Economics – Profit and Revenue

· 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

Profit Maximisation

· 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

Page created by: Tejvan Pettinger,November 28, 2012