# Price and output determination (TR-TC Approach) || Production and cost || Bcis Notes

## Price and output determination (TR-TC Approach)

Profit maximization of a firm TR-TC approach. The price and output determination under TR and TC approach is explained below:-

1. Perfect competition – Where there is a maximum difference between TR and TC, the output is determined. Characteristics of perfect competition:-
• Large numbers of sellers and buyers
• Homogeneous products
• Free entry and exit of firms
• Price taker
• AR and MR are constant
• No selling cost

The profit maximization level of output can be shown by the help of the following diagram:

In the above figure, we measure the cost revenue in y-axis and output in x-axis respectively.

The line TR increases proportionately to the increase in output sales. TC is inverse  S-shaped. It shows the operation of law of diminishing returns, in the production process.

The maximum level of profit and output is determined by drawing a tangent to the S-shaped TC curve. The vertical distance between Total revenue and total cost measures the maximum level of per-unit profit.

Total profit= per unit profit × quantity sold

Imperfect Competition – Where there is a maximum difference between TR and TC, the output is determined. Characteristics are:-

1. Monopoly Market
• Single sellers.
• Price discrimination
• No free entry and exit of firms/restriction
• Price maker
• AR and MR are not constant i.e. different
• Low selling cost
• Incomplete information

2. Monopolistic Market

• Product differentiation
• Price maker
• Relatively easy market entry
• Large selling cost
• AR and MR are different
• Incomplete information

3. Oligopoly

• Few sellers
• Act like monopoly
• High dependency between firms
• AR and MR are different
• Low selling Cost
• The entry of new firms is restricted

The profit curve is drawn by measuring the gap between total revenue and total cost curves. The maximum profit Qm. Before Q1 and Q2, the profit curve lies below the x-axis which represents that there is loss to the firm. The maximum profit is at the output Qm. Thus Q2 is the equilibrium output level of the firm.

Therefore the Price and output determination (TR-TC Approach) is explained above.

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