# Chapter 5 Section 3 by linzhengnd

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```									Revenues
Chapter 6 Section 3
for Economics

Standard  3.6
Demonstrate how firms
determine price and output
through marginal analysis.
Questions
1.   How do firms decide how many
goods to produce?
2.   How do firms decide how much
to charge for a good or service?
3.   How do firms decide how many
workers to hire?
Objectives
1.   What is Total Revenue?
2.   What is Marginal Revenue?
3.   Why does a business firm compare
marginal revenue with marginal
cost when deciding how many units
of a good to produce?
4.   What is the Law of Diminishing
Returns?
your own words, what does
 In
“marginal” mean?
Formulas
Total Revenue
 TR = P x Q
Marginal Revenue
 MR = ∆ TR / ∆ Q
Sample Problem
 Given:   P = \$0.75
Situation 1       Situation 2
FC = \$400         FC’ = \$450
VC = \$55          VC’= \$70
Q = 700           Q’ = 850
 Find   the following for Situation 1 & 2:
TR, TC, AFC, AVC, ATC, MR, MC
Reg. Rounding

 TR=   0.75 x 700            = \$525
 TC = 400+55                 = \$455
 AFC = 400 / 700             = \$0.57
 AVC = 55 / 700              = \$0.08
 ATC = 455 / 700             = \$0.65
Reg. Rounding

 TR’=  0.75 x 850           = \$637.50
 TC’ = 450+70               = \$520
 AFC’ = 450 / 850           = \$0.53
 AVC’ = 70 / 850            = \$0.08
 ATC’ = 520 / 850           = \$0.61
Reg. Rounding

MR
=(\$637.50’-\$525) / (850’-700)
=\$112.5 / 150
= \$0.75
Reg. Rounding

MC
=(\$520’-\$455) / (850’-700)
= \$65 / 150
= \$0.43
Compare MR to MC
 If           DO IT!
MR > MC =
Make the Change
 If MR < MC = DO NOT DO IT!
MR          MC
\$0.75       \$0.43
DO IT!
Do companies want to make
as much profit as possible?
(Trick Question)

NO!
Would  you be willing to work
for \$1.00 per hour?
Why  not? It would allow you
to earn more profit.
Companies want to
MAXIMIZE PROFITS
using the
Law of Diminishing Returns
Law of Diminishing Returns
 If
resource (labor) to a resource
(capital) that is fixed in supply,
eventually the additional output
produced will decrease.
Law of Diminishing Returns
Things    Things
Hour   Learned  Learned
1       10      10
2      25       15   Law of
Diminishing
3      33        8   Returns
4      40       7
How many workers
should you hire?
Workers Of Output  Output
1       5        5
2       11       6
3       18       7   Law of
Diminishing
4        23       5 Returns
5        26       3
Assessment
1.   What is Total Revenue?
2.   What is Marginal Revenue?
3.   Why does a business firm compare
marginal revenue with marginal
cost when deciding how many units
of a good to produce?
4.   What is the Law of Diminishing
Returns?

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