1. Profit and the Firm

2. What is profit? Profit = Total Revenue – Total Costs Price. Q – Total Costs Total Costs = Total Explicit Costs – Total Implicit costs Business Profit = TR – T. Explicit Costs When economic profit is equal to zero, business profit is equal to “normal” profit. When a firm is making less than a normal profit it may consider leaving the industry in long run while it may continue operation in the short run

3. Profit and the Firm A business firm’s primary objective is making profits A firm that cannot remain profitable loses its value and will eventually fail. Investors may tolerate or even accept temporary losses in the hope of higher future profits, but there is a limit to their patience. »The demise of many internet and technology companies in recent years is a good example of investors’ disappointment in companies that fail to show a profit.

4. Profit: A Simple Case  = TR - TC TR = P. Q ; P = Constant TC = TFC + AVC. Q ; AVC = MC Or TC = AFC. Q + AVC. Q  = P.Q - AFC. Q - AVC.Q

5. Or we can write: Or we can write: Profit = PQ - TFC - AVC.Q Break-even Q: Profit = Zero PQ -TFC -AVC.Q = 0, or Q(P-AVC) = TFC TFC Q b = ------------- P -AVC

6. Break-Even Quantity TR = P.Q TC = TFC +AVC. Q TFC 0 Q $ TFC’ QbQ’b

7. Profit: The Case of Increasing Marginal Cost Profit = P.Q - TC (Q) oQ $ TR TC MC MR

8. Profit: The case increasing marginal cost and downward-sloping demand TR TC o Q $ MR MC Q1Q2 Q3

9. The Profit Function Q $ Profit Marginal Profit = 0 Q*

10. Profit-Maximizing Rule Set marginal profit = zero Set MR = MC Set Price = MC (Perfect Competition) Set LMC = MR Set LMC = Price (Perfect Competition) Set MRPL = Wage Set MRPK = Rent