Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 14 of 36 Firms In Competitive Markets
Section 6 of 24
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Table 2 here
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The goal of all firms including competitive firms is to maximize profit.
Profit = Total Revenue - Total Cost
Here we examine
· how a competitive firm maximizes profit
· how profit maximization determines the supply curve
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Table 2 column 1
· shows the Quantity (Q) of milk the Vaca Family Dairy Farm produces
· in a given time period
Column 2
· shows the farm's Total Revenue (TR)
· which is unit price $6 times Q
Column 3
· shows the farm's Total Cost (TC), which includes
· fixed costs, which are $3 at every level of Q
· variable costs, which depend on Q
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Here, at each level of Q, variable cost = TC - $3
Column 4 shows the farm's total profit = TR - TC
At Q of 0 gallons, the farm has a loss of $3 = $0 - $3
At Q of 1 gallon, it has a profit of $1 = $6 - $5
At Q of 2 gallons, it has a profit of $4 = $12 - $8
At Q of 3 gallons, it has a profit of $6 = $18 - $12
At Q of 4 gallons, it has a profit of $7 = $24 - $17
At Q of 5 gallons, it has a profit of $7 = $30 - $23
At Q of 6 gallons, it has a profit of $6 = $36 - $30
Because the Vaca family's goal is to maximize profit, it chooses to produce the quantity of milk that maximizes profit, Q of 4 or 5 gallons
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