1. Profit maximisation rule.....MC = MR
Intro to Profits
Mrs Gordon

2. Return of HWK Posters…. Key issue is of FC – NOT linked to output!
Some examples still had FC items as VC! Check notes on your work.
MC Q’s
See next slide

3. Profit maximisation rule.....MC = MR
Explanation:
AC MC
8000 C
Answer
Mrs Gordon

4. E Explanation: AVC = VC/output TC = FC + VC VC = TC-FC
= (15000 – 10000)/5000 = £1 E

5. Profit maximisation rule.....MC = MR
Intro to Profits
Mrs Gordon

6. Profit maximisation rule.....MC = MR
Aims…
To understand the different types of profit.
Tesco Profits
Mrs Gordon

7. But 1st…can you remember the diagram….?
Quick test….draw a business cost diagram to show: MC
AVC
ATC
AFC
Label the point where diminishing returns set in.
Label the most productively efficient output level.
This diagram is central to this unit of work!!!
You need to be able to have the labels correctly labeled and in the right order!

8. Draw this in your notes!

9. Perspectives on profit
“What is a man if he is not a thief who openly charges as much as he can for the goods he sells?”
Gandhi
“Civilization and profits go hand in hand”
Calvin Coolidge (30th US president)

10. Profit maximisation rule.....MC = MR
What is profit?
Mrs Gordon

11. Accounting Profits… Is the difference between revenue and costs.
A firm will maximise profits where the difference between TR & TC is greatest.

12. The profit maximising level of output
Profit maximisation rule.....MC = MR
The profit maximising level of output
Need to add red lines on top to show TC and below to show MC (LRAC curve)
The points where MC cut MR (twice) are the same where TC cut TR 1st and 2nd is th max gap!!! SEE BOOK p 305
Another diagram to learn!
Mrs Gordon

13. A numeric example… Calculate the total profit at each level of output.
Output (m)
TR (£m)
TC (£m) 1 10 8 2 20 14 3 30 4 40 5 50 6 60 80
Calculate the total profit at each level of output.
What is the profit maximising level of output?
Calculate the MR & MC of production at each level of output.
Write a sentence to explain why MC = MR at the profit maximising level of output.

14. Create the graph… Use graph paper… Using the previous data…
Create TWO graphs directly underneath each other! Use the same scale for output on both
Top shows TR & TC
Underneath shows MR & MC
Mark on each – the breakeven level of output
The profit maximising level of output.

15. Different types of profit!

16. Different types of profit
Profit measures the return to risk when committing scarce resources to a market or industry
In economics there are 3 different types of profit:
Normal profit
Sub-normal profit
Abnormal profit

17. Normal Profits
Normal profit - is the minimum level of profit required to keep the factors of production in their current use in the long run
Normal profits reflect the opportunity cost of using funds to finance a business
If you wanted to start up your own business and put £50,000 of your own money into its start up, then you would look at how much £50k would earn you in a fairly risk-free way in a bank or building society deposit account. You could look at the interest you’d earn on that £50k as the minimum rate of return that you need to make from your business investment in order to keep going in the long run!
So your ‘normal’ profit must cover this opportunity cost of you running this business!

18. Sub-normal Profits
Because we treat normal profit as an opportunity cost of investing financial capital in a business, we normally include an estimate for normal profit in the average total cost curve, thus, if the firm covers its ATC (where AR meets AC) then it is making normal profits.
Sub-normal profit - is any profit less than normal profit (where price < average total cost)
So in our example, if you invested £50k and could get 1% IR…. Your normal profit would have to be £500… so if you only earned £200 profit …. It’s profit but sub-normal!

19. Shut down level
What would you do if your company earned subnormal profits?
Too much sub-normal profits will mean that the business will have to shut down in the long run!

20. Sub-normal profits in mortgage industry
Profit maximisation rule.....MC = MR
Sub-normal profits in mortgage industry
Many financial institutions are leaving the FIXED rate mortgage market – as they are experiencing sub-normal profits…. And the effect on the economy is?
Mrs Gordon

21. Super-normal Profits
Super normal or Abnormal profit - is any profit achieved in excess of normal profit - also known as supernormal profit
So in our example, if your business earned £3000 profit this year…. It’s super normal

22. Profit maximisation
MR = MC

23. Need to look at allocative efficiency
But in this lesson?

24. http://www. tutor2u. net/blog/index
Sony loss dvd 1 ½ min

25. Look at these figures… fill in the gaps…
Profit maximisation rule.....MC = MR
Look at these figures… fill in the gaps…
MR-MC
output TR TC
profit MR MC
‘extra’ profit 1 25 35 2 50 61 3 75 4
100 90 5
125
106 6
150
123 7
175
148 8
200
182 9
225
229
Another exercise….leave for HWK?
Extra profit = MR-MC….the firm will continue to increase output so long as there is ‘extra’ profit to be made… once its negative … stop sales!
Mrs Gordon

26. Profit maximisation rule.....MC = MR
The answers….
Uses concept
of contribution
What’s the optimal output?
output TR TC
profit MR MC
‘extra’ profit 1 25 35
-10 2 50 61
-11 26 -1 3 75 14 11 4
100 90 10 15 5
125
106 19 16 9 6
150
123 27 17 8 7
175
148
200
182 18 34 -9
225
229 -4 47
-22
So now you’ve got to plot the
TC & TR and the MR & MC data.
It can be on the same chart
Break even…
TR = TC
Survival
Extra profit = MR-MC….the firm will continue to increase output so long as there is ‘extra’ profit to be made… once its negative … stop sales!
Which is best …. Sell 6 or 7 units?
It depends on
business objectives!
Mrs Gordon

27. Plot the data onto a chart – it would look ‘something’ like this…
Maximum profit area
MR = MC

28. HWK
Find a business news article about a company recording profits or losses & analyse the key issues
Eg Tesco, Sony, Google etc
Use BBC, Guardian or other online newspaper search engine