The firm and its customers
,Introduction
* The firm's decisions :
This unit will focus
on how firms choose
product's price and
quantity
which depends on
demand & production
costs .
Context for this unit 1) Model of interactions between customers and profit
firms differenciated
maximizing producing products.
2) factors that affect the firm's choice of price and quantities
produced (costs , price elasticity ,
market power) .
3) Surplus from trade
measuring gains
:
Product decisions
Pricing and
How does firm decide
a
price and quantity
of their product that maximizes profit ?
Example > firm cereal
1
Selling breakfast cereal
Imagine makes and sells
: -
a
>
-
The cereal $2
costs per unit to
produce
, 1) total cost : unit cost x quantity
= 2xQ
It is clear that profit depends on
2) total revenue =
price X
quantity P and Q .
=
pxQ Consider this 3 dimensional picture ;
3) Profit= total revenue -
total costs
↑
= (P +Q) -
(2xQ)
-
· &
The 2 dimention version is what we call
Isoprofit curves
* The
height represents profit .
↓ * Profit forms a hill' with
height starting
of price and at zero where Q = 0 and P =
2 /price
show all combos quan
equals unit .
give firm
cost)
that the same profit
(similar to firms indiff curves) & As P and Q increase ,
profit gets
·
higher and
higher .
↑
-
/
>
-
If sell 10,000 at $3
.
· 60 000
/
Profit = (3x10000) -
(2x10000) = $10 , 000
·
· 10 000
· TR -
TC
C
-
zero
profit >
-
If sell 20000 at $5
line
Profit : (5x20000) -
(2x20000) = $60 , 000
* Isoprofit downward
sloping because if two points the level of
curves
give same
are
profit ,
the point with the
higher price must have a lower quantity.
,Introduction
* The firm's decisions :
This unit will focus
on how firms choose
product's price and
quantity
which depends on
demand & production
costs .
Context for this unit 1) Model of interactions between customers and profit
firms differenciated
maximizing producing products.
2) factors that affect the firm's choice of price and quantities
produced (costs , price elasticity ,
market power) .
3) Surplus from trade
measuring gains
:
Product decisions
Pricing and
How does firm decide
a
price and quantity
of their product that maximizes profit ?
Example > firm cereal
1
Selling breakfast cereal
Imagine makes and sells
: -
a
>
-
The cereal $2
costs per unit to
produce
, 1) total cost : unit cost x quantity
= 2xQ
It is clear that profit depends on
2) total revenue =
price X
quantity P and Q .
=
pxQ Consider this 3 dimensional picture ;
3) Profit= total revenue -
total costs
↑
= (P +Q) -
(2xQ)
-
· &
The 2 dimention version is what we call
Isoprofit curves
* The
height represents profit .
↓ * Profit forms a hill' with
height starting
of price and at zero where Q = 0 and P =
2 /price
show all combos quan
equals unit .
give firm
cost)
that the same profit
(similar to firms indiff curves) & As P and Q increase ,
profit gets
·
higher and
higher .
↑
-
/
>
-
If sell 10,000 at $3
.
· 60 000
/
Profit = (3x10000) -
(2x10000) = $10 , 000
·
· 10 000
· TR -
TC
C
-
zero
profit >
-
If sell 20000 at $5
line
Profit : (5x20000) -
(2x20000) = $60 , 000
* Isoprofit downward
sloping because if two points the level of
curves
give same
are
profit ,
the point with the
higher price must have a lower quantity.
