2. Profit Maximization
▪ PROFIT’S, that is the difference between total revenue and total costs.
▪ Economic profit --the difference between total revenue and total cost, where
total cost includes all costs—both explicit and implicit—associated with
resources used by the firm.
▪ Accounting profit --is simply total revenue less all explicit costs incurred.
does not subtract the implicit costs.
6. MARGINAL APPROACH
▪ Marginal PRINCIPLE
Increase the level of an activity if its marginal benefit
exceeds its marginal cost, but reduce the level if the
marginal cost exceeds the marginal benefit. If possible,
pick the level at which the marginal benefit equals the
marginal cost.
7. The Marginal Rule for Profit Maximization
A firm maximizes profit in accordance with the marginal principle—by setting marginal revenue
(or market price) equal to marginal cost.
MR=MC
Marginal cost
the COST added by producing one additional unit of a product or service.
Marginal revenue
the additional revenue that will be generated by increasing product sales by one unit
