Module Micro 17 Econ 53 Profit Maximization KRUGMANS

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Module Micro: 17 Econ: 53 Profit Maximization KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and

Module Micro: 17 Econ: 53 Profit Maximization KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • The principle of marginal analysis. •

What you will learn in this Module: • The principle of marginal analysis. • How to determine the profit-maximizing level of output using the optimal output rule. The main goal of any firm is to maximize profit .

Profit Maximization • Both TR and TC are functions of output. As more output

Profit Maximization • Both TR and TC are functions of output. As more output is sold (at a constant price), TR and TC both rise. The goal of the firm is to find the level of output where the economic profit is greatest (maximized).

Marginal Analysis • Marginal revenue is the additional revenue from selling one more unit

Marginal Analysis • Marginal revenue is the additional revenue from selling one more unit of output. MR = ΔTR/∆Q • Marginal cost is the additional cost incurred from producing one more unit of output. MC = ΔTC/∆Q • Firms will continue to produce as long as MR > MC and will stop producing when MC = MR

The Optimal Output Rule MC = MR is the optimal output rule for profit

The Optimal Output Rule MC = MR is the optimal output rule for profit maximization and one of the cornerstone results in microeconomics.

Graphical Representation of Profit Maximization

Graphical Representation of Profit Maximization

When is Production Profitable? So long as economic profit is greater than or equal

When is Production Profitable? So long as economic profit is greater than or equal to zero, the firm should continue to operate. If economic profits dip below zero (i. e. below a normal profit), the firm would consider permanently closing and moving resources to their next best alternative.

Table 53. 1 Profit for Jennifer and Jason’s Farm When Market Price Is $18

Table 53. 1 Profit for Jennifer and Jason’s Farm When Market Price Is $18 Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Table 53. 2 Short-Run Costs for Jennifer and Jason’s Farm Ray and Anderson: Krugman’s

Table 53. 2 Short-Run Costs for Jennifer and Jason’s Farm Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 53. 1 The Firm’s Profit-Maximizing Quantity of Output Ray and Anderson: Krugman’s Economics

Figure 53. 1 The Firm’s Profit-Maximizing Quantity of Output Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

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