CH07
CH07
CH07
Revenues Analysis
Profit Maximization
Lecture Notes
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Costs Analysis
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Lecture Notes
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Total cost takes into account all of the costs a business faces in the
course of its operations.
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Total Fixed The costs that remain the same regardless of level of
Cost (TFC) production or services offered.
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TC
TC,
TFC,
TVC TVC
TFC
output
Figure (47): Total Costs
Note When the output equal zero, The total cost curve begins from total
fixed cost because there is not variable cost and all costs are fixed cost.
The vertical distance between the total cost curve and the total
Note
variable cost curve is total fixed cost.
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Lecture Notes
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The most useful measure of cost is marginal cost which means: the extra
cost incurred when producing one more unit of output.
Marginal cost is more useful than total cost because it shows the
Note
change in total variable costs when output increases.
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Lecture Notes
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There are three average cost concepts:
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ATC, AFC,
AVC, MC MC ATC
AVC
AFC
output
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Average fixed cost (AFC) slopes downward.
Average variable cost (AVC) and average total cost (ATC) are U-
shaped, it decrease and reach the minimum point then increase.
The vertical distance between (AVC) and (ATC) curves is equal to
average fixed cost (that distance shrinks as output increases
because average fixed cost decreases with increasing output).
The marginal cost curve intersects (AVC) and (ATC) curves at their
minimum points.
When marginal cost is less than average cost, average cost is
decreasing; When marginal cost exceeds average cost, average
cost is increasing.
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Lecture Notes
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Revenues Analysis
The total revenue is all the revenue that a business receives. It is total
amount earned by a firm from the sale of its products.
Total revenue is equal to the number of units sold multi plied by the
average price per unit.
TR = quantities x price
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Price is determined by the intersection of market demand and market
supply; individual firms do not have any influence on the market price
in perfect competition. Once the market price has been determined by
market supply and demand forces, individual firms become price takers.
P D P
S
Q Q
Figure (49): Price in perfect competition market
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Note
Because of individual firms in perfect competition market do not have any influence on
the market price (the price is constant), total revenue is a straight line.
Quantity 0 1 2 3 4 5 6 7 8 9 10 11 12
Price 10 10 10 10 10 10 10 10 10 10 10 10 10
Total revenue 0 10 20 30 40 50 60 70 80 90 100 110 120
Marginal revenue - 10 10 10 10 10 10 10 10 10 10 10 10
Average revenue - 10 10 10 10 10 10 10 10 10 10 10 10
Table (12): Price and Total revenue in perfect competition
P market TR
TR
P = AR = MR
Q Q
Figure (50): Price and Total revenue in perfect competition
market
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Lecture Notes
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For a monopoly firm that is a price maker rather than price
taker, market control means the firm faces a negatively-sloped demand
curve. As such, the price received is not fixed, but depends on the
quantity of output sold.
Table (13) and figure (51), both show a case in which there is a monopoly
firm (who is the sole seller of its product, and where there are no close
substitutes). This firm faces a negatively-sloped demand curve. To sell a
larger quantity of a product, it must lower the price.
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Quantity 0 1 2 3 4 5 6 7 8 9 10 11 12
Price 10.5 10 9.5 9 8.5 8 7.5 7 6.5 6 5.5 5 4.5
Total revenue 0 10 19 27 34 40 45 49 52 54 55 55 54
Marginal revenue - 10 9 8 7 6 5 4 3 2 1 0 -1
Average revenue - 10 9.5 9 8.5 8 7.5 7 6.5 6 5.5 5 4.5
P TR
TR
P = AR
MR
Q Q
Figure (51): Price and Total revenue in monopoly market
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The more important measure of revenue is marginal revenue, which
means the extra revenue a business receives from the production and
sale of one additional unit of output.
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Lecture Notes
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Profit Maximization
According this approach, a firm produce the output where the distance
between total revenue and total cost (profit) as big as possible.
EX.
From table (14), When we put production schedule with both costs and
revenues, we find that the profit reach the biggest number when the firm
employ the seventh worker, since profit become 485. At any output less or
more than 125 using 7 workers, profits would decrease.
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Lecture Notes
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PRODUCTION SCHEDULE Costs Revenues
Total Total
Regions Total Marginal Total Marginal Total Marginal profit
labor fixed variable
of product product cost t cost revenue revenue
cost cost al
production
0 0 -- 40 0 40 0 0 9 -40
1 10 10 40 60 100 6 90 9 -10
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Most people, as well as most businesses, use marginal analysis, a type
of decision making that compares the extra benefits of an action to
the extra costs of taking the action.
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