profit maximisation

What is total revenue?

Revenue received by a firm from sales of goods/services.

What is the formula for total revenue?

TR = P * Q

What is average revenue?

Revenue received by a firm per unit of output.

What is the formula for average revenue?

TR / Q = P

What is marginal revenue?

Additional revenue received from selling an additional unit of output.

What is the formula for marginal revenue?

MR = ΔTR / ΔQ

How does the TR curve change with quantity?

TR increases with quantity as long as demand is elastic, but decreases when demand is inelastic.

What is the turning point of total revenue?

The level of output beyond which further increase in quantity will decrease total revenue.

What are the main decisions a firm has to make?

Determining the price and quantity to produce.

What is the main objective of a firm according to traditional economics?

To maximize profit.

What is profit?

The difference between total revenue and total costs.

What is the formula for profit?

PF = TR - TC = (P-AC)Q

What is normal profit?

The amount of profit needed to keep an entrepreneur in their present activity.

Is normal profit included in total costs?

Yes, it is treated as a cost of production.

Can abnormal profit be considered economic profit?

Yes, abnormal profit = economic profit.

above the normal profit.

What is the reward for successful innovation?

Profit

What is the result of market imperfections?

Extra profits

What could arise from shortages in an industry which enable a firm to raise prices and take extra profits?

Market power

What is profit maximisation?

Selecting output level where MR = MC

What is the explanation for the profit maximisation condition?

If MR > MC, increase output; if MR < MC, reduce production

What does the TC curve represent?

Total cost for all levels of output

Where is maximum profit achieved on the graph?

Where the vertical distance between TR and TC is the biggest

What is the goal of profit maximisation?

Maximising the difference between TR and TC

What does the total profit curve represent?

The relationship between profit and output level

What is the purpose of using total curves in profit maximisation?

To determine the output level that maximises profit

What is the goal of profit maximisation using total curves?

Maximising the difference between TR and TC

What is the loss minimization case?

Producing where MR equals MC, unless the price is below the minimum average variable cost (AVC), in which case the firm shuts down.

What are some alternative objectives for firms?

Revenue/sales maximization, output maximization, cost minimization, and manager's own status/job security.

What happens to firms that do not maximize profit?

They are unlikely to survive.

How is market structure defined?

• By the number of firms,

• firms' ability to affect price,

• extent of barriers to entry/exit,

• degree of product differentiation.

What are the main characteristics used to classify industries/markets?

• Number of firms,

• firms' ability to affect price,

• extent of barriers to entry/exit,

• degree of product differentiation.

Why does market structure matter?

It determines whether economic profit can be retained in the long run.

Which types of firms can earn abnormal profits in the long run?

Monopolistic and oligopolistic firms.

What happens if entry barriers exist in an industry?

Economic profit will be retained in the long run.

What is the relationship between total revenue and total cost in the long run for monopolistic and oligopolistic firms?

They are able to earn (abnormal) profits in the long run.

What happens if there are no entry barriers?

New entrants are attracted by economic profit.

What happens to extra profit in competitive markets?

It is competed away.

When can firms in competitive markets earn abnormal profits?

In the short run only.

When is only normal profit made in competitive markets?

In the long run.