1. Asst. Prof. Dr. Serdar AYAN
CH7 : Output, Price, and
Profit :
The Importance of
Marginal Analysis
Asst. Prof. Dr. Serdar AYAN

2. SHORT-RUN PRODUCTION COSTS
Fixed Costs
Total Fixed Costs
Average Fixed Costs =
Total Fixed Costs
Quantity
Variable Costs
Total Variable Costs
Average Variable Costs =
Total Variable Costs
Quantity

3. SHORT-RUN PRODUCTION COSTS
Total Cost
= Total Fixed + Variable Costs
Average Total Cost =
Total Costs
Quantity
Marginal Cost
Total Variable Costs
Marginal Cost =
Change in Total Costs
Change in Quantity

4. SHORT-RUN PRODUCTION COSTS Summary of Definitions
Total Fixed Costs = TFC
Total Variable Costs = TVC
Total Costs = TC
Average Fixed Costs = AFC
Average Variable Costs = AVC
Average Total Costs = ATC
Marginal Cost = MC

5. SHORT-RUN COSTS GRAPHICALLYTC
TVC
Costs (dollars)
TFC
Quantity

6. LONG-RUN PRODUCTION COSTS
Unit Costs
Output

7. LONG-RUN PRODUCTION COSTS
The Long-run ATC just “envelopes”
all of the short-run ATC curves
Unit Costs
Output

8. LONG-RUN PRODUCTION COSTS
Unit Costs
Long-run ATC
Output

9. ECONOMIES AND DISECONOMIES OF SCALE
Constant returns
to scale
Diseconomies
of scale
Unit Costs
Long-run ATC
Output

10. Price and Quantity: One Decision, Not Two
Firms face a demand curve on which price and quantity are related.
They can choose either price or quantity, but not both.

11. FIGURE 7-1 Demand Curve for Al’s Garages35 D i h g e f d c b a j 30 26
Profit maximum 25 22 20 19
Price per Garage (thousands $) 16 15 10 5 1 2 3 4 5 6 7 8 9 10
Output, Garages Marketed per Year .

12. Total Profit
Simplifying assumption: maximum total profit is the firm’s goal.
Total profit = total revenue - total costs

13. Total Profit Total, Average, and Marginal Revenue
Total Revenue = P  Q
Average Revenue = TR/Q = (P  Q)/Q = P
Marginal Revenue =  total revenue from one more unit of output =
TR/ Q.
Marginal Cost =  total cost from one more unit of output =
TC/ Q.

14. TABLE 7-1 Demand for Al’s Garages

15. FIGURE 7-2 Total Revenue Curve for Al’s Garages
140 TR A B C D E F G H I J
120
100 80
Total Revenue per Year (thousands $) 60 40 20 1 2 3 4 5 6 7 8 9 10
Output, Garages Sold per Year

16. TABLE 7-2 Al’s Total, Average, and Marginal Costs

17. FIGURE 7-3 (a) Cost Curves for Al’s Garages
200 TC
180
160
140
120
Total Cost per Year (thousands $)
100 80 60 40 20 1 2 3 4 5 6 7 8 9 10
Output, Garages per Year
(a) Total Cost

18. FIGURE 7-3 (b) Cost Curves for Al’s Garages45 40 35 30 25
Average Cost per Garage (thousands $) AC 20 15 10 5 1 2 3 4 5 6 7 8 9 10
Output, Garages per Year
(b) Average Cost

19. FIGURE 7-3 (c) Cost Curves for Al’s Garages50 MC 45 40 35 30
Marginal Cost per Added Garage (thousands $) 25 20 15 10 5 1 2 3 4 5 6 7 8 9 10
Output, Garages per Year
(c) Marginal Cost

20. Total Profit Maximization of Total Profits
Profits typically increase with output, then fall.
Some intermediate level of output, therefore, generates the maximum profit.

21. TABLE 7-3 TR, Costs, and Profit for Al’s Garages.

22. Marginal Analysis and Maximization of Total Profit
Marginal profit is the slope of the total profit curve.
Profit is at a maximum when the marginal profit is zero.

23. FIGURE 7-4 (a) Profit Maximization
200 TC
180
160
140 TR
120
Profit
Total Revenue, Total Cost per Year (thousands $)
100 96 A
22,000 80 74 B 60 40 20 1 2 3 4 5 6 7 8 9 10
Output, Garages per Year
(a) Total Revenue. Total Cost

24. FIGURE 7-4 (b) Profit Maximization
Total profit F 40 M 34 D E C 20 9 2 3 4 5 6 7 8 10
Total Profit per Year (thousands $)
–20 1
–40
–60
–80
Output, Garages per Year
(b) Total Profit

25. Marginal Analysis and Maximization of Total Profit
Optimum Marginal Revenue and Marginal Cost
If MR > MC,  production   profits
If MR < MC,  production   profits
Profit maximizing level out output: MR = MC

26. TABLE 7-4 Al’s Marginal Revenue and Marginal Cost

27. FIGURE 7-5(a) Profit Maxim: Another Graphical Interpretation50 MC 40 30 MR
MR and MC per Garage per Year
(thousands $) 20 E 10 1 2 3 4 5 6 7 8 9 10
–10
Output, Garages per Year
(a) Marginal Revenue and Marginal Cost

28. Marginal Analysis and Maximization of Total Profit
Finding the Optimal Price from Optimal Output
MR = MC: rule for determining the level of output
Demand curve  price buyers will pay to purchase that level of output
Both output and price are now determined for the profit maximizing firm.

29. Logic of Marginal Analysis & Maximization
Application: Fixed Cost and Profit Maximization
An increase in fixed costs does not change optimal output or price because it does not affect marginal costs.