Transcript 1999 South-Western College Publishing

Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
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Chapter 9
Maximizing Profit
4/8/2016
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This chapter discusses
principles associated with
Total, Average, &
Corporate
Profit
Loss
MRMinimization
Maximization
Empire
= MC Rule
Building
Entrepreneurial
Behavior
Marginal Revenue
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What is
Profit Maximization?
The primary goal of a firm
to achieve the most profit
possible from its
production and sales
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What is Profit?
Income earned by
entrepreneurs
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Find out more about
entrepreneurs and other
business owners:
http://www.entrepreneurmag.com
http://www.virtualentrepreneur.com
http://www.be-your-own-boss.com
http://www.tannedfeet.com
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At what point of
production are profits
maximized?
MR = MC
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What does the word
Margin mean?
The marginal unit is the
last unit produced
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What is
Marginal Revenue?
The change in total
revenue generated by the
sale of one additional
unit of goods or services
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What is Marginal Cost?
The cost incurred on the
last unit produced
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Why are profits maximized at
MR = MC?
MR > MC (keep producing)
MR < MC (stop producing)
MR = MC (no $ gained or
lost on the last unit)
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What is Total Revenue?
The price of a good
multiplied by the
number of units sold
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What is
Average Revenue?
Total revenue divided
by the quantity of
goods or services sold
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What is a Perfectly
Competitive Market?
•homogeneous product
•many buyers and sellers
• no one has much market power
• easy entry & easy exit
• can sell all bring to market
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Why does P = MR in
Perfect Competition?
Because no matter how
many units are brought to
market, the firm can sell all
of them at the market price
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Why does AR=P
in all markets?
Because each unit is
sold for the same price
at one point in time
AR = TR / Q = P
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What determines
Price in a Free Market?
Market Demand & Supply
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P1
Surplus
S
Shortage
Q3
D
P3
P2
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The Firm’s Demand Curve
in Perfect Competition
P
D
S
Market quantity
P
d
Individual quantity
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Why is a Perfectly
Competitive firm’s
demand curve horizontal
at the market price?
All units brought to
market can be sold at
the market price
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Profits are maximized where
P
MR = MC
MC
MR1
MR2
MR1=MC
MR2=MC
Q
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Economic Profit
MR=AR=P
AC
MC
ATC
AR
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Does the MR = MC
Rule apply to
minimizing losses?
YES
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AC
Loss
MC
ATC
MR=AR=P
AR
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What is a Fixed Cost?
Costs that have to be
paid regardless of the
level of production
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Are there any Fixed
Costs in the Long Run?
No, all costs are
variable in the long run
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Loss = Fixed Costs
AC
MR=AR=P
MC
ATC
AVC
AVC
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Why should a firm
stay in business if it’s
losing money?
Because its losses may be
less than its fixed costs
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Loss - Stay Open
AR
MR=AR=P
AC
MC
ATC
AVC
AVC
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Loss - Close Down
MC
ATC
AVC
MR=AR
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Is a firm’s first priority
always maximizing
profits?
No! Sometime there
are social, political
and historical factors
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Who is a Stakeholder?
Someone who has a
personal and
consequential interest in
the viability of the firm
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Do Stakeholders always
want to maximize profits?
The preservation of the
managerial class may
have a higher priority
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•
•
•
•
•
What does the word Margin mean?
What is Total Revenue?
What is Marginal Revenue?
What is Marginal Cost?
Why are profits maximized at
MR = MC?
• Why should a firm stay in business
if it’s losing money?
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END
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