1. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen CHAPTER 10 PROFIT MAXIMIZATION ANALYSIS 2 nd Semester, S.Y 2013 – 2014

2. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen The Big Questions How do firms behave? –The assumption: Profit is the main motivation for firms’ actions. –How do firms maximize profit? By controlling their variables: Price (if possible) Quantity Cost.

3. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen What is Profit Maximization?  The ultimate goal of a firm to achieve the most profit possible from its production and sales.  A profit-maximizing firm chooses both its inputs and its outputs with the sole goal of achieving maximum economic profits. seeks to maximize the difference between total revenue and total economic costs  If firms are strictly profit maximizers, they will make decisions in a “marginal” way. examine the marginal profit obtainable from producing one more unit of hiring one additional laborer. A firm sets its output where its marginal revenue equals its marginal cost: MR(q) = MC(q).

4. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen 8- 4 Two Steps to Maximizing Profit

5. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Profit Defined

6. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Total Revenue and Total Cost Defined

7. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and a firm has "broken even". For example, if a business firm sells fewer than 200 computers each month, it will make a loss, if it sells more, it will be a profit. With this information, the business managers will then need to see if they expect to be able to make and sell 200 computers per month. Break-even Analysis

8. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Cost, Revenue and Profit Function

9. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Suppose the fixed cost of production for a product is P100, the variable cost is P6.00 per unit and the product sells for P10 per unit. What is the break-even quantity and the break-even amount for total cost and total revenue? Problem – Break Even Analysis

10. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Break-even Analysis TR TC BEP

11. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Let’s Check Your Understanding!

12. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen 12 Copyright © Houghton Mifflin Company. All rights reserved. Marginal Revenue and Marginal Cost Defined

13. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Profit-Maximizing Rule To maximize profit a competitive firm will expand production until the revenue from an additional sale equals the cost of an additional sale. In short, MR = MC.  If marginal revenue is greater than marginal cost (MR > MC), then an additional unit of output increases revenues more than costs leading to greater profit.  If marginal revenue is less than marginal cost (MR < MC), then an additional unit of output increases costs more than revenues leading to less profit.  So, profit is maximized at a level of output where MR = MC.  If MC > MR (P) then reduce Q to increase profits  If MR (P) > MC then increase Q to increase profits

14. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Graphical Analysis – Profit Maximization profit risesprofit falls MC MR 0 600 500 400 300 200 100 –100 –200 Output Pesos 123456 7 8

15. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen MR = MC

16. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen MR and MC Schedule

17. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen MC MR AC MR and MC Curves

18. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Decision to Shut-Down, Enter or Exit The Firm's Short-Run Decision to Shut Down –In certain circumstances, a firm will decide to shut down and produce zero output. –There is a difference between a temporary shutdown and an exit from the market. A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market. If a firm shuts down temporarily, it still must pay fixed costs. If a firm exits the industry in the long run, it has no costs.

19. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Decision to Shut-Down, Enter or Exit

20. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen

21. BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen