Costs of Production and Profit Maximization Analysis

for the Perfect Competitive Market Structure

Market
Total Average Average Price
Total Total Variable Total Fixed Variable Average Marginal Perfect
Output/h Fixed Cost Cost Cost Cost Total Cost Cost Competiti Total
r Cost (TFC) (TVC) (TC) (AFC) (AVC) (ATC) (MC) on Revenue
0 $ 12.00 $ - $ 12.00 - - - - $ 6.00 $ -
1 $ 12.00 $ 6.00 $ 18.00 $ 12.00 $ 6.00 $ 18.00 $ 6.00 $ 6.00 $ 6.00
2 $ 12.00 $ 9.00 $ 21.00 $ 6.00 $ 4.50 $ 10.50 $ 3.00 $ 6.00 $ 12.00
3 $ 12.00 $ 11.00 $ 23.00 $ 4.00 $ 3.67 $ 7.67 $ 2.00 $ 6.00 $ 18.00
4 $ 12.00 $ 12.00 $ 24.00 $ 3.00 $ 3.00 $ 6.00 $ 1.00 $ 6.00 $ 24.00
5 $ 12.00 $ 14.00 $ 26.00 $ 2.40 $ 2.80 $ 5.20 $ 2.00 $ 6.00 $ 30.00
6 $ 12.00 $ 17.00 $ 29.00 $ 2.00 $ 2.83 $ 4.83 $ 3.00 $ 6.00 $ 36.00
7 $ 12.00 $ 21.00 $ 33.00 $ 1.71 $ 3.00 $ 4.71 $ 4.00 $ 6.00 $ 42.00
8 $ 12.00 $ 26.00 $ 38.00 $ 1.50 $ 3.25 $ 4.75 $ 5.00 $ 6.00 $ 48.00
9 $ 12.00 $ 32.00 $ 44.00 $ 1.33 $ 3.56 $ 4.89 $ 6.00 $ 6.00 $ 54.00
10 $ 12.00 $ 39.00 $ 51.00 $ 1.20 $ 3.90 $ 5.10 $ 7.00 $ 6.00 $ 60.00
11 $ 12.00 $ 47.00 $ 59.00 $ 1.09 $ 4.27 $ 5.36 $ 8.00 $ 6.00 $ 66.00

Average Costs of Production Total Costs of Prod

$20.00 $70.00
$18.00
$60.00
$16.00
$14.00 $50.00
Production Costs

$12.00
Dollar Costs

$40.00
$10.00
$8.00 $30.00
$6.00 $20.00
$4.00
$10.00
$2.00
$- $-
1 2 3 4 5 6 7 8 9 10 11 1 2 3 4 5 6 7 8 9
Output Output

Profit Maximization Measuring Total P

$70.00 $20.00
$60.00 $18.00
$16.00
price and cost per unit

$50.00
Revenue and costs

$14.00
$40.00 $12.00
$10.00
$30.00 $8.00
$20.00 $6.00
$4.00
$10.00
$2.00
$- $-
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7
Output Output
 $40.00
$10.00

Revenue an

price and cost

$30.00 $8.00
$20.00 $6.00
$4.00
$10.00
$2.00
$- $-
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7
Output Output

Column D Col umn J Column G Col umn H

 Profitability Analysis:

1. The point at which MC=MR is a profit maximizing production level because this is where th
cost of producing one more unit doesn't increase MC but still increases MR. Basically, this is
where producing one more unit doesn't hurt the business.
2. If prices dropped to $5.35 the loss minimizing level of production would be 4 units/hr. You
Marginal would still have a loss of $2 as far as profits are concerned.
Total Revenue 3. The firm could still operate but should look towards selling off and cutting costs where they
Profit (MR) can.
$ (12.00) $ 6.00
$ (12.00) $ 6.00
$ (9.00) $ 6.00
$ (5.00) $ 6.00
$ - $ 6.00 Marginal
Marginal Costs
Costs == Marginal
Marginal Revenues
Revenues
$ 4.00 $ 6.00
$ 7.00 $ 6.00 Maximum Profit at Profit Maximizing Output
$ 9.00 $ 6.00
$ 10.00 $ 6.00
$ 10.00 $ 6.00
$ 9.00 $ 6.00
$ 7.00 $ 6.00

Total Costs of Production

Col umn B
Col umn C
Col umn D

1 2 3 4 5 6 7 8 9 10 11 12
Output

Measuring Total Profits

2 3 4 5 6 7 8 9 10 11 12
Output
2 3 4 5 6 7 8 9 10 11 12
Output

Col umn G Column H Column L

 Monopoly Profit Maximizing Analysis
on level because this is where the
increases MR. Basically, this is

uction would be 4 units/hr. You Price Per Average

Total Unit Total Total Total Total Marginal
off and cutting costs where they Output (Demand Revenue Costs Profit Costs Costs
Units ) (TR) (TC) (TP) (ATC) (MC)
0 $ 7.10 $ - $ 9.00 $ (9.00) - -
1 $ 6.90 $ 6.90 $ 13.00 $ (6.10) $ 13.00 $ 4.00
2 $ 6.70 $ 13.40 $ 16.60 $ (3.20) $ 8.30 $ 3.60
3 $ 6.50 $ 19.50 $ 19.85 $ (0.35) $ 6.62 $ 3.25
4 $ 6.30 $ 25.20 $ 22.90 $ 2.30 $ 5.73 $ 3.05
5 $ 6.10 $ 30.50 $ 25.80 $ 4.70 $ 5.16 $ 2.90
6 $ 5.90 $ 35.40 $ 28.60 $ 6.80 $ 4.77 $ 2.80
7 $ 5.70 $ 39.90 $ 31.35 $ 8.55 $ 4.48 $ 2.75
8 $ 5.50 $ 44.00 $ 34.20 $ 9.80 $ 4.28 $ 2.85
9 $ 5.30 $ 47.70 $ 37.40 $ 10.30 $ 4.16 $ 3.20
10 $ 5.10 $ 51.00 $ 41.80 $ 9.20 $ 4.18 $ 4.40
11 $ 4.90 $ 53.90 $ 47.80 $ 6.10 $ 4.35 $ 6.00
12 $ 4.70 $ 56.40 $ 56.80 $ (0.40) $ 4.73 $ 9.00

Monopoly Profit Determination

$14.00
Pri ce, Ma rgi na l Revenue, a nd Costs

$12.00

$10.00
7.1
$8.00

$6.00
Monopoly Profit
$4.00

$2.00

$-
1 2 3 4 5 6 7 8 9 10 11 12
Output
alysis
Profitability Analysis-Monopoly:

1. The point where MC=MR is a profit maximization level because this point is
Marginal where the lowest change in cost versus revenue when producing one more unit
Revenues similar to Perfect Competition.
(MR) 2. The monopolistic firm sets its price along the Price Demand Curve where
- MC=MR. The selling price is typically higher than the point at which MC=MR
meaning that the monopoly doesn't have to sell as high a volume to generate
$ 6.90 profits.
$ 6.50 3. There are two reasons why monopolies are considered ineffecient in the use
$ 6.10 of resources. First, they charge a price higher than MC. Second, they use fewer
resources causing a surplus of those resources.
$ 5.70
$ 5.30
$ 4.90
$ 4.50
$ 4.10
$ 3.70
$ 3.30
$ 2.90
$ 2.50

Demand Price Revenue - Cost Comparison

$60.00

MC = MR $50.00
Tota l Costs /tota l Revenues

$40.00

Average Total $30.00

Col umn C
Costs Col umn D

$20.00

$10.00

$-
1 2 3 4 5 6 7 8 9 10 11 12 13
output
Col umn C
Col umn D