ptofit and loss account12

May 13th, 2015
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profit and loss statement describe profit maximisation

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MaximizationProfit MaximizationFundamentalsPROFIT = TR-TCTotal Revenue (TR) this is the total income afirm receives.Total cost (TC) refers to the total expenseincurred in reaching a particular level of output;if such total cost is divided by the quantityproduced, average or unit cost is obtained.Marginal Revenue (MR) means the addedrevenue from a small increase in sales, usuallya single unit.Marginal Cost (MC) is the change in costwhich comes from producing an additional unitof output.Profit maximizing output is achievedwhereMR=MC.This level of output is shown to theright as Q*. Remember that this mustbe profit maximizing; at any higherlevel of output the added costs (MC)of the extra units would be greaterthan the added revenue (MR). Atlower levels of output the firmwouldn't be producing some unitswhose added revenue (MR) is greaterthan their added costs (MC), so thefirm would be throwing away profitopportunities.To determined the profitmaximizing price and outputThe graph to the right shows aprofitable monopolist. Since P* xQ* is total revenue and ATC* xQ* is total cost, the difference(shown as the shaded area) isprofit.Another way to see this is torecognize that P* - ATC* is "averageprofit" (profit averaged over numberof units sold) so (P* - ATC*) xQ* also gives profit.Sample of a simple profit calculation.We show the firm producing20unitsof output, the level of output whereMR=MC. At that

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