Profit Maximization in Economics

TOTAL REVENUE (TR)

By ‘total revenue’ of a firm is meant the total amount of sale proceeds or the total receipts of the firm.

Total Revenue = Price x Quantity Sold

TR = P.q

Here:  P means price,  q means quantity, TR means total revenue.

MARGINAL REVENUE (MR)

Marginal revenue is the addition made to the total revenue by a one unit increase in the volume of sales by the firm in the market. It can also called as the net revenue earned by selling on additional unit of output.

Here: TR means total revenue, q means quantity.

AVERAGE REVENUE

Average revenue is revenue earned per unit of output. Average revenue is obtained by dividing the total revenue by the number of units sold in the market.

LONG RUN EQUILIBRIUM OF THE PRICE TAKER FIRM

“All the firms in a competitive industry achieve long run equilibrium when market price or marginal revenue equals marginal cost equals minimum of average total cost.”

Price = Marginal Cost = Minimum Average Total Cost

SUBSTITUTE RELATIONSHIP

If two commodities are close substitutes of each other, then the rise in the price of one commodity will result in the rise in price of the other.

For instance, if the price of tea rises, the price of coffee will also go up and vice versa. Here, the concept of cross elasticity will be very useful for measuring the mutual relationship of the demand for interrelated commodities. The cross elasticity of the demand is measured with the help of the following formula:

Here X stands for tea and Y for coffee.

MARGINAL PRODUCTIVITY THEORY

By marginal productively theory of a factor is meant the value of the marginal physical product of the factor. It is worked out by multiplying the price of the output per unit by units of output.

VMP = MP x P

Value of Marginal Product (VMP) = Marginal Physical Product x Price

The marginal productivity theory contends that in a competitive market, the price or reward of each factor of production tends to be equal to its marginal productivity.

WAGE FUND THEORY

“Wages depend upon the proportion between population and capital, or rather between the number of laboring classes who work for hire and the aggregate of what may be called the wage fund which consists of that part of circulating capital which is expanded in the direct hire of labor”. In short, we can say, wage fund is that amount of’ floating capital which is set apart by employers for paying wages to the labor. The average wage rate is determined by dividing the wage fund by the total number of workers employed.

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