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| A question on Economics (micro) https://gladerebooted.net/viewtopic.php?f=2&t=815 |
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| Author: | Screeling [ Wed Nov 11, 2009 12:39 pm ] |
| Post subject: | A question on Economics (micro) |
I've read through the book and it doesn't explain it very well. The chapter is discussing firms and I'm having a tough time wrapping my mind around why profit is maximized when the Marginal Revenue curve intersects the Marginal Cost curve. Marginal Revenue, as I understand it is the amount of revenue made from a one unit increase in production. Marginal Cost being the same thing. For some reason my mind is trying to say that anywhere the distance between MR and MC is greatest (vertically) would be the best place. Can somebody straighten me out on this? Thanks for any help. |
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| Author: | Elmarnieh [ Wed Nov 11, 2009 12:52 pm ] |
| Post subject: | |
Marginal Cost isn't the revenue gained from an extra unit of production. |
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| Author: | Rafael [ Wed Nov 11, 2009 12:56 pm ] |
| Post subject: | |
I think you are mistaking total revenue revenue and costs (and therefore total profit) for marginal costs and revenue (profit). Remember that marginal revenues are the derivative (slope) of total revenues and likewise with costs. Where these lines intersect represents an inflection point for marginal costs and revenues where marginal costs exceed revenues and thus maginal profit becomes negative. That is because it costs more at this point to produce another good than revenue can be made from the additional unit of production. I'm sorry that doesn't really answer the question, but try going back to the chapter introducing marginal costs, revenues and profits and really just dwell on that. Look at the graphs and just think about what they mean. I promise it will just *click*. I prefer to read my microecon book while sitting on the can. |
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| Author: | Lonedar [ Wed Nov 11, 2009 1:13 pm ] |
| Post subject: | |
Every widget manufactured up to the point where marginal revenue = marginal cost generates profit for the company. The total profit is the area under the curve up to that point. If you keep generating widgets beyond that point, you will need to sell at a loss to make sales. Is that what you are looking for? |
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| Author: | Elmarnieh [ Wed Nov 11, 2009 1:17 pm ] |
| Post subject: | Re: |
Lonedar wrote: Every widget manufactured up to the point where marginal revenue = marginal cost generates profit for the company. The total profit is the area under the curve up to that point. If you keep generating widgets beyond that point, you will need to sell at a loss to make sales. Is that what you are looking for? Thats the easiest way to describe it. I think Rafael found the confusion point. |
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| Author: | Screeling [ Wed Nov 11, 2009 2:26 pm ] |
| Post subject: | Re: |
Lonedar wrote: Every widget manufactured up to the point where marginal revenue = marginal cost generates profit for the company. The total profit is the area under the curve up to that point. If you keep generating widgets beyond that point, you will need to sell at a loss to make sales. Is that what you are looking for? Oh, okay. The book didn't really describe things that way. Let me rethink it based on that. |
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| Author: | darksiege [ Wed Nov 11, 2009 2:40 pm ] |
| Post subject: | Re: |
Lonedar wrote: Every widget manufactured up to the point where marginal revenue = marginal cost generates profit for the company. The total profit is the area under the curve up to that point. If you keep generating widgets beyond that point, you will need to sell at a loss to make sales. Is that what you are looking for? **** man... Had someoneexplained it to me that way; i probably would have gotten about 10% higher in my micro class |
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| Author: | Rafael [ Wed Nov 11, 2009 2:44 pm ] |
| Post subject: | |
It really, really helps to have had a Calc I class in Micro Econ, IMO. Though everything can be done algebraically, being able to use Calculus and think in terms of derivatives makes it very simple. |
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| Author: | Screeling [ Wed Nov 11, 2009 2:48 pm ] |
| Post subject: | |
Okay, so let me rephrase and somebody tell me if I'm right. MR and MC are not representative of total revenue/costs, but just the rate of change of each (derivatives). So my initial (incorrect) understanding was that you want MR to be as high as possible and MC as low as possible, so why not just stop BEFORE the intersection of the curves to exploit that gap. But since these are just rates of change and not total, I would be short-changing myself money because my rate of return isn't as high? So for a given outputs, MR=5,MC=1; MR=4;MC=2; MR=3,MC=3. My initial understanding was stop at the first. But then I'm screwing myself out of the money made at MR=4 and the money made after that up until 3. Which is why Lonedar says I basically have to take the integral of both functions and subtract the difference to determine my total revenue. Since my question was about maximizing profit, I only care about the point where making one more unit costs me more money than I make on it (the intersection of the two points). Is that right? Raph: Unfortunately, the guy hasn't been teaching us using the actual functions so that we could use the integrals and derivatives. Otherwise I'd be all 'bout it. |
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| Author: | DFK! [ Wed Nov 11, 2009 3:09 pm ] |
| Post subject: | Re: |
Screeling wrote: Since my question was about maximizing profit, I only care about the point where making one more unit costs me more money than I make on it (the intersection of the two points). Is that right? Exactly. |
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