Question

How do you calculate revenue for a firm that makes one product? How do you calculate costs for a firm that makes only one product? How does a competitive firm maximize profits?

Answer 1

Total revenue can be defined as the total receipts earned by a seller from the sale of goods and services to the consumers.

Total revenue(TR) can be calculated by multiplying the quantity of output(Q)sold with its market price(P)

TR = P*Q

Total cost can be defined as the cost incured by a firm in the production process. Total cost include both fixed cost and variable cost. Total Fixed cost (TFC) is the cost for the fixed factors of production which does not vary with the level of output. Total Variable cost(TVC) is the cost for the variable factors of production which vary with the level of output.

TC = TVC +TFC

A competitive firm can maximize its profit using the following condition

MC = MR

Marginal Cost (MC) is the additional cost to the total cost from the production of an additional unit of output.

MC = change in total cost/ change in output

Marginal Revenue(MR) is the additional revenue to the total revenue from the sale of an additional unit of output.

MR = change in total revenue / change in output.

If the marginal cost is less than the Marginal revenue, the firm can increase its profit by increasing its production.

If marginal cost is higher than the marginal revenue, the cost is higher than the revenue. Therefore firm can achieve profit by reducing output.

Therefore a competitive firm can maximize its profit by producing output and charging a price at which marginal cost is equal to marginal revenue (MC= MR)