Rule

The firm should produce where MR = MC

PROVIDED
that above that output MC exceeds MR and below
MC, MR

that output MR exceeds MC.

MC

MR
Q
O Q1 Q2
 Shut down point
Costs,
revenue

P = AVC AC
AVC

AR = D
Q
O Q
Using calculus to find maximum profit
output

• TR = 48Q – Q2

• TC = 12 + 16Q + 3Q2
Q TR TC Tπ = TR –TC

0 0 12 -12
1 47 31 16
2 92 56 36
3 135 87 48
4 176 124 52
5 215 167 48
6 252 216 36
7 287 271 16
• FINDING WHERE MR = MC

• MR = dTR
dQ

MC = dTC
dQ

• Differentiating the TR and TC gives

dTR = 48 – 2Q = MR
dQ

dTC = 16 + 6Q = MC
dQ
• Profit is maximized where MR = MC:

48 – 2Q = 16 + 6Q

• Solving this for Q gives:

32 = 8Q
Q=4

• The equation for total profit is

Tπ = TR –TC
= 48Q – Q2 – (12 + 16Q + 3Q2)
= -12 + 32Q – 4Q2
Putting Q = 4
Tπ = 52
 10
8
Slope
6 =–1
AR , MR Rs Crores

4 Sl
op
e=
–2
2 AR
0 Q

-2 0 1 2 3 4 5 6 7 8
-4
MR
-6
 Implication
Type of Number Freedom of Nature of for demand
Examples
market of firms entry product curve of
firm

Grains
(wheat) or Horizontal;
Perfect Very Homogenous
Unrestricted firm is a
competition many (undifferentiated) vegetables
price taker

Downward
sloping but
relatively
Monopolistic Many / Plumbers,
Unrestricted Differentiated elastic; firm
competition Several restaurants
has some
control over
prices.
 Implication
Type of Number Freedom of for demand
Nature of product Examples
market of firms entry curve of
firm
Downward
sloping
Cement,
relatively
cars,
Oligopoly 1.Undifferentiated inelastic but
Few Restricted electrical
or Cartel or 2. Differentiated depends on
appliance,
reactions of
oil.
rivals to a
price change

Downward
sloping more
inelastic than
Restricted or
WAPDA, oligopoly;
Monopoly One completely Unique
or KESC firm has
blocked
considerable
control over
price
 A price taking firm

(a) The market (b) The firm

P

AR,MR (RS)
S

D=AR = MR
P*

O Q O Q
(millions)
 Firm makes super normal profits
Costs,
revenue

MC
AC

AR V T D=AR = MR
AC K L

Q
O Q*
 Firm makes normal profits
Costs,
revenue
MC
AC`

V T D=AR = MR
AR

Q
O Q*
 Firm makes loss
Costs,
revenue
MC AC``

U S
AC
AR V T D=AR = MR

Q
O Q*