs
Week 14 Imperfect Competition 3. Price- it can charge more and provide
Monopoly poor services

 Is the (sole)only firm in an industry Monopolistic Competition

 Nobody else selling anything like what the Characteristics:


monopolist is producing • Difficult to enter because of barriers
 No close substitutes • Moderate control over price
 Price maker (strong control over price) • Homogeneous yet differentiated products

• Few number of sellers


MICROECONOMICS

Common questions

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Marginal revenue equaling marginal cost is a critical condition for firms seeking to maximize profit or minimize loss. At this point, firms ensure that the cost of producing an additional unit equals the revenue it generates, thus avoiding unnecessary expenditure that could lead to losses ().

Pure competition ensures efficient resource allocation as firms operate at a level where price equals marginal cost, promoting optimal distribution of resources across the market. In monopolistic markets, lack of competition reduces incentives to minimize costs, leading to inefficient resource use ().

Perfect competition involves no barriers to entry and firms produce homogeneous products, meaning no differentiation between products (). In contrast, monopolistic competition features barriers to entry and firms produce differentiated products, allowing for some control over pricing ().

In the long-run equilibrium, prices adjust to reflect the total costs of production, with firms earning normal profits. As firms complete adjustments, and new firms enter while unproductive ones exit, the market stabilizes with price equaling average total cost. All firms operate at an optimal scale, preventing excessive profits or losses ().

A firm might decide to shut down production in the short run if the market price falls below the minimum average variable cost. Continuing production under these circumstances would only increase losses, so ceasing production minimizes them ().

In a purely competitive market, the large number of small buyers and sellers means that no single entity can significantly influence the market price. As a result, all participants must accept the market price as given, thus becoming price takers ().

Implicit costs are opportunity costs of using resources owned by the firm for business which are not directly paid out. They are subtracted from accounting profits to calculate economic profits, helping firms decide whether to continue existing operations or explore alternative actions ().

The breakeven point is achieved when total revenue equals total costs, meaning no net profit or loss is made. This financial state implies the firm covers all its expenses but does not yet generate profit ().

Barriers to entry limit new competitors in a market. In a monopolistic market, high barriers maintain single-firm dominance and minimal competition. Conversely, low barriers in pure competitive markets allow for free entry and exit, sustaining high competition and keeping prices aligned with costs ().

Perfect knowledge ensures all market participants have full information about prices and products, facilitating informed decisions that drive efficiency and resource optimization. Imperfect information can lead to misinformed decisions, market inefficiencies, and resource misallocation ().

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