Economics - Using Diagrams Explain the Profit Maximizing Point Is Where Mr = Mc

Question 1: Using diagrams explain the profit maximizing point is where MR = MC.

When a firm starts operating, their ultimate goal is to gain profit. The rule of profit maximization is marginal revenue equals marginal cost. Therefore the firms need to make a decision on the best output plan.

A profit will then find out is total revenue deduct total cost while the total revenue of the firms is price times quantity. Marginal revenue is the amount of changes in total revenue when the total output increase each additional unit. Marginal cost is the amount of changes in total costs when the total output increase each additional unit (Gillespie, 2013).

Equation of MR=MC:

[pic 1]

[pic 2]

[pic 3]

[pic 4]

According to figure 1 (Boyes and Melvin, 2012) illustrates profit maximization, when the output less than Q1 units, MR ˃ MC, the revenue will more than costs by increasing each additional output, the firms will increase output to make more profit.

When the output more than Q1 units, MR ˂ MC, costs will more than revenue by increasing each additional output, the firms then decrease output to reduce losses.

Only when the output comes to Q1 units, MR = MC, revenue is equal to costs by increasing each additional output, and then will cause profit maximization or loss minimization. So, the firms will choose the MR = MC output level where the output at Q1 units are the most suitable level of output, it also named as optimum output.

Question 2: Examine the impacts of a minimum price on a certain consumer good.

Utility of supply and demand are very important as they decided many market prices. Thus, not everyone is satisfied with the prices of supply and demand although they might think prices are able to reach a steady state economy. For example, the farmers complain about the prices of their crops are too low (Arnold, 2008).

Against to the complaints, government will take interventions towards the markets by using price controls. Government might also force the markets not to reach an equilibrium.

Minimum price is a method of price controls. Government make sure that the price of a certain consumer good is higher than the specific quota. This is because government think that the equilibrium price is too low will harm the producer welfare. For example, the government use a fixed minimum price to purchase the crops from farmers in order to ensure their income.

Figure 2 (Arnold, 2008) showed the minimum price in a market. P1 and Q1 are the market equilibrium price and quantity which are fixed by the government. The minimum price is higher than the equilibrium price, the quantity supplied more than quantity demanded then causes the excess supply in the market. In order to solve the problem, government will purchase the excess crops and restrict the output to stimulate consumer demand.