Profit Maximization in Shotr-run: MR/MC ApproachThis is a featured page

Profit-maximizing case
Profit Maximization in Shotr-run: MR/MC Approach - Welker's Wikinomics Page
  • As long as MRDARP > AVC at the point where MC = MR, profit is maximized and production should continue
  • At any point where MR>MC, keep producing!! You can still profit more
  • At any point where MR<MC, reduce production. It only makes sense to produce less, because your costs are already more than what you're gaining
  • Firms must sell at the market price because
    • 1) demand is perfectly elastic so higher price drops quantity consumed to zero
    • 2) if price is decreased, ATC and AVC still remain unaffected, and economic profit decreases.
  • If Qpm = optimal outputs, then economic profit = Q(P-ATC)


Loss-minimizing case
Profit Maximization in Shotr-run: MR/MC Approach - Welker's Wikinomics Page
  • Even though the firm is not earning any economic profit, it is earning enough to pay their laborers (AVC), and thus it incurs less loss compared to the whole of average fixed cost.
  • In this situation, the company should continue producing the product.
  • P = MR > AVC , P = MR < ATC --> point where MC = MR minimize its loss
  • Economic loss = Q (ATC - P)
  • When AVC < P < ATC, the firm can stay open as long as they can cover the AVC
  • If a firm can cover all of the AVC and even part of the fixed costs, they will lose less than shutting down, as MR < ATC
    • Shutting down would mean losing everything and still have to pay for fixed costs, while in the loss minimizing case, costs are still covered.

Shut-down case

Profit Maximization in Shotr-run: MR/MC Approach - Welker's Wikinomics Page
  • This is when the amount of lost revenue that a firm gets from producing a unit is even greater than the cost of shutting down the company. (P = MR < AVC < ATC)
  • The only time when a company should shut down!
  • All the costs are above the equilibrium price line, meaning that the company will just lose money by producing its goods.



No user avatar
Robert.Wang 		Latest page update: made by Robert.Wang , Nov 18 2007, 6:02 AM EST (about this update About This Update Robert.Wang Edited by Robert.Wang

3 words added
5 words deleted

view changes
- complete history)
Keyword tags: None
More Info: links to this page

Threads for this page

There are no threads for this page.  Be the first to start a new thread.