AAEC 2305 Fundamentals of Ag Economics Chapter 4 – Continued Costs, Returns, and Profit Maximization

 Maximization : Total Output Basis Objective is to determine output level that will maximize profits. Producer compares total revenue to total cost at each pdn level to determine that output level that will maximize profits

Total Revenue Curve Total Revenue (TR) – amount of money received when the producer sells the product. TR = TPP * Py Since firm is a price taker, firm sells each additional unit of output for same price. T/F, the added revenue from each additional unit of output sold is Py T/F, TR is linear with slope equal to Py

Revenue Curves Diagram TR, TC, TVC, and TFC Firms will continue to expand pdn as long as increase in revenue is greater than increase in costs.  = TR – TC T/F, max  will occur when distance between TR and TC curve is greatest

Example – Table 4.3 pg. 85 Assume TFC = $10, Px = $4, and Py = $3 Given this information, Calculate TR, TFC, TVC, TC, and Profit. Furthermore, determine the  maximizing level of output use. XY

Decisions Under Changing Prices How are output levels adjusted when facing changing input or output prices? Changing Output Prices- – If output price  ’s, the level of revenue earned at each level of output changes. Changing Input Prices – – If input price  ’s, the total cost incurred at each level of output changes.

 Maximization: Per-Unit Output Basis Most managers do not make decisions looking at TR and TC. Most decisions are made at the “margin.” The output level that will maximize  is determined by comparing the amount that EACH ADDITIONAL unit of output adds to TR and TC. Recall, MC represents additional cost from producing an additional unit of output.

Per-Unit Revenue Concepts Average Revenue (AR) – average dollar amount received per-unit of output sold (produced) AR = TR / TPP = Py Marginal Revenue (MR) – addition to TR from selling (producing) an additional (one more) unit of output. MR =  TR /  Y = Py

Per-Unit Revenue Concepts Since the firm is a price taker, Py does not  with output levels. T/F, MR always equals Py. – Hence, MR and AR are graphed as a horizontal line – If output price changes, the position of MR and AR curves change. Additional revenue from selling an additional unit of output is equal to the price of that output.

Determining  Max: Per-unit Output Basis Combining per-unit cost curves with per- unit revenue measure, yields output level that will maximize . Firm will continue to expand pdn until added revenue received from additional unit of output sold is equal to the additional cost of producing that unit of output (firm compares MR to MC)

Economic Rule Profits are maximized when added cost of producing an additional unit of output is equal to additional revenue from selling that unit of output. ***  are max when MR = MC Diagram MR, MC, ATC, AVC, and AVC

Example – Table 4.5 pg 90 Assume TFC = $10, Px = $4, and Py = $3 Given this information, Calculate AFC, AVC, ATC, MC, and MR. Furthermore, determine the  maximizing level of output. XY

Decisions Under Changing Prices Changing Output Prices – If output price changes (  Py), the position of the MR curve will change. Hence, the point where MR=MC changes and pdn changes. Changing Input Prices – If input price changes (  Px), the MC and ATC curves will shift reflecting the change in the input price. Hence, the point where MR=MC changes and pdn changes