PRODUCTION COSTS PROFIT FUNCTION COST FUNCTION P = TR – TC P = PROFITS

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Presentation transcript:

PRODUCTION COSTS PROFIT FUNCTION COST FUNCTION P = TR – TC P = PROFITS TR = TOTAL REVENUE TC = TOTAL COST TR = PRICE X QUANTITY COST FUNCTION TC = FIXED COST + VARIABLE COST

DEMAND SCHEDULE

DEMAND

MATRIX COSTS

COST & REVENUE FUNCTION

MARGINAL ANALYSIS

How much to produce? Marginal cost Marginal Revenue MR=MC Average cost

To close or not to close? RULE OF THUMB A firm must close or should stop offering the service if at every level of production average revenue (AR) is less than the average cost (AC). Why?

Why close? AR < AC IT = P X Q AR = IT / Q = P AR = P = D AC = TC/Q PROFIT = TR – TC AVERAGE P = A R – A C IF A P < 0 THEN A C > A R AC > P