1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Robin Naylor, Department of Economics, Warwick
Topic 2: Lecture 12
Now revise B&B 4th Ed., pp ;
Robin Naylor, Department of Economics, Warwick