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Unformatted text preview: ecide how many T-shirts to
produce? This is one question that every
business firm has to answer: MR MC $10
$11 Having looked at the data, someone asks
you: What is the right number of T-shirts for
you to produce? What would your answer
be? The correct answer is four T-shirts. In
other words, you should keep producing
T-shirts as long as marginal revenue (additional revenue of producing the additional
T-shirt) is greater than the marginal cost
(additional cost of producing the additional
T-shirt). As long as what comes in through
the “revenue door” is greater than what
leaves through the “cost door,” you ought to
keep producing T-shirts. Look at it this way: How much should we produce? Suppose you decide to produce 1,000
T-shirts a month. Now someone comes up
to you and asks: What price will you charge
for each T-shirt? What are you going to say?
Are you going to say $10, or $10.50, or $15?
How will you decide how much to charge
for each T-shirt? Here then is a second question every firm has to answer:
What price should we charge? In this section we will talk more about
these two questions. How Much Will a Firm
Suppose again that you produce T-shirts.
You have to decide how many to produce.
What two pieces of information do you
need before you can decide how many T- MR > MC → Produce
MC > MR → Do not produce Now if you want to produce as long as
MR > MC, and you don’t want to produce if
MC > MR, then ask yourself when you
should stop producing. For example, you’ve
already produced, say, 10,000 hats. Should
you go ahead and produce one more? The
answer is yes as long as marginal revenue is
greater than marginal cost—even if the difference between marginal cost and marginal
revenue is one penny (as was the case for the
fourth T-shirt in the example).
Now suppose the difference is even less
than one penny. Suppose it is half a penny.
Should you still produce the good? Again
the answer is yes. What about one-fourth of
a penny? Yes, produce it. You can perhaps
see where we are leading. Economists essentially say that it is beneficial to produce as
long as marginal revenue is greater than Section 3 Revenue and Its Applications 177 07 (154-185) EMC Chap 07 All companies
want to maximize
profits and generate
the kinds of results
you see in the newspaper reports. How
know how many
cars to produce
and what does
that have to do
profits? 11/17/05 5:14 PM Page 178 marginal cost, even if the difference
between the two is extremely small. For all
practical purposes, then, economists are
saying that a business firm should continue
to produce additional units of its good until
the marginal revenue (MR) is equal to the
marginal cost (MC).
In the T-shirt example, we didn’t find any
unit of T-shirt at which MR MC, but we
did find one where there was only a penny
difference. We stopped producing after we
had produced the fourth T-shirt because it
was as close to MR MC as we could get. QUESTION: I have known some people who owned business...
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This document was uploaded on 01/16/2014.
- Winter '14