Revenue & Profits (matches pp of text) December 8-14

 Describe various revenue terms ◦ Total – Average - Marginal  Understand the various profit terms ◦ Economic – Accounting – Normal – Supernormal  Diagram profit maximizing point(s) ◦ Total revenue/cost – Marginal revenue/cost  Discuss other motivations of the firm ◦ “Wait, I thought it was all about profit!”

 Total Revenue (TR) = ____________________ Price Quantity D S P1 Q1

 Marginal Revenue:  Average Revenue:  When does a firm have control over price? Think: Monopoly – Monopolistic Competition – Oligopoly – Perfect Competition

Accounting Profit Economic Profit Accounting Profit Economic Profit Implicit Costs Accounting Costs Accounting Costs Super-normal / Abnormal Profit Opportunity Cost involving payment In Economics, when we say “profits,” we mean _____________________ Opportunity Cost without payment

Economic Profit Implicit Costs Accounting Costs Implicit Costs Accounting Costs Supernormal / Abnormal Profit Opportunity Cost without payment Opportunity Cost involving payment Scenario: Revenues create “supernormal” profit Revenues create “normal” profit

 Profit (generally): ____________________ _________________________________  Economic Profit: _____________________ _________________________________  Accounting Profit: ____________________ _________________________________  Normal Profit: _______________________ _________________________________  Supernormal Profit: ___________________ _________________________________

 “Profit Maximization”: What level of output should I produce in order to create as much profit as possible? (or, how much output would enable me to minimize my losses?)  Two ways to analyze profit: ◦ Total Revenue and Costs ◦ Marginal Revenue and Costs

 Total Revenue and Costs: Profit = Total Revenue (TR) – Total Cost (TC) ◦ If TR > TC, firm is generating an economic profit ◦ If TR = TC, firm is earning normal profit but zero economic profit ◦ If TR < TC, firm has negative economic profit (i.e., a loss)  Marginal Revenue and Costs: Move output to the level where MR = MC ◦ If MC < MR, too cold  make more! ◦ If MC > MR, too hot  make less! ◦ If MC = MR…just right!

 Profit maximization in: ___________________________ Q $ MC MR Q ∏max Q MC MR Q ∏max Profit maximization in: ___________________________

 Is “Profit Maximization” all black and white? ◦ Do firms really know their marginal costs and revenues? ◦ Do firms really know their Demand curves, how competitors behave? ◦ Would a firm ever sacrifice profit in the short term? ◦ How valid are a firm’s assumptions? Do market conditions change? ◦ What else matters to a firm?  True, but what about…? ◦ Why else would you go into business? ◦ How else can you stay in business, and fund future activity? ◦ How else do you get financing from a bank? ◦ What about shareholder meetings? (see  Office) ◦ What about your performance pay?

 Revenue Maximization  Growth Maximization  Managerial Utility Maximization  Sacrificing Firm Behavior  Ethical and Environmental Concerns