Profit Maximization in the Short-run: TR/TC ApproachThis is a featured page

  • Firm = price taker → firms can only adjust output to maximize profit
  • Short-run = fixed plant → firms can only adjust amount of variable resource such as labor and materials.
  • 2 ways to determine maximum profit & minimum loss output level
    • Total-revenue-total-cost approach
    • Marginal-revenue-marginal-cost approach
    • Both apply to pure competition, pure monopoly, monopolistic competition, oligopoly

Total-revenue-total-cost approach

  • Should we produce this product? Profit → Yes; Loss→ No
  • In what amount?
    • Output level where economic profit is maximized
    • TR– TC = (P x Q) - (FC + VC) = economic profits
  • Break-even point = when normal profit is satisfied
    • Intersection of TC + TR (TR covers all TC)
    • No economic profit – only normal
    • There are 2 break-even points on graph – any point in between is economic profits
    • Profit is maximized on a graph where the vertical distance between TR and TC is the greatest
Profit Maximization in the Short-run: TR/TC Approach - Welker's Wikinomics Page
  • At break even point 1: the industry should PRODUCE MORE!
  • At profit max point: the vertical distance between TR and TC is at its greatest, meaning the firm is earning maximum economic profits; therefore, industry should keep producing at this level of output, because more profits can still be made!
  • At break even point 2: STOP PRODUCING! or REDUCE the quantity producing! TR and TC are equal, meaning the firm is now only earning a normal profit.
  • The exact point in which profit is maximized is difficult to pinpoint from inspection, which is why the MR=MC method is stronger.
  • The reason why a profit-max point can be found is due to the law of diminishing returns.

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