2. 1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

3. 2 Chapter 9 Maximizing Profit 3/4/2016 © ©1999 South-Western College Publishing

4. 3 This chapter discusses principles associated with MR = MC RuleLoss MinimizationProfit Maximization Total, Average, & Marginal Revenue Entrepreneurial Behavior © ©1999 South-Western College Publishing Corporate Empire Building

5. 4 What is Profit Maximization? The primary goal of a firm to achieve the most profit possible from its production and sales © ©1999 South-Western College Publishing

6. 5 What is Profit? Income earned by entrepreneurs © ©1999 South-Western College Publishing

7. 6 Find out more about entrepreneurs and other business owners: http://www.entrepreneurmag.com http://www.virtualentrepreneur.com http://www.be-your-own-boss.com http://www.tannedfeet.com © ©1999 South-Western College Publishing

8. 7 At what point of production are profits maximized? MR = MC © ©1999 South-Western College Publishing

9. 8 What does the word Marginal mean? The marginal unit is the last unit produced © ©1999 South-Western College Publishing

10. 9 What is Marginal Revenue? The change in total revenue generated by the sale of one additional unit of goods or services © ©1999 South-Western College Publishing

11. 10 What is Marginal Cost? The cost incurred on the last unit produced © ©1999 South-Western College Publishing

12. 11 Why are profits maximized at MR = MC? MR > MC (adds to profit) MR < MC (subtracts from profit) MR = MC (no $ gained or lost on the last unit) © ©1999 South-Western College Publishing

13. 12 What is Total Revenue? The price of a good multiplied by the number of units sold © ©1999 South-Western College Publishing

14. 13 What is Average Revenue? Total revenue divided by the quantity of goods or services sold © ©1999 South-Western College Publishing

15. 14 What is a Perfectly Competitive Market? homogeneous product many buyers and sellers no one has market power easy entry & easy exit can sell all bring to market © ©1999 South-Western College Publishing

16. 15 Why does P = MR in Perfect Competition? Because the price of the good is precisely what is added to total revenue © ©1999 South-Western College Publishing

17. 16 Why does AR=P? Because each unit is sold for the same price AR = (TR / Q) = P © ©1999 South-Western College Publishing

18. 17 What determines Market Price? Demand & Supply © ©1999 South-Western College Publishing

19. 18 D S P3 Q3 P1 Surplus P2 Shortage 18

20. 19 The Firm’s Demand Curve in Perfect Competition Market quantity P S D Individual quantity P d 19

21. 20 Why is a Perfectly Competitive firm’s demand curve horizontal at the market price? All units brought to market can be sold at the market price © ©1999 South-Western College Publishing

22. 21 Q MC MR1 MR1=MC MR2 Profits are maximized where MR = MC MR2=MC P 21

23. 22 ATC MC MR=P P ATC Economic Profit 22 P Q

24. 23 Does the MR = MC Rule apply to minimizing losses? YES © ©1999 South-Western College Publishing

25. 24 ATC MC MR=P ATC P Loss 24

26. 25 What is a Fixed Cost? Costs that have to be paid regardless of the level of production © ©1999 South-Western College Publishing

27. 26 Are there any Fixed Costs in the Long Run? No, all costs are variable in the long run © ©1999 South-Western College Publishing

28. 27 ATC AVC MC ATC AVC Loss = Fixed Costs MR=P 27

29. 28 Why should a firm stay in business if it’s losing money? Because its losses may be less than its fixed costs © ©1999 South-Western College Publishing

30. 29 ATC AVC MC MR=P P ATC AVC Loss - Stay Open 29

31. 30 ATC AVC MC MR=P Loss - Close Down 30

32. 31 Is a firm’s first priority always maximizing profits? No! Sometime there are social, political and historical factors © ©1999 South-Western College Publishing

33. 32 Who is a Stakeholder? Someone who has a personal and consequential interest in the viability of the firm © ©1999 South-Western College Publishing

34. 33 Do Stakeholders always want to maximize profits? The preservation of the managerial class may have a higher priority © ©1999 South-Western College Publishing

35. 34 What does the word Margin mean? What is Total Revenue? What is Marginal Revenue? What is Marginal Cost? Why are profits maximized at MR = MC?Why are profits maximized at MR = MC? Why should a firm stay in business if it’s losing money?Why should a firm stay in business if it’s losing money?

36. 35 ENDEND © ©1999 South-Western College Publishing