O MR

MC

, M

R

Q

MC

Q1 Q2

RuleThe firm should produce where MR = MC

PROVIDED that above that output MC exceeds MR and below

that output MR exceeds MC.

O

AR = D

AC

Q

Costs, revenue

AVC

Q

P = AVC

Shut down point

Using calculus to find maximum profit output

• TR = 48Q – Q2

• TC = 12 + 16Q + 3Q2

Q TR TC Tπ = TR –TC

0 0 12 -12

1 47 31 16

2 92 56 36

3 135 87 48

4 176 124 52

5 215 167 48

6 252 216 36

7 287 271 16

• FINDING WHERE MR = MC

• MR = dTR dQ

MC = dTC dQ

• Differentiating the TR and TC givesdTR = 48 – 2Q = MR dQ

dTC = 16 + 6Q = MC dQ

• Profit is maximized where MR = MC:

48 – 2Q = 16 + 6Q

• Solving this for Q gives: 32 = 8Q Q = 4

• The equation for total profit is Tπ = TR –TC

= 48Q – Q2 – (12 + 16Q + 3Q2)= -12 + 32Q – 4Q2

Putting Q = 4Tπ = 52

-6

-4

-2

0

2

4

6

8

10

0 1 2 3 4 5 6 7 8

AR

, M

R

Rs

Cro

res

MR

AR

Q

Slope = – 1

Slope = – 2

Type of market

Number of firms

Freedom of entry

Nature of product

Examples

Implication for demand curve of firm

Perfect competition

Very many

Unrestricted Homogenous (undifferentiated)

Grains (wheat) or vegetables

Horizontal; firm is a price taker

Monopolistic competition

Many / Several

Unrestricted DifferentiatedPlumbers, restaurants

Downward sloping but relatively elastic; firm has some control over prices.

Oligopoly or Cartel

Few Restricted1.Undifferentiated or 2. Differentiated

Cement, cars, electrical appliance, oil.

Downward sloping relatively inelastic but depends on reactions of rivals to a price change

Monopoly OneRestricted or completely blocked

UniqueWAPDA, or KESC

Downward sloping more inelastic than oligopoly; firm has considerable control over price

Type of market

Number of firms

Freedom of entry

Nature of product Examples

Implication for demand curve of firm

O O

P

Q(millions)

Q

AR

,MR

(R

S)

D

S

(a) The market (b) The firm

P*D=AR = MR

A price taking firm

O

D=AR = MR

MC

AC

Q*

AC

AR

Q

Costs, revenue

Firm makes super normal profits

V

K

T

L

O

D=AR = MR

MC

AC`

Q

Costs, revenue

Firm makes normal profits

V T

Q*

AR

O

D=AR = MR

MC AC``

AC

AR

Q

Costs, revenue

Firm makes loss

V

U

T

S

Q*