Profit Maximization

TR - cost of inputs = ?

accounting profit

accounting profit - opportunity cost of capital = ?

economic profit

vertical line

choose price, not quantity; perfectly inelastic

positive economic profit

earn higher profits than can be earned in other business

negative economic profit

earn lower profits than can be earned in another business

zero economic profit

earn some profits as can be earned in another business

horizontal line

choose quantity, not price; perfectly elastic

downward sloping line

choose price AND quantity

total revenue (TR)

price x quantity

total cost (TC)

average total cost x quantity

profits

total revenue - total cost

marginal cost

the additional cost of producing one more unit of output

marginal revenue

the additional revenue obtained from selling one more unit of output

MR>MC

the firm can increase its profits by producing more output

MR<MC

it costs more to produce another unit of output than the firm can sell it for so the firm can increase its profits by producing less