hey internet this is jacob clifford entrepreneurship in the united states and throughout the world is on the rise so there's a good chance that many of you are gonna start your own business someday which means you're gonna have to understand how to calculate and maximize profit now in real life businesses don't have the perfect cost curve that you see in a microeconomics class i've ran my own business since 2007 i've never sat down and draw my cost curves or done the calculations but i do use the concepts marginal analysis and profit maximizing all the time for you to do well in your microeconomics course and exam there's two skills that you absolutely have to master you're gonna have to be able to maximize and calculate profit using both the graph and the chart so let's jump into it with the most important concept in all of microeconomics the profit maximizing rule you always produce where the mr equals the mc [Music] in other words you keep producing as long as the additional revenue from selling an additional unit is greater than the additional cost of producing that unit if you do that you're going to maximize profit let me explain it all using a graph now here's the marginal cost curve that you learned earlier notice it goes down and up because of the law diminishing marginal returns as you produce more pizza the additional cost of producing each additional units will be greater than the previous unit so the marginal cost goes up and let's assume that you can sell every single pizza for 10 so the price is 10 and that's the same as the marginal revenue which makes sense if the price is ten dollars and the additional revenue that you get from each pizza is ten dollars but how many units should you make if you stop producing right here the additional revenue is greater than the additional cost you can still get more profit if you produce more units so you keep producing as long as the additional revenue is above additional cost and you stop right here and you never produce over here where the additional cost is greater than the additional revenue that's producing too much you want to produce less back where mr equals mc and that's it that's the profit maximizing quantity and you're using the profit maximizing rule notice that i didn't even add an average total cost curve you actually don't even need it to figure out the profit maximizing quantity so whether the atc is down here or up here you're still going to produce where mr equals mc i'll say it again you don't need the atc to figure out the profit maximizing quantity but you do need it to actually calculate the profit so let's say the atc is down here and we're producing this quantity the price times that quantity is the total revenue which is that box and the total cost is the average total cost times the quantity which is that box the difference between them is the profit which is there because you're producing where mr equals mc that is the biggest this box can possibly get if you increase the quantity or decrease the quantity the box is going to get smaller that's why it's called the profit maximizing rule but if the atc is up here you're going to be making a loss but since you're making a loss anyways it's best to produce where michael's mc because the profit maximizing rule is also the loss minimizing rule this is a loss but it's the smallest possible loss you can get if you produce more output or less output you're going to end up with a bigger loss so you always produce where mr equals mc kinda if your loss becomes really really big then you should actually not produce gram michael's mc and produce nothing at all and just shut down but this is not the same thing as permanently leaving the market you're just shutting down in the short run and trying to wait things out sorry folks we're closed for two weeks to clean and repair america's favorite family fun park to help you remember this idea think of it like an inverted stoplight anytime the price is above here above atc you're definitely going to want to produce because you're going to make economic profit and if there's low barriers to entry other companies are going to see you making profit they're going to want to jump into the market in the long run other firms are going to want to jump into this market because they want to make profit too and that competition is going to drive down the price bringing it down to here but remember this isn't a bad thing your total revenue covers both your explicit costs and your implicit cost your opportunity cost so you'll be making accounting profit plus extra money that covers your opportunity cost so in competitive markets with low barriers to entry you end up with no economic profit and that's called normal profit well what happens if the price falls even further it's not green but it's still yellow which means you keep producing except you're making a loss and when firms are making a loss eventually some of those firms are going to leave the market because they want to go make money somewhere else and that'll cause the price to go back up because there's less competition and that'll put us back at no economic profit or normal profit in the long run but what happens if the price keeps falling down at what point do you just shut down and stop producing well it's right here at the minimum avc if the price falls below that you produce nothing you shut down you tell your workers to go home and that's called the shutdown rule to explain why let's go back and look at the relationship between the cost curves remember the difference between the average total cost and the average variable cost is the average fixed cost and if that's the average fixed cost then this box right here is the total fixed cost this is the cost of your oven your rent and your insurance even if you produce no output you're still gonna have to pay your fixed costs when the price is below the average total cost but above the average variable cost you're going to make a loss but at least you're covering some of your fixed costs but if the price keeps falling and falls below the average variable cost and eventually that loss is going to be bigger than your fixed cost instead of continuing to produce and having that huge loss it makes more sense to shut down and take your fixed cost as your loss so whenever the price falls below the minimum avc you should stop and produce nothing you should shut down again you're not leaving the market you're just shutting down in the short run sorry folks parks closed the moose out front should have told you and that's what's happening on the graph if the price is up here we're doing great we're making a lot of profit things are good okay still making oh price is falling well still making oh and i'm making no economic profit i'm breaking even my total revenue equals my total cost including my opt-o price is falling okay okay well now i have a loss but at least we're covering some of our fixed costs stay open oh and probably oh shut down again notice how it looks like an inverted stoplight so for competitive firms the marginal cost curve above the average variable cost is the short run supply curve as the price goes up they produce more and as the price falls they produce less but if it falls below a certain point the minimum abc they shut down and produce nothing now to help you remember this concept i'm going to add this to my wall if you're making economic profit start producing if you're making a loss that's okay keep producing if the price falls below avc shut out but remember doing this on a graph is only one of the two skills that you have to master you have to also be able to do it on a chart so you're gonna have to watch the other video i made and practice calculating total revenue total cost and profit but before you do that there's two things you have to do number one if you like my videos please subscribe and go get the ultimate review packet it's gonna help you get an a in your class and rock your exams and the second thing we had to do it's time for a pop quiz the questions won't be on the screen for very long so you have to pause the video and look at the first comment below for the answers thanks so much for watching and for maximizing profit until next time you