· Total Revenue (TR): This is the total income a firm receives.
This will equal Price * Quantity
· Average Revenue (AR): = TR / Q
· Marginal Revenue (MR = the extra revenue gained from selling an extra
unit of a good
· Profit = Total revenue(TR) – Total Costs (TC) or
(AR – AC)* Q
· In classical economics it is assumed that firms will seek to maximise their profits. This occurs when the difference between TR – TC is the greatest.
· Profit maximisation will also occur at an output where MR = MC
· When MR> MC the firms is increasing its profits and Total Profit is increasing.
· When MR< MC total profit starts to fall
· Therefore profit is maximised where MR = MC
Definition Normal Profit.
This occurs when TR = TC. This is the breakeven point for a firm. It is the minimum profit level to keep the firm in the industry in the long run
Definition Supernormal Profit.
This occurs when TR > TC
Whether To Produce at all
If AR > ATC The firm is making supernormal profits
If AR= ATC The firm is making normal profits
IF AR< ATC but AR > AVC. it is making an operating profit, and is
covering its variable costs. However it is making a loss because it can not cover its fixed costs as well.
· In the short run it is best to keep producing because it has already paid for its fixed costs.
· It is at least making a contribution to its fixed costs
If AR <AVC The firm is likely to shut down in the short run.
Difficulties in Maximizing Profits: In the real world it is more difficult for firms to max profits because they do not have access to costs and MR easily, it is difficult to predict