Principle of profit maximization
Profit maximization is achieved
when the difference between the total revenue and the total cost is at its
greatest.
-
Profit maximization point is where the vertical
distance between the TR curve and TC curve is the maximum and also at the point
where marginal cost is equal to marginal revenue.
-
In the long run, firms will continue to produce if it’s
making a profit.
Exercise
Complete the table and draw the TR
and TC curves MR & MC curves
Output
|
Price
|
TR
|
TC
|
Profit
|
Average
Profit
|
MC
|
MR
|
0
|
550
|
1000
|
|||||
1
|
550
|
1350
|
|||||
2
|
550
|
1560
|
|||||
3
|
550
|
1740
|
|||||
4
|
550
|
2000
|
|||||
5
|
550
|
2400
|
|||||
6
|
550
|
3000
|
|||||
7
|
550
|
3850
|
|||||
8
|
550
|
4960
|
a) What
is the range of output the firm makes a profit?
----------------------------------------------------------------------------------------------
b) What
is the profit maximization output?
----------------------------------------------------------------------------------------------
c) What
is the break-even output?
----------------------------------------------------------------------------------------------
The Optimum point of production
The
optimum point of production is where the average cost of producing each good is
at the lowest level possible. It is said to be the best level of production. At
this point the entrepreneur has managed to organize and combine the factors of
production in the most cost effective or efficient way.
 |