Profit Maximization

Marginal Cost (MC)

- The additional cost of producing one more unit.

Average Variable Cost (AVC)

- Variable costs divided by quantity produced.

Average Total Cost (ATC)

- Total costs divided by quantity produced.

Average Fixed Cost (AFC)

- Fixed costs divided by quantity produced.

Total Variable Cost (TVC)

- All costs that vary with production level.

Total Fixed Cost (TFC)

- Costs that don't change with output level.

Total Cost (TC)

Sum of all costs (TFC + TVC).

Marginal Revenue (MR)

Additional revenue from selling one more unit.

Total Revenue (TR)

- Price times quantity sold.

Price

- Amount charged per unit.

Firms maximize profit where

MR = MC

Economic Profit

Economic Profit = TR - TC

When TR > TC →

When TR < TC →

→ firm earns a profit

→ firm incurs a loss

Short Run:

Stay open if TR > TVC (or Price > AVC)

• If covering variable costs, continue operating

Long Run:

Stay open if TR > TC (or Price > ATC)

• Must cover all costs to remain in business long-term