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Explain Total Revenue - Total Cost Approach

Explain Total Revenue - Total Cost Approach.

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A rational entrepreneur expands output if he considers he can increase his profits by doing so and would contract output to avoid losses and thus increase profits.

At equilibrium the firm’s profits are maximum and therefore has no incentive either to expand or reduce its output .At this point the difference between TR and TC is at the highest





The cost-revenue position of an imaginary firm is shown in above where TC represents total cost curve and TR represents the total revenue curve.

-Total cost curve TC starts not at the origin but point F. This is because it is assumed that even if the firm produces zero output, it has to bear certain costs of production due to fixed factors. These are the fixed costs.

- The figure shows that at any level of output less than OL, TC>TR and the firm incurs losses.

- At the output OL TC=TR and the firm is having neither losses nor profits. This point is known as ‘Break-even point’.

- At the outputs larger than ON, the TR
- Between two levels of output OL and ON lies the optimum point of maximum profits

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marto answered the question on April 16, 2019 at 13:16

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