1. November 5, 2014 1.Lesson 3-4: Revenue, Profit, and Profit Maximization Rules 2.Activity 3-5 3.Quiz Friday: Lessons 1-4 (Cumulative Unit 3 Quiz)

2. Revenue Goal of the Firm?- Maximize its total profit! TP = TR – TC Three measures of revenue: Total Revenue: Total income a firm receives from selling a given level of output at a given price. TR = P x Q Average Revenue (Revenue per unit) AR = TR/Q = P Marginal Revenue: Extra revenue from 1 more unit MR = ΔTR/ΔQ

3. Profit Total Profit: Difference between Total Revenue and Total Cost TR – TC Average Profit: Profit the firm receives from one unit at a given level of output AP = TP/Q Marginal Profit: Change in Total Profit resulting from the firm selling one more unit of output (extra profit from one more unit) MP = ΔTP/ ΔQ

4. Profit Maximization Rules Q: So how many units of a good or service should a firm produce to maximize its total profit? RULE #1: PRODUCE OUTPUT WHERE MR = MC! RULE #2: FIRM SHOULD CHARGE THE PRICE ON THE DEMAND CURVE FOR ITS OPTIMAL OUTPUT LEVEL! RULE #3: A FIRM SHOULD SHUT DOWN (PRODUCE ZERO OUTPUT) IF TOTAL REVENUE IS LESS THAN TOTAL VARIABLE COST (TR < TVC) AT ITS OPTIMAL OUTPUT! Logic 1.If firm shuts down completely, it will have no TR and no TVC, but will still have TFC 2.If firm produces optimal output and has TR that is less than TVC, the firm will make a loss on producing combined with TFC! 3.If firm produces optimal output and has TR that is greater than TVC, the it can use leftover TR to apply towards TFC, making its loss less than TFC.