Short-run Profit Maximization for the Firm
If the firm wishes to maximize profits, the firm will
produce and sell so long as the price it can charge
for the next unit is greater than the cost of producing
that unit.
The change in total revenue (TR) from selling one additional unit
is the marginal revenue (MR). The change in the total cost (TC) is
called the marginal cost (MC)
Since the firm’s demand function is elastic, they can sell all they
want at the market price. In pure competition a perfectly elastic
demand function for the firm results in P = AR = MR.
To maximize profits, produce to the level of output where
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P = MR = MC !
Profit Maximization
© L Reynolds, 1999
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Price
The demand function faced
by the firm is perfectly
elastic. The means that for
Demand, Pe = AR = MR.
The firm will maximize
profits where P = MR = MC.
MC
Demand
MR = AR
Pe
Given the MC (determined by
technology and the prices of
the variable inputs), MC is
expected eventually rise.
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QM
Profits are maximized where P = MR = MC.
QX / ut
(As long as P = AR > AC or losses are minimized if AC> P = AR > AVC)
The firm will produce QM amount which they can sell at
a price of Pe (the equilibrium price in the market).
So long as the price, Pe is greater than the average
variable cost (AVC), the firm will produce in the short-run.
Finis
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© L Reynolds, 1999
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