Profit-Maximizing Output
From this point on, when we talk about a firm’s profit, we will always
mean economic profit, where all explicit and implicit costs are
considered. Our next step in developing a theory of supply is to
determine the level of output that maximizes a firm’s economic profit, to
which we give the symbol (the lowercase Greek letter pi). This is the
difference between the total revenue (TR) each firm derives from the sale
of its output and the total cost (TC) of producing that output:
By determining the profit-maximizing level of output for any given firm,
we will be closer to understanding that firm’s supply curve, which
naturally helps us to better understand the origin of market supply
curves. Firms make output decisions over quite different time horizons,
however, and we must briefly examine this point before exploring the
relationship between a firm’s costs, profits, and output.
ππ=TR−TC