So far we have assumed that supply curves are generally upward sloping: that a higher price will encourage firms to supply more. But just how much will firms choose to supply at each price? It depends largely on the amount of profit they will make. If a firm can increase its profits by producing more, it will normally do so.
Profit is made by firms earning more from the sale of goods than they cost to produce. A firm’s total profit is thus the difference between its total sales revenue (TR) and its total costs of production (TC). In order then to discover how a firm can maximise its profit or even get a sufficient level of profit, we must first consider what determines costs and revenue.
In Sections 3.1 and 3.2 we examine short-run and long-run costs respectively. Over the short run a firm will be limited in what inputs it can expand. For example, a manufacturing company might be able to use more raw materials, or possibly more labour, but it will not have time to open up another factory. Over the long run, however, a firm will have much more flexibility. It can, if it chooses, expand the whole scale of its operations.
In Section 3.3 we turn to the revenue side and see how a firm’s revenue varies with output. Finally, Section 3.4 puts revenue and cost together to see how profit is determined. In particular, we shall see how profit varies with output and how the point of maximum profit is found.
