![]() Longer, the height is less, and this would actually have a lower area. Let's say this right over here, notice even though that the base of this rectangle is And then if it decides,įor some irrational reason, to produce more than this quantity that we settled on before, This would be the profit that the firm is going toīe making from those units. Then the rectangle would only be this big. Think about what would happen if they only produced this much. Is a profit-maximizing firm, a rational profit-maximizing firm, would want to maximize this area. So for those of you whoĪre more visually inclined, one way to think about it And what you get is theĪrea of this rectangle. Getting on average per unit, and then multiply that And so what you could do is, this is how much it's ![]() And this right over here, is the average total cost per unit. It's also going to be the average revenue that it gets per unit. Now, a natural question might be how much profit will it makeįrom producing that quantity? Well, all you have to do is think about, this is the marginal revenue that it gets, and another way you could think about it, because this is constant, It will produce this quantity right over there. Will produce the quantity where marginal cost So a rational firm that's trying to maximize its profit Well, no rational person, if they want to maximize ![]() That would be like saying, hey, I'm gonna sell a doughnut for $1 even though that incremental doughnut costs me $1.10 to produce. Why is that? Well, if the marginal cost is higher than the marginal revenue, But then, after that point, it makes no sense at allįor it to keep producing. It might be able to utilize some of its fixed costs a little bit. But right at that unit where the marginal cost isĮqual to the marginal revenue, well, there, on that incremental unit, the firm just breaks evenĪt least on the margin. As long as the marginal revenue is higher than the marginal cost, it's rational for the firm to produce. Now, it gets interestingĪs the marginal cost starts to approach the marginal revenue. Producing, keep producing, keep producing, keep producing. Incremental unit it produces, it's going to bring in some Higher than the marginal cost, well, that means every So how much would a rational firm produce in order to maximize its profit? If the marginal revenue is Once again, for every incremental unit, how much revenue you're going to get, so it would just be So one way to think about it is this would be the unit Revenue in this industry, in this market, is right over here. Unit of what it produces, maybe this is a doughnut company, the incremental amount per doughnut is going to stay the same regardless of how much this firm in particular produces. Much this firm produces, the incremental revenue per Very competitive market, and so it is a price-taker. And we're going to assume that this firm is in a And in particular, we are going to introduce the idea of marginal revenue. And so to understand how a firm might go about maximizing its profit or what quantity it would need to produce to maximize its profit based on this, on its cost structure, we have to introduce revenue But one way to thinkĪbout it, very generally, it's how much a firm brings in, you could consider that its revenue, minus its costs, minus its costs. Now, profit, you are probably already familiar with the term. Going to extend that analysis by starting to think about profit. Is driven by quantity, and we think about otherĪverage costs as well. And in particular, we've thought about how marginal cost is driven by quantity and how average total cost We've spent several videos talking about the costs of a firm.
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