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 8 of 24
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Table 2 here
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Per Table 2, when the Vaca Farm reaches quantity 5 gallons of milk total profit starts to decrease.
The sixth gallon would have
· a marginal revenue (MR, column 5) of $6
· a marginal cost (MC, column 6) of $7
Producing the sixth gallon would reduce column 4 total profit by $1, from $7 to $6
So, the Vacas do not produce more than 5 gallons.
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Restated from Chapter 1, the Ten Principles of Economics:
1: people face trade-offs
2: the cost of something is what you give up to get it
3: rational people think at the margin
4: people respond to incentives
5: trade can make everyone better off
6: markets are usually a good way to organize economic activity
7: governments can sometimes improve market outcomes
8: a country's standard of living depends on its ability to produce goods and services
9: prices rise when the government issues too much money
10: society faces a short-run trade-off between inflation and unemployment
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One of the Ten Principles of Economics, #3: rational people think at the margin.
If MR is greater than MC
· here it is from quantity (Q) of 1 to Q of 5
· the Vacas should increase milk production
· because it increases MR more than MC and adds to profit
If MR is less than MC
· here it is from Q of 5 to Q of 8
· the Vacas should decrease production
· because it decreases MC more than MR and adds to profit
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When the Vacas and all firms think at the margin, they
· make incremental adjustments to the level of production
· are naturally led to produce the profit-maximizing quantity
Here for the Vacas the profit-maximizing quantity is 4 or 5 units.
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