Perfect competition 
Competitive firm and profit maximisation:  Total revenue and total cost

Economic profit is the difference between TR and TC and is represented by the vertical distance between the TR curve and the TC curve.

At point a with an output level of Q1, TR = TC and the firm's total economic profit is zero.  At levels of output below Q1, TR (point c) < TC (point b) and the firm therefore incurs economic losses. This is indicated by the red area. At levels of output above Q1, TR (point d) > TC (point e) and the firm therefore incurs economic profits. This is indicated by the yellow area.

 

The total cost curve  (more) is shaped like a reversed S.  It does not start from the origin, since part of the firm's cost is fixed.


The total revenue curve (more) is a straight line with a positive slope which starts at the origin and has a slope equal to the price of the product.
The firm's profits will be maximised where the positive vertical difference between TR and TC is the greatest.  This point can be determined by drawing a tangent to the TC curve, parallel to the TR curve. At the point of tangency the vertical difference (ie total profit) will be at a maximum.

Given the total revenue and total cost curves, this particular firm will maximise profits by producing a quantity of Q4.

 

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