Cost and Revenue Curves
ECO/533 Economics for Managerial Decision Making
April 7, 2005
Total profit is the product of profit per unit and the quantity. To maximize profit, quantity is chosen at the point where marginal cost (MR) is equal to marginal revenue (MR) which is where the two graphs intersect. This is the ideal situation to a profit seeking company. Since price is greater than the Average Total Cost (ATC), for each unit sold the profit per unit is simply the value by which the price exceeds the ATC. To maximize profit the firm should continue production in the short run at the quantity where MR=MC. A profit maximizing output means every unit of output represents greater marginal revenue than marginal cost of output. In the case of the State of California in the simulation producing 120,000 units, where MR=MC will result in maximum profit. Any units produced where MC>MR will result in a drop in total revenue due to added cost.
When the price of oranges is lowered the plant will produce at 130,000 unit capacity. At that rate the MC=MR, the MR is above the ATC, the AFC is at its lowest so is the AVC. At 130,000 units the Total Revenue (TR) is greater than the Total Cost resulting in . The Average Variable Cost (AVC) curve will shift downward when the price of oranges is lowered resulting the Average Total Cost (ATC) curve to be lowered too. If the fixed cost has changed we will see an upward move in the Average Fixed Cost (AFC) curve that will lead to an upward shift in the Average Total Cost (ATC) curve. The unit price goes up as the the fixed cost increases. The Total Cost (TC) curve will move upward as the total Revenue (TR) moves downward.
When MR=MC occurs where the price is equal to the AVC at this point companies generally will make the decision to shutdown in the short run. The losses at this point are exactly equal to the Total Fixed Cost (TFC). Operating at a price below this price means...
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