Changes in Total Costs and Profit Maximization
A firm maximizes profit by operating where marginal revenue equal marginal costs. A change in fixed costs has no effect on the profit maximizing output or price. The firm merely treats short term fixed costs as sunk costs and continues to operate as before. This can be confirmed graphically. Using the diagram illustrating the total cost–total revenue perspective, the firm maximizes profit at the point where the slopes of the total cost line and total revenue line are equal. An increase in fixed cost would cause the total cost curve to shift up by the amount of the change. There would be no effect on the total revenue curve or the shape of the total cost curve. Consequently, the profit maximizing point would remain the same. This point can also be illustrated using the diagram for the marginal revenue–marginal cost perspective. A change in fixed cost would have no effect on the position or shape of these curves.
Read more about this topic: Profit Maximization
Famous quotes containing the words total, costs and/or profit:
“Parenting is the one area of my life where I can feel incompetent, out of control and like a total failure all of the time.”
—Attorney Father. As quoted in Reviving Ophelia, by Mary Pipher, ch. 4 (1994)
“Pride can go without domestics, without fine clothes, can live in a house with two rooms, can eat potato, purslain, beans, lyed corn, can work on the soil, can travel afoot, can talk with poor men, or sit silent well contented with fine saloons. But vanity costs money, labor, horses, men, women, health and peace, and is still nothing at last; a long way leading nowhere.—Only one drawback; proud people are intolerably selfish, and the vain are gentle and giving.”
—Ralph Waldo Emerson (1803–1882)
“Grant me profits only, grant me the joy of profit made,
and see to it that I enjoy cheating the buyer!”
—Ovid (Publius Ovidius Naso)