Search results
Results From The WOW.Com Content Network
An example diagram of Profit Maximization: In the supply and demand graph, the output of is the intersection point of (Marginal Revenue) and (Marginal Cost), where =.The firm which produces at this output level is said to maximize profits.
The company is able to collect a price based on the average revenue (AR) curve. The difference between the company's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit. A short-run monopolistic competition equilibrium graph has the same properties of a monopoly equilibrium graph.
The mathematical profit maximization conditions ("first order conditions") ensure the price elasticity of demand must be less than negative one, [2] [7] since no rational firm that attempts to maximize its profit would incur additional cost (a positive marginal cost) in order to reduce revenue (when MR < 0). [1]
Mathematically, the markup rule can be derived for a firm with price-setting power by maximizing the following expression for profit: = () where Q = quantity sold, P(Q) = inverse demand function, and thereby the price at which Q can be sold given the existing demand C(Q) = total cost of producing Q.
Notice that at the profit-maximizing quantity where =, we must have = which is why we set the above equations equal to zero. Now that we have two equations describing the states at which each firm is producing at the profit-maximizing quantity, we can simply solve this system of equations to obtain each firm's optimal level of output, q 1 , q 2 ...
In a single-goods case, a positive economic profit happens when the firm's average cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity of output multiplied by the difference between the average cost and the price.
Withholding production to drive prices higher produces additional profit, which is called monopoly profits. [ 2 ] According to classical and neoclassical economic thought, firms in a perfectly competitive market are price takers because no firm can charge a price that is different from the equilibrium price set within the entire industry's ...
The unmaximized profit function is (,,,,) =. From this can be derived the profit-maximizing choices of inputs and the maximized profit function, a function just of the input and output prices, which is