Turn to Page 111. We are going to use the Production Cost Schedule

I.                    We are a beanbag making business

a.       The goal of all firms is to make as much money as possible

b.      How can we do that?

c.       Produce the amount that “maximizes profits” OR makes the most money (TR-TC = PROFIT)

                                                               i.      That would be 10 beanbags 

d.       MC=MR also shows where profits are maximized.

                                                               i.      keep making beanbags until what you are charging for them is the same as what it costs for you to make them. If you make more or less than that, you are not making as much money.

Marginal Cost (MC): The cost you pay for making 1 more item.

• As you can see from the production cost schedule, the marginal cost of making 6 beanbags instead of 5 is $9.
• The Total Cost of making 6 bean bags = $72
• The Total Cost of making 5 bean bags = $63
• $72-$63 = 9

Marginal Revenue (MR): The extra amount of money you make for selling one extra item.

• In the free market system, a firm’s marginal revenue is the market price. (You cannot decide the price; you have to sell it at the "market price.”

Another way to find the ideal amount to produce is find when …

            Marginal revenue = marginal cost.

            In other words, price = marginal cost

When should a business temporarily shut down?

• When Variable Costs are more Total Revenue

o    You do not factor in Total Costs since you are going to pay those costs anyway.