Profit maximization for the price-taking firm
(short run)NOTESProfit = total revenue – total cost Profit will be maximized when the difference between TR and TC is the greatest. In other words, at max-profit output, Qπ, marginal profit (i.e., ∆profit/∆output) is equal to zero. By definition, marginal profit = marginal revenue –
marginal cost.
When the seller can sell as much as he wants at a constant price, the total revenue curve (TR) is a straight line from the origin. Since price is constant, MR is equal to price (P) because: For a price taker, therefore, at its max-profit output Qπ, P = MR = MC.
With P and ATC, the distance between P and ATC represents profit per
unit output. When P is equal to minimum ATC, total profit is zero. When P is equal to minimum AVC, TR covers only TVC, with nothing left
over to cover fixed cost. Since fixed cost is irrecoverable sunk cost
in the short run, the firm is indifferent between staying in business
and quitting altogether. Therefore, minimum TVC is known as the |

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