Three Rules and Four Models
Three Rules:
How to find the profit maximizing quantity:
A firm will maximize its profit (or minimize its losses) by producing that
output at which marginal revenue and marginal cost are equal
provided product price is equal to or greater than average variable
cost.
(1) Find the quantity where: MR=MC
(2) produce this quantity if: AR > AVC
How to find the productively efficient quantity:
Society will achieve productive efficiency by producing that output at
which the average total cost (ATC) is at a minimum.
minimum ATC, or
MC = ATC
How to find the allocatively efficient quantity:
Society will achieve allocative efficiency by producing that output at
which price and marginal cost are equal.
P=MC
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