Standing Alone: Identifying the Sources of Monopoly Power Unable to Charge as Much as You Want: Relating Demand,

144 Part III: Market Structures and the Decision-Making Environment

As I explain in Chapter 8, total cost has two components — total fixed cost and total variable cost. Total fixed cost is a constant, so even if your firm shuts down and produces zero units of output, it still incurs total fixed cost. In Figure 9-1, total fixed cost corresponds to the point where the total cost curve intersects the vertical axis at TFC.

As the quantity of output produced increases, total cost increases at a decreasing rate. This fact indicates the total cost curve is becoming flatter due to diminishing returns. Inevitably, however, total cost begins increasing at an increasing rate; or, in other words, the total cost curve becomes steeper, as illustrated in Figure 9-1.

Total profit equals total revenue minus total cost, or

Total profit is maximized at the output level where the difference between total revenue and total cost is greatest. In Figure 9-1, this occurs at the output level q0. At the output level q0, total revenue equals TR0, total cost equals TC0, and total profit is the difference between them. On the graph, total profit, π, is the vertical distance between TR0 and TC0, and this vertical distance is at its greatest at q0.

Economists use the terms profit and economic profit interchangeably. Economic profit is defined as the difference between total revenue and the explicit plus implicit costs of production. (See Chapter 8 for the discussion of explicit and implicit costs.) As an equation

The explicit costs plus implicit costs include every cost associated with production, including the opportunity cost of your time and financial investment. Therefore, if economic profit equals zero, you stay in business. Zero economic profit means you’re receiving exactly as much income in this situation as you will in your next best alternative.

Zero economic profit is okay. Positive economic profit is even better. Negative economic profit is always bad.

Maximizing total profit with calculus

You can also determine maximum profit by using calculus. In this case, you simply take the derivative of total profit with respect to quantity in order to determine the profit-maximizing quantity of output. Using equations and calculus to maximize profit enables you to avoid “eyeballing” a graph, trying to determine where the difference between total revenue and total cost is greatest.