ECO1A Profit Maximization

Topics: Monopoly, Economics, Oligopoly Pages: 7 (1062 words) Published: March 21, 2015


Economics1A
3rd Assignment

Presented to:
Prof. Michael T. Noel

Presented by:
Joymie Wilver C. Dayon

January, 2015

1. What is Profit Maximization using TR-TC Approach?
Profit Maximization using TR-TC Approach is a method in determining the Profit and the Loss of a certain Company. To obtain the profit maximizing output quantity, we start by recognizing that profit is equal to total revenue (TR) minus total cost (TC). Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph. (Lipsey, 2011)

Figure 1.Illustration of Profit Maximization using TR-TC Approach.

A method in determining the Profit and the Loss of a certain Company is one of the fundamentals in Economics. The profit-maximizing output is the one at which this difference reaches its maximum. In the accompanying diagram, the linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price. The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB. This output level is also the one at which the total profit curve is at its maximum. (Lipsey, 2011)

Figure 2. Illustration of Profit Maximization: TR-TC Approach.
Therefore, Profit Maximization using TR-TC Approach is one of the fundamentals in Economics.

2.) What is Profit Maximization using MR-MC Approach?
Profit Maximization using MR-MC Approach is a method wherein the profit-maximizing quantity of output occurs where MC = MR = P. An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC). Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced. (Lipsey, 2011)

Figure 3. Illustration of Profit Maximization using MR-MC Approach.

A method wherein the profit-maximizing quantity of output occurs where MC = MR = P is one of the backbone in Economics. If total revenue and total cost figures are difficult to procure, this method may also be used. For each unit sold, marginal profit equals marginal revenue minus marginal cost. Then, if marginal revenue is greater than marginal cost, marginal profit is positive, and if marginal revenue is less than marginal cost, marginal profit is negative. When marginal revenue equals marginal cost, marginal profit is zero. (Lipsey, 2011)

Figure 4. Illustration of Profit Maximization: MR-MC Approach.

Hence, Profit Maximization using MR-MC Approach is one of the backbones in Economics.

3.) What is Monopoly?
Monopoly is a structure in which a single supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. (Orbach, 2012)

A structure in which a single supplier produces and sells a given product is free to set any price it chooses and will usually set the price that yields the largest possible profit. Just being a monopoly need not make an enterprise more profitable than other enterprises that face competition: the market may be so small that it barely supports one enterprise. But if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and...
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