Short-Run Profit Maximization 8.3-2 Flashcards
The rule for profit maximization
Produce where price is equal to marginal cost. Also, be sure that marginal cost is increasing.
What happens when marginal cost is greater than price?
You can reduce marginal cost by reducing output and getting back in the direction of profit maximization.
What happens after marginal cost exceeds price?
Profit begins to decline.
What happens if you produce where price equal marginal cost and marginal cost is decreasing?
Profit is minimizing.
Maximizing profit:
Just because a firm is maximizing its profit, doesn’t mean its profit is positive.
How do you make sure that when a firm is maximizing a profit that it’s making a positive profit instead of a negative one?
You look at an Average Cost Curve.
Average Cost Curve:
Looks at the whole picture to tell us the cost on average of producing a product.
Maximizing profit continued:
As long as price is above per unit cost, firm is maximizing profit and making a positive profit. Vise Versa.
Average Total Cost:
TC
—- X per unit cost of output
TP
Comparing:
Compare price with ATC to see if profit is positive.
What happens as long as MC is less than price?
The firm’s profitability increases as the firm’s production increases.
If the price exceeds the ATC at the profit maximizing output:
The firm is profiting.
If the ATC is greater than the price:
The firm has a negative profit or loss.
