Costs of Production and Profit Maximization Analysis for the Perfect Competitive Market Structure

Total Output/hr
0
1
2
3
4
5
6
7
8
9
10
11

Total
Total
Average Average Average
Fixed
Variable
Total
Fixed
Variable
Total
Costs
Costs
Costs
Costs
Costs
Costs
(TFC)
(TVF)
(TC)
(AFC)
(AVC)
(ATC)
$ 10.00
0
$ 10.00
0
0
0
$ 10.00 $
7.00 $ 17.00 $ 10.00 $
7.00 $ 17.00
$ 10.00 $ 10.00 $ 20.00 $
5.00 $
5.00 $ 10.00
$ 10.00 $ 12.00 $ 22.00 $
3.33 $
4.00 $
7.33
$ 10.00 $ 13.00 $ 23.00 $
2.50 $
3.25 $
5.75
$ 10.00 $ 15.00 $ 25.00 $
2.00 $
3.00 $
5.00
$ 10.00 $ 18.00 $ 28.00 $
1.67 $
3.00 $
4.67
$ 10.00 $ 22.00 $ 32.00 $
1.43 $
3.14 $
4.57
$ 10.00 $ 27.00 $ 37.00 $
1.25 $
3.38 $
4.63
$ 10.00 $ 33.00 $ 43.00 $
1.11 $
3.67 $
4.78
$ 10.00 $ 40.00 $ 50.00 $
1.00 $
4.00 $
5.00
$ 10.00 $ 48.00 $ 58.00 $
0.91 $
4.36 $
5.27

$15.00
$10.00

Dollar Cost

$20.00
$10.00
$-

$5.00
1

$
$
$
$
$
$
$
$
$
$
$
$

Total
Revenue
0
$
5.00
$ 10.00
$ 15.00
$ 20.00
$ 25.00
$ 30.00
$ 35.00
$ 40.00
$ 45.00
$ 50.00
$ 55.00

5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00

Marginal
Total
Revenue
Profit
(MR)
$ (10.00)
-$ (12.00) $
5.00
$ (10.00) $
5.00
$ (7.00) $
5.00
$ (3.00) $
5.00
Marginal
Costs = Marginal Revenues
0
$
5.00
$
2.00 $
5.00
$
3.00 $
5.00
$
3.00 $
5.00
$
2.00 $
5.00
0
$
5.00
$ (3.00)Maximum
$
5.00Profit at Profit Maximizing Output
Maximum Profit
at Profit Maximizing Output

$70.00
$60.00
$50.00
$40.00
$30.00

$20.00

$-

Market Price
Perfect
Competition

Total Cost of Production

Average Cost of Production

Production Costs

Marginal
Costs
(MC)
-$
7.00
$
3.00
$
2.00
$
1.00
$
2.00
$
3.00
$
4.00
$
5.00
$
6.00
$
7.00
$
8.00

10 11 12

Output

10

Output

Average Fixed Costs (AFC)

Average Variable Costs (AVC)

Total Fixed Costs (TFC)

Average Total Costs (ATC)

Marginal Costs (MC)

Total Costs (TC)

Total Variable Costs (TVF)

Profit Maximization
$70.00
$60.00
$50.00
$40.00

Revenue and Costs

$30.00
$20.00
$10.00
$-

10 11 12

Output
Total Costs (TC)

Total Revenue

Measuring Total cost

18
16
14
12
10

Price and Cost per Unit

8
6
4
2
0

10 11 12

Output
Marginal Revenue (MR)

Marginal Costs (MC)

Average Total Costs (ATC)

1. The profit maximizing production level has been reached at MR = MC (8 units) because if this firm tries to
add an additional unit of production; the extra unit (9th unit) is going to be adding more to the total cost than
to the total revenue. Whereas, before reaching MR = MC the extra unit was adding more to the total revenue
than to the total cost. This implies that 8 units or MR = MC will be the most optimal level of production to
maximize profits.
2. If the price drops to 4.25, this firm will incur in a loss minimization level of production.
3. At $4.25 price level, this firm is incuring in economic loss, but since the average variable cost (AVC) still less
than the price, this firm still generates enough revenue to pay all variable costs plus a portion of fixed costs. In
this scenario the firm can still operate at economic loss. They are better off shutting production, if the price
drops below the average variable cost(AVC)

11

12

Monopoly Profit Maximizing Analysis

Total
Output
Units
0
1
2
3
4
5
6
7
8
9
10
11
12

Price Per
Total
Total
Unit
Revenue
Cost (TC)
(Demand)
(TR)
$8.00
$7.80
$7.60
$7.40
$7.20
$7.00
$6.80
$6.60
$6.40
$6.20
$6.00
$5.80
$5.60

0
7.80
15.20
22.20
28.80
35.00
40.80
46.20
51.20
55.80
60.00
63.80
67.20

Average
Marginal Marginal
Total
Cost
Revenue
Cost
(MC)
(MR)
(ATC)

Total
Profit
(TP)

10.00
14.00
17.50
20.75
23.80
26.70
29.50
32.25
35.10
38.30
42.70
48.70
57.70

-10.00
-6.20
-2.30
1.45
5.00
8.30
11.30
13.95
16.10
17.50
17.30
15.10
9.50

-14.00
8.75
6.92
5.95
5.34
4.92
4.61
4.39
4.26
4.27
4.43
4.81

-4.00
3.50
3.25
3.05
2.90
2.80
2.75
2.85
3.20
4.40
6.00
9.00

-7.80
7.40
7.00
6.60
6.20
5.80
5.40
5.00
4.60
4.20
3.80
3.40

Monopoly Profit
Chart Title
Determination
$16.00
$14.00
$12.00

MC

$10.00

Demand Price

$8.00

Price, Marginal Revenue, and Costs

MC = MR

$6.00

Monopoly Profit

$4.00

MR
$2.00
$0.00

10 11 12

Average Total
Costs

Output
Price Per Unit (Demand) $8.00

Average Total Cost (ATC) --

Marginal Cost (MC) --

Marginal Revenue (MR) --

Revenue -Chart
CostTitle
Comparison
80

TR
TC

70
60
50

Total Cost / Total Revenue

40
30
20
10
0

10

11

12

13

Output
Total Revenue (TR)

Total Cost (TC)

1. At the point where MC = MR, this monopolist firm reaches its maximum profits because monopolist firms
have the same conditions that the perfectly competitive firms, except that for the monopolist the demand
curve is different than the marginal revenue curve(MR).
2. Monopolist firms are called price makers and the way they determine the price is by using the point
where MR = MC and then, extend the line of the level of output of this point to the demand curve; at this
point is where monopolist firms indicate the price.

1. At the point where MC = MR, this monopolist firm reaches its maximum profits because monopolist firms
have the same conditions that the perfectly competitive firms, except that for the monopolist the demand
curve is different than the marginal revenue curve(MR).
2. Monopolist firms are called price makers and the way they determine the price is by using the point
where MR = MC and then, extend the line of the level of output of this point to the demand curve; at this
point is where monopolist firms indicate the price.
3. Monopolies use resources inefficiently because of the inequality between price and marginal cost and
because they produce less output at a higher price than the other market structures.