# profit-loss account 46

May 13th, 2015
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profit and loss statement describe Profit maximization by firms

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Profit maximization by firmsECO61Udayan RoyFall 2008Revenues and costs A firms costs (C) were discussed in the previouschapter A firms revenue is R = P Q Where P is the price charged by the firm for thecommodity it sells and Q is the quantity of the firmsoutput that people buy We discussed the link between price and quantityconsumed the demand curve earlier Now it is time to bring revenues and coststogether to study a firms behaviorProfit-MaximizingPrices and Quantities A firms profit , , is equal to its revenue R less its costC =RC We assume that a firms actions are aimed atmaximizing profit Maximizing profit is another example of finding a bestchoice by balancing benefits and costs Benefit of selling output is firms revenue, R(Q) = P(Q)Q Cost of selling that quantity is the firms cost of production,C(Q) Overall, = R(Q) C(Q) = P(Q)Q C(Q)9-3Profit-Maximization: An Example Noah and Naomi face weekly inverse demandfunction P(Q) = 200-Q for their gardenbenches Weekly cost function is C(Q)=Q2 Suppose they produce in batches of 10 To maximize profit, they need to find theproduction level with the greatest differencebetween revenue and cost9-4Profit-Maximization: An Example R C P Q C (200 Q) Q Q 2 200Q Q 2 Q 2 200Q 2Q 2 2(100Q Q 2 ) 2(50 2 50 2

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