PROFIT = TR-TC

Total Revenue (TR) this is the total income a

firm receives.
Total cost (TC) refers to the total expense
incurred in reaching a particular level of output;
if such total cost is divided by the quantity
produced, average or unit cost is obtained.
Marginal Revenue (MR) means the added
revenue from a small increase in sales, usually
a single unit.
Marginal Cost (MC) is the change in cost
which comes from producing an additional unit
of output.

Profit maximizing output is achieved

where MR = MC.
This level of output is shown to the
right as Q*. Remember that this must
be profit maximizing; at any higher
level of output the added costs (MC)
of the extra units would be greater
than the added revenue (MR). At
lower levels of output the firm
wouldn't be producing some units
whose added revenue (MR) is greater
than their added costs (MC), so the
firm would be throwing away profit
opportunities.

To determined the profit maximizing

price and output
The graph to the right shows a
profitable monopolist. Since P* x
Q* is total revenue and ATC* x Q* is
total cost, the difference (shown as
the shaded area) is profit.
Another way to see this is to
recognize that P* - ATC* is "average
profit" (profit averaged over number
of units sold) so (P* - ATC*) x
Q* also gives profit.

Sample of a simple profit calculation.

We show the firm producing 20 units of output,
the level of output where MR = MC. At that level
of output the firm sells its product for 10 per unit.
This means the firm's total revenue is 10 x 20 = 200.
At 20 units of output ATC = 7 so total cost is per
unit, so prof20 x 7 = 140.
So profit = TR - TC = 200 - 140 = 60.
Or average profit is 10 - 7 = 3 it is 20 x 3 = 60.

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