Profit maximisation: total and marginal approaches sheetEssay frameExplain profit maximisation using the total revenue-total cost approach and the marginal revenue-marginal cost approach.
How to lay out the answer. Follow the frame, then write it in your own words.
- 1 · Define the terms. TR, AR, MR, TC, MC; profit = TR − TC; normal and supernormal profit.
- 2 · Total approach with diagram. [Diagram: TR and TC curves; the widest vertical gap marked at Q*, where the slopes are equal]
- 3 · Marginal approach with diagram. [Diagram: MR and MC curves; MC cutting MR from below at Q*]
- 4 · State the two conditions. First-order: MR = MC. Second-order: MC rising.
- 5 · Numerical example. Price Rs. 6,000: profit −10,000, −8,000, −5,000, −1,000, 2,000, 3,000, 2,000; maximum at 5 batches. MC of the 6th (7,000) > MR.
- 6 · Show the approaches agree. Both give 5 batches and Rs. 3,000 profit.
- 7 · Sri Lankan business link. Deciding extra shifts, longer opening hours or extra production runs uses MR = MC.
- 8 · Conclude with other objectives. Real firms may also pursue sales, growth, satisficing or social goals.
Scoring tip: Put the profit column in your table. Examiners look for it before reading your explanation.
