Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 13 of 36 - Firms In Competitive Markets
Section 7 of 24
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In the Table 2 and Figure T2 example of the Vaca family farm, column 4 total profit is maximized when the farm produces 4 or 5 gallons of milk, for a total profit of $7.
The Vacas can find the profit-maximizing quantity for each marginal (additional) gallon produced by comparing
· column 5 Marginal Revenue (MR)
· column 6 Marginal Cost (MC)
…
Column 5 computes MR from change in total revenue as quantity (Q) increases by 1 gallon
Column 6 computes MC from change in total cost as Q increases by 1 gallon.
Column 7 shows the change in profit MR-MC for each additional gallon produced.
Quantity of 1 has
· a Marginal Revenue of $6
· a Marginal Cost of $2
· a change in profit of +$4
Q of 2 has
· a MR of $6
· a MC of $3
· a change in profit of +$3
Q of 3 has
· a MR of $6
· a MC of $4
· a change in profit of +$2
Q of 4 has
· a MR of $6
· a MC of $5
· a change in profit of +$1
Q of 5 has
· a MR of $6
· a MC of $6
· a change in profit of $0
Q of 6 has
· a MR of $6
· a MC of $7
· a change in profit of -$1
Q of 7 has
· a MR of $6
· a MC of $8
· a change in profit of -$2
Q of 8 has
· a MR of $6
· a MC of $9
· a change in profit of -$3
…
As long as MR exceeds MC
· an increase in sales revenue exceeds increase in costs required to get that extra revenue
· increasing Q increases profit
… …
profit is maximized
rieki ga saidaika
利益が最大化
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