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Background to Supply. Background to Supply The Short-run Theory of Production.

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Presentation on theme: "Background to Supply. Background to Supply The Short-run Theory of Production."— Presentation transcript:

1 Background to Supply

2 Background to Supply The Short-run Theory of Production

3 SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP =  TPP/  Q V Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP =  TPP/  Q V

4 Wheat production per year from a particular farm (tonnes)

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8 SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP =  TPP/  Q V –graphical relationship between TPP, APP and MPP Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP =  TPP/  Q V –graphical relationship between TPP, APP and MPP

9 Number of farm workers Wheat production per year from a particular farm Tonnes of wheat produced per year Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 40

10 Number of farm workers Wheat production per year from a particular farm Tonnes of wheat produced per year Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 40

11 Wheat production per year from a particular farm Number of farm workers Tonnes of wheat produced per year TPP b Diminishing returns set in here d Maximum output

12 Wheat production per year from a particular farm Number of farm workers (L) Tonnes of wheat per year TPP Tonnes of wheat per year Number of farm workers (L)  TPP = 7  L = 1 MPP =  TPP /  L = 7

13 Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year MPP Number of farm workers (L) Number of farm workers (L)

14 Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP APP = TPP / L Number of farm workers (L) Number of farm workers (L)

15 b b Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP Diminishing returns set in here Number of farm workers (L) Number of farm workers (L)

16 Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP b d d Number of farm workers (L) Number of farm workers (L) Maximum output b

17 c c Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP b b d d Number of farm workers (L) Number of farm workers (L) Slope = TPP / L = APP

18 Background to Supply Short-run Costs

19 SHORT-RUN COSTS Measuring costs of production: opportunity costs –explicit costs –implicit costs Fixed costs and variable costs Total costs –total fixed cost (TFC) –total variable cost (TVC) –total cost (TC = TFC + TVC) Measuring costs of production: opportunity costs –explicit costs –implicit costs Fixed costs and variable costs Total costs –total fixed cost (TFC) –total variable cost (TVC) –total cost (TC = TFC + TVC)

20 Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 Total costs for firm X

21 TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 Total costs for firm X

22 TFC Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91

23 TVC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TFC Total costs for firm X

24 TVC TFC Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103

25 TC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TVC TFC Total costs for firm X

26 TC TVC TFC Total costs for firm X Diminishing marginal returns set in here

27 Marginal cost –marginal cost (MC) and the law of diminishing returns Marginal cost –marginal cost (MC) and the law of diminishing returns SHORT-RUN COSTS

28 Average and marginal physical product Output Quantity of the variable factor MPP b Diminishing returns set in here

29 Output Quantity of the variable factor MPP b c APP Average and marginal physical product

30 Output (Q) Costs (£) MC x Diminishing marginal returns set in here Marginal cost

31 –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves SHORT-RUN COSTS

32 TC TVC TFC Total costs for firm X Bottom of the MC curve

33 Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost SHORT-RUN COSTS

34 Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) SHORT-RUN COSTS

35 Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) SHORT-RUN COSTS

36 Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) SHORT-RUN COSTS

37 Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) –relationship between AC and MC Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) –relationship between AC and MC SHORT-RUN COSTS

38 Output (Q) Costs (£) AFC AVC MC x AC z y Average and marginal costs

39 Background to Supply The Long-run Theory of Production

40 LONG-RUN THEORY OF PRODUCTION All factors variable in long run The scale of production: –constant returns to scale –increasing returns to scale –decreasing returns to scale All factors variable in long run The scale of production: –constant returns to scale –increasing returns to scale –decreasing returns to scale

41 Short-run and long-run increases in output

42 Economies of scale –specialisation & division of labour –indivisibilities –container principle –greater efficiency of large machines –by-products –multi-stage production –organisational & administrative economies –financial economies –economies of scope Economies of scale –specialisation & division of labour –indivisibilities –container principle –greater efficiency of large machines –by-products –multi-stage production –organisational & administrative economies –financial economies –economies of scope LONG-RUN THEORY OF PRODUCTION

43 Diseconomies of scale External economies and diseconomies of scale Optimum combination of factors MPP a /P a = MPP b /P b... = MPP n /P n Diseconomies of scale External economies and diseconomies of scale Optimum combination of factors MPP a /P a = MPP b /P b... = MPP n /P n LONG-RUN THEORY OF PRODUCTION

44 Background to Supply Isoquant–Isocost Analysis

45 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape Isoquants –their shape

46 Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e Units of labour (L) Units of capital (K) An isoquant

47 Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e a Units of labour (L) Units of capital (K) An isoquant

48 Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e a b Units of labour (L) Units of capital (K) An isoquant

49 Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e a b c d e Units of labour (L) Units of capital (K) An isoquant

50 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution Isoquants –their shape –diminishing marginal rate of substitution

51 Units of capital (K) Units of labour (L) g h  K = 2  L = 1 isoquant MRS = 2 MRS =  K /  L Diminishing marginal rate of factor substitution

52 Units of capital (K) Units of labour (L) g h j k  K = 2  L = 1  K = 1  L = 1 isoquant MRS = 2 MRS = 1 MRS =  K /  L Diminishing marginal rate of factor substitution

53 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –an isoquant map Isoquants –their shape –diminishing marginal rate of substitution –an isoquant map

54 I1I1 I2I2 I3I3 I4I4 I5I5 Units of capital (K) Units of labour (L) An isoquant map

55 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale

56 I1I1 I2I2 I3I3 I4I4 I5I5 Units of capital (K) Units of labour (L) An isoquant map

57 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns

58 Units of capital (K) Units of labour (L) g h j k  K = 2  L = 1  K = 1  L = 1 isoquant MRS = 2 MRS = 1 MRS =  K /  L Diminishing marginal rate of factor substitution

59 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts

60 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost

61 Units of labour (L) Units of capital (K) Assumptions P K = £20 000 W = £10 000 TC = £300 000 An isocost

62 Units of labour (L) Units of capital (K) TC = £300 000 a b c d Assumptions P K = £20 000 W = £10 000 TC = £300 000 An isocost

63 ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost –shifts in the isocost Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost –shifts in the isocost

64 Least-cost combination of factors for a given output –point of tangency Least-cost combination of factors for a given output –point of tangency ISOQUANT- ISOCOST ANALYSIS

65 Units of labour (L) Units of capital (K) Assumptions P K = £20 000 W = £10 000 TC = £200 000 TC = £300 000 TC = £400 000 TC = £500 000 Finding the least-cost method of production

66 Units of labour (L) Units of capital (K) TPP 1 TC = £400 000 TC = £500 000 r s t Finding the least-cost method of production

67 Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach ISOQUANT- ISOCOST ANALYSIS

68 Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach Highest output for a given cost of production Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach Highest output for a given cost of production ISOQUANT- ISOCOST ANALYSIS

69 TPP 2 TPP 3 TPP 4 TPP 5 Units of capital (K) Units of labour (L) O TPP 1 Finding the maximum output for a given total cost

70 O Isocost Units of capital (K) Units of labour (L) TPP 2 TPP 3 TPP 4 TPP 5 TPP 1 Finding the maximum output for a given total cost

71 O s u Units of capital (K) Units of labour (L) TPP 2 TPP 3 TPP 4 TPP 5 r v TPP 1 Finding the maximum output for a given total cost

72 O K1K1 L1L1 Units of capital (K) Units of labour (L) TPP 2 TPP 3 TPP 4 TPP 5 r v s u TPP 1 t Finding the maximum output for a given total cost

73 Background to Supply Long-run Costs

74 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run average costs –shape of the LRAC curve –assumptions behind the curve

75 Alternative long-run average cost curves Output O Costs LRAC Economies of Scale

76 Output O Costs LRAC Alternative long-run average cost curves Diseconomies of Scale

77 Output O Costs LRAC Alternative long-run average cost curves Constant costs

78 A typical long-run average cost curve Output O Costs LRAC

79 A typical long-run average cost curve Output O Costs LRAC Economies of scale Constant costs Diseconomies of scale

80 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs

81 Long-run average and marginal costs Output O Costs LRAC LRMC Economies of Scale

82 Output O Costs LRAC Long-run average and marginal costs LRMC Diseconomies of Scale

83 Output O Costs LRAC Long-run average and marginal costs = LRMC Constant costs

84 Output O Costs Long-run average and marginal costs LRMC LRAC Initial economies of scale, then diseconomies of scale

85 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs

86 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve

87 Deriving long-run average cost curves: factories of fixed size SRAC 3 Costs Output O SRAC 4 SRAC 5 5 factories 4 factories 3 factories 2 factories 1 factory SRAC 1 SRAC 2

88 SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 LRAC Costs Output O Deriving long-run average cost curves: factories of fixed size

89 Deriving a long-run average cost curve: choice of factory size Costs Output O Examples of short-run average cost curves

90 LRAC Costs Output O Deriving a long-run average cost curve: choice of factory size

91 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice

92 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence

93 LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence –minimum efficient plant size Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence –minimum efficient plant size

94 Derivation of long-run costs from an isoquant map –derivation of long-run costs Derivation of long-run costs from an isoquant map –derivation of long-run costs LONG-RUN COSTS

95 Units of capital (K) O Units of labour (L) TC 1 100 TC 2 200 At an output of 200 LRAC = TC 2 / 200 Deriving an LRAC curve from an isoquant map

96 Units of capital (K) O Units of labour (L) TC 1 TC 2 TC 3 TC 4 TC 5 TC 6 TC 7 100 200 300 400 500 600 700 Note: increasing returns to scale up to 400 units; decreasing returns to scale above 400 units Deriving an LRAC curve from an isoquant map

97 Derivation of long-run costs from an isoquant map –derivation of long-run costs –the expansion path Derivation of long-run costs from an isoquant map –derivation of long-run costs –the expansion path LONG-RUN COSTS

98 Units of capital (K) O Units of labour (L) TC 1 TC 2 TC 3 TC 4 TC 5 TC 6 TC 7 100 200 300 400 500 600 700 Expansion path Deriving an LRAC curve from an isoquant map

99 Background to Supply Revenue

100 REVENUE Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR) Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR)

101 O O Price (£) AR, MR (£) Q (millions)Q (hundreds) PePe S D (a) The market(b) The firm Deriving a firm’s AR and MR: price-taking firm

102 O O Price (£) AR, MR (£) PePe S D D = AR = MR Q (millions)Q (hundreds) (a) The market(b) The firm Deriving a firm’s AR and MR: price-taking firm

103 REVENUE Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR)

104 Total revenue for a price-taking firm TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555

105 TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555 TR (£) 0 1000 2000 3000 4000 5000 6000 Total revenue for a price-taking firm

106 TR TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555 TR (£) 0 1000 2000 3000 4000 5000 6000 Total revenue for a price-taking firm

107 TR TR (£) Quantity Total revenue for a price-taking firm

108 Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) REVENUE

109 Revenues for a firm facing a downward-sloping demand curve

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112 AR and MR curves for a firm facing a downward-sloping D curve Q (units) 12345671234567 P =AR (£) 87654328765432 AR AR, MR (£) Quantity

113 Q (units) 12345671234567 P =AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 MR (£) 6 4 2 0 -2 -4 MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve AR

114 Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) REVENUE

115 TR curve for a firm facing a downward-sloping D curve Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14

116 TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14

117 Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand REVENUE

118 TR curve for a firm facing a downward-sloping D curve TR Elasticity = -1 Elastic Inelastic Quantity TR (£)

119 Elasticity = -1 Elastic Inelastic AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve MR AR

120 Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand Shifts in revenue curves Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand Shifts in revenue curves REVENUE

121 Background to Supply Profit Maximisation

122 PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC Using total curves –maximising difference between TR and TC

123 TR, TC, T  (£) Quantity Finding maximum profit using total curves

124 TR, TC, T  (£) TR Quantity Finding maximum profit using total curves

125 TR, TC, T  (£) TR TC Quantity Finding maximum profit using total curves

126 PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using total curves –maximising difference between TR and TC –the total profit curve

127 TR, TC, T  (£) TT TR TC Quantity Finding maximum profit using total curves

128 TR, TC, T  (£) TT TR TC a b c d Quantity Finding maximum profit using total curves

129 TR, TC, T  (£) TT TR TC d e f Quantity Finding maximum profit using total curves

130 PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves

131 PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC

132 Quantity Costs and revenue (£) Finding the profit-maximising output using marginal curves

133 Quantity Costs and revenue (£) MC Finding the profit-maximising output using marginal curves

134 Quantity Costs and revenue (£) e MR MC Profit-maximising output Finding the profit-maximising output using marginal curves

135 PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC –stage 2: using AR and AC curves to measure maximum profit Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC –stage 2: using AR and AC curves to measure maximum profit

136 Quantity Costs and revenue (£) Measuring the maximum profit using average curves MR MC

137 Quantity Costs and revenue (£) MR MC AR Measuring the maximum profit using average curves

138 6.00 4.50 T O T A L P R O F I T MR Quantity Costs and revenue (£) MC AC AR b a Total profit = £1.50 x 3 = £4.50 Measuring the maximum profit using average curves

139 Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC PROFIT MAXIMISATION

140 LOSS O Costs and revenue (£) Quantity MC AC AR MR Q AC AR Loss-minimising output

141 Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC PROFIT MAXIMISATION

142 The short-run shut-down point O Costs and revenue (£) Quantity AR AVC AC P = AVC Q

143 Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC –long-run shut-down point: P = LRAC Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC –long-run shut-down point: P = LRAC PROFIT MAXIMISATION


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