Calculating Profits and Losses Microeconomics

In this section, we provide an alternative approach which uses marginal revenue and marginal cost. Following the decision rule of producing where the marginal revenue equals the marginal cost, we can determine that producing six units and charging a price of $550 will maximize profits. At the sixth unit, our marginal revenue is 175 and the marginal cost is 140. At seven units the marginal cost would exceed the marginal revenue. In looking at the column on the far right, we verify that this is the quantity that maximizes profits. At six units of output, the mid-point elasticity between five and six units is 1.42, which is elastic.

The launching of an additional seven spare satellites and other tinkering have extended the life of the system to at least 2014. The firm was temporarily shut down but, with its new owners and new demand for its services, has come roaring back. The supply curve for a firm is that portion of its MC curve that lies above the AVC curve, shown in Panel . To obtain the short-run supply curve for the industry, we add the outputs of each firm at each price.

Marginal cost curve crosses the average variable cost curve. In this first figure, we find the point of profit-maximization by finding the intersection between the marginal revenue curve and the marginal cost curve. Move vertically down to the horizontal axis to determine the profit-maximizing quantity. You can also move horizontally from the point of intersection to find the profit-maximizing price, but this will just be the equilibrium price for perfectly competitive markets.

Because the market price is not affected by the output choice of a single firm, the marginal revenue the firm gains by producing one more unit is always the market price. The marginal revenue curve shows the relationship between marginal revenue and the quantity a firm produces. For a perfectly competitive firm, the marginal revenue curve is a horizontal line at the market price. If the market price of a pound of radishes is $0.40, then the marginal revenue is $0.40. Marginal revenue curves for prices of $0.20, $0.40, and $0.60 are given in Panel of Figure 9.2 “Total Revenue, Marginal Revenue, and Average Revenue”.

You might spend two hours mowing your lawn instead of paying the kid next door $20 dollars to do it for you. But if you’re an accountant who charges $70 per hour, instead of saving $20 dollars, you’re actually losing $120. Explicit costs refer to the easily quantifiable out-of-pocket expenditures made to produce something – These often include items like wages, rents, and raw materials.

On Figure 1, the vertical gap between total revenue and total cost represents either profit or losses . In this example, total costs will exceed total revenues at output levels from 0 to 40, and so over this range of output, the firm will be making losses. At output levels from 50 to 80, total revenues exceed tresa todd lugten reviews total costs, so the firm is earning profits. But then at an output of 90 or 100, total costs again exceed total revenues and the firm is making losses. The highest total profits in the table, as in the figure that is based on the table values, occur at an output of 70–80, when profits will be $56.

There is a useful relationship between marginal revenue and the price elasticity of demand . It is derived by taking the first derivative of the total revenue function. What happens to revenues when output is increased by one unit? The answer to this question reveals useful information about the nature of the pricing decision for firms with market power, or a downward sloping demand curve. Consider what happens when output is increased by one unit in Figure 3.8. The profit-maximizing solution for the monopolist is found by locating the biggest difference between total revenues and total costs , as in Equation 3.1.

To calculate the profit margin, divide the profit amount with cost price. When profits are generated, they can be retained by the firm, or distributed to its owners. A government may provide tax incentives for those firms that retain their profits, and use them for investment.

Suppose that the agricultural chemical firm is a constant cost industry. This means that the per-unit cost of producing one more ounce of chemical is the same, no matter what quantity is produced. Assume that the cost per unit is ten dollars per ounce (10 USD/oz). The long‐run equilibrium for an individual firm in a perfectly competitive market is illustrated in Figure .

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