11/4/2008
Cost and Revenue Curves for a Competitive Firm
700
Marginal
Revenue ($)
Costs / Revenue (Dollars)
600
Finding the
“Profit Maximizing”
Output
Marginal
Costs ($)
500
400
Average
Variable Cost
($)
300
Average Total
Cost ($)
200
100
Average
Fixed Cost
($)
0
0
1
2
3
4
5
6
7
8
9
10 11
Output (Units Produced)
Cost and Revenue Curves for a Competitive Firm
700
Marginal
Revenue ($)
The “Marginal” approach to
finding profit maximization
Costs / Revenue (Dollars)
600
Marginal
Revenue is
simply the price
at which the
product is sold.
This curve is flat
because the
output of this one
tiny firm cannot
influence the
market price.
Thus, the price
remains constant
across all levels
of output.
Marginal revenue
could fall anywhere!
The firm has no
control over it!
Profit is
maximized
where marginal
costs are equal
to marginal
revenue.
Marginal
Costs ($)
500
400
Average
Variable Cost
($)
300
Average Total
Cost ($)
200
100
Let’s remove the
other curves so
we can focus on
this concept…
Average
Fixed Cost
($)
0
0
1
2
3
4
5
6
7
8
9
10 11
Output (Units Produced)
Cost and Revenue Curves for a Competitive Firm
700
Costs / Revenue (Dollars)
600
Marginal
Revenue ($)
500
400
300
extra
losses!
200
extra
profits!
Marginal
Costs ($)
100
0
0
1
2
3
4
5
6
7
8
9
As long as our
“extra” revenue is
greater than our
“extra” costs,
we’re making
“extra” profit!
Thus, we continue
making output
until we make NO
extra profit at all!
(The point where
there is no point!)
The “Total” approach to finding
profit maximization
After all, until
we’re making no
extra profit, then
we obviously have
a little extra profit
still to be made!
10 11
Output (Units Produced)
1
11/4/2008
Quantity
2000
1800
1600
Total Costs
C o s t s ( D o lla r s )
1400
1200
Total Variable
Costs
1000
800
Total Fixed Costs
600
400
200
0
0
50
100
Output (Units Produced)
150
0
10
20
30
40
50
60
70
80
90
100
Total
Costs
350
470
566
650
730
840
950
1100
1280
1530
1810
Total
Variable
Costs
0
120
216
300
380
490
600
750
930
1180
1460
Total
Fixed
Costs
350
350
350
350
350
350
350
350
350
350
350
Note:
Note:
The climb in total costs
is entirely due to
increasing variable
costs!
Fixed costs are the
same… even if we
produce nothing!
Total
Costs
Total Cost Curves
2000
1800
1600
1400
C o s t s ( D o lla r s )
Total Cost Curves
Total Costs
1200
Total Variable Costs
1000
Total Fixed Costs
800
Total Revenue
600
400
200
0
0
50
100
Output (Units Produced)
150
350
470
566
650
730
840
950
1100
1280
1530
1810
Total
Variable
Costs
0
120
216
300
380
490
600
750
930
1180
1460
Total
Total
Fixed
Revenue
Costs
350
0
350
180
350
360
350
540
350
720
350
900
350
1080
350
1260
350
1440
350
1620
350
1800
Note::
Note
When we impose a
total revenue curve, we
can see that profits are
maximized where total
revenue is furthest
above total costs!
2