Economics Final Exam Notes

Profit Maximizing Rule: MR = MC! This rule applies to all market structures (Perfect Competition, Monopoly, Oligopoly, and Monopolistic Competition)!

What is Marginal Revenue (MR)? MR is the change in Total Revenue (TR), divided by the change in quantity sold. It is used to determine what quantity of output (Q) should be produced to maximize profit or minimize loss!

In my yard sale, if I sell 10 (Q) plates at $3 (Price) each, then I make TR, $30 [3x10]. What is then Marginal Cost (MC)? MC is the change in Total Cost (TC) divided by the change in Q. Total cost has two components: fixed 'overhead' cost (e.g. rent or lease on a building) and variable cost (e.g. hourly wages and utilities).

Marginal costs actually play the most important role, because additional costs can tell us whether the last unit of output produced led to a big change, small change, or even no change to total cost.

What is Average Total Cost (ATC)? Simply divide Total Cost by Total Output. It will tell you the quantity needed to give a Normal Profit (Zero Economic Profit). Businesses break even when they make zero economic profit! What it really means is that accounting profits that do not consider implicit costs tend to equalize in a truly competitive economy.

Remember Profit is simply the difference between Total Revenue (TR) and Total Cost (TC)! When TR exceeds TC, a firm or industry is profitable! This will attract more competitors, increasing supply and driving down the profit rate.