Maximizing Profit Flashcards
In a perfectly competitive market, a firm maximizes profits from production by:
choosing the level of output at which marginal cost equals marginal revenue, which, in perfect competition, is the market price
Total Revenue Equation:
TR = Price * Quantity
Marginal Revenue:
Change in TR from each additional unit sold
How do you find profit maximizing level of output using Marginal Cost?
If the price exceeds the marginal cost of increasing output by one unit, the firm will produce another unit. It keeps increasing its output until it reaches a point where increasing output by one more unit has a marginal cost that is greater than the price.
At what level do firms shut down?
When Price falls below Av. Variable Cost
In perfectly competitive market firms can not do this in the short run:
Freely exit the market
General Rule for Profit Maximization
Increase output as long as marginal revenue is greater than marginal cost
Under perfect competition each firm’s marginal revenue curve is determined by…
Market Price