1. Profit Maximization

2. Profit maximization Total Revenue - Total Cost Profit =
Total Cost = Fixed Cost + Variable Cost
Fixed vs. Variable… examples?
Fixed – rent, loan payments, capital equipment
Variable – labor, raw materials
Firms want TR > TC…
But how do they maximize this profit?
MARGINAL ANALYSIS!!!!
Firms act on the margin
Additional workers
Layoffs
Total Revenue - Total Cost

3. Profit maximization Marginal Cost = ∆ Cost of Inputs/ ∆ Output
Do all costs change when you increase production in the short run?
Revised equation: MC = ∆ Variable Cost/ ∆ Output
Marginal Revenue =
MC and MR are PER UNIT measurements
Profit Maximization:
As long as MR > MC, producers will continue to produce.
Reach the point where MR = MC
If Coca Cola can invest $2000 to produce 10,000 additional cans of coke that they can sell for $0.30 a can.... Should they?
MC = $2000/10,000 = $0.20 per can
MR = $0.30 per can
Yesssss!!!!!! - $0.10 profit per can!
Production Function.notebook
Price each unit is sold for
?????