November 5, 2014
1. Lesson 3-4: Revenue, Profit, and Profit Maximization Rules
2. Activity 3-5
3. Quiz Friday: Lessons 1-4 (Cumulative Unit 3 Quiz)
Revenue
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Goal of the Firm?- Maximize its total profit!
TP = TR – TC
Three measures of revenue:
Total Revenue: Total income a firm receives from
selling a given level of output at a given price.
TR = P x Q
Average Revenue (Revenue per unit)
AR = TR/Q = P
Marginal Revenue: Extra revenue from 1 more unit
MR = ΔTR/ΔQ
Profit
• Total Profit: Difference between Total Revenue and
Total Cost
• TR – TC
• Average Profit: Profit the firm receives from one unit
at a given level of output
• AP = TP/Q
• Marginal Profit: Change in Total Profit resulting from
the firm selling one more unit of output (extra profit
from one more unit)
• MP = ΔTP/ ΔQ
Profit Maximization Rules
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Q: So how many units of a good or service should a firm produce to maximize its
total profit?
RULE #1: PRODUCE OUTPUT WHERE MR = MC!
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RULE #2: FIRM SHOULD CHARGE THE PRICE ON THE DEMAND CURVE FOR
ITS OPTIMAL OUTPUT LEVEL!
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RULE #3: A FIRM SHOULD SHUT DOWN (PRODUCE ZERO OUTPUT) IF
TOTAL REVENUE IS LESS THAN TOTAL VARIABLE COST (TR < TVC) AT ITS
OPTIMAL OUTPUT!
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Logic
1. If firm shuts down completely, it will have no TR and no TVC, but will still
have TFC
2. If firm produces optimal output and has TR that is less than TVC, the firm
will make a loss on producing combined with TFC!
3. If firm produces optimal output and has TR that is greater than TVC, the it
can use leftover TR to apply towards TFC, making its loss less than TFC.