Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together Note: scale is different on the vertical axis in the 2 panels Suppose that your business has just one fixed cost to pay: How would you show this on the lower panel of the diagram? And on the upper panel? p D TR X MR TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together Suppose that your business has just one fixed cost to pay: How would you show this on the lower panel of the diagram? And on the upper panel? MC=0 p D TR X MR TR TC X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together Suppose that your business has just one fixed cost to pay: What is the profit-maximising output level? (Recall that = TR – TC.) p D TR X MR TR TC X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together p In this case, what is the profit-maximising output level? Let’s assume that the fixed cost is a sunk cost . . . In the long-run, there are no fixed costs . . . So? D TR X MR TC TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together Now suppose that the firm has no fixed costs, but has only variable ‘running’ costs (e.g.?). How would you show this in the diagram? In this case, what is the profit-maximising output level? p D TR X MR TC? TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together In this case, what is the profit-maximising output level? Ie, in the lower panel, where is TR - TC maximised? p D TR X MR TC TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together In this case, what is the profit-maximising output level? Ie, in the lower panel, where is TR - TC maximised? p D TR X MR TC TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together In this case, what is the profit-maximising output level? Ie, in the lower panel, where is TR - TC maximised? p D TR X MR TC TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together In this case, what is the profit-maximising output level? How would you show this in the upper panel? p D TR X MR TC TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together Note: the height of the MC is equal to the slope of the TC curve. In this case, what is the profit-maximising output level? How would you show this in the upper panel? p MC D TR X MR TC TR X=a/2b X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together Notice that the general principle is that Profit is maximised when the vertical difference between TR and TC is maximised. (Because = TR – TC). And this occurs at the output level at which the slopes of the TC and TR are equal . . . In the upper panel, this translates into the condition that . . . MR=MC. p MC D MR TR X TC TR X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 Putting Simple Costs and Revenues together What is the precise value of X when MR = MC? Consider the linear demand case . . . . . . we will show that X*=(a-c)/2b. p MC D MR TR X TC TR X* X Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2 Lecture 12 What is the precise value of X when MR = MC? Robin Naylor, Department of Economics, Warwick
Robin Naylor, Department of Economics, Warwick Topic 2: Lecture 12 Now revise B&B 4th Ed., pp. 439-455; 458-463 Robin Naylor, Department of Economics, Warwick