Monopolist Profit Maximization and Equilibrium
Total Revenue vs Total Cost Approach
A monopolist earns maximum profits when the gap between Total Revenue (TR) and Total Cost (TC) is maximum. The TR curve starts from the origin as there is no revenue if output is zero, and TR is inverse ‘U’ shaped because of the inverse relation between price and quantity. TC is inverse ‘S’ shaped because of the Law of Variable Proportions. Total profits are derived by subtracting TC from TR. Initially, with TC being greater than TR, the firm incurs losses. Points
Read MoreEconomics Production and Cost Theory: Solved Problems
Economics: Production and Cost Theory – Solved Problems
Production and Cost Theory Problems
- c. The company produces at the technical optimum.
- d. It should choose 1,500 units of labor and 7,500 units of capital.
- a. Straight lines with a negative slope.
- a. Decreasing returns to scale and diseconomies of scale.
- b. Increasing.
- c. Increasing returns to scale.
- b. It will buy all labor and no capital.
- e. All of the above are correct.
- d. For the cost function CT(Q) = 8Q3 – 3Q2 + 10Q + 100, all of the above are correct.
Profit Maximization and Competitive Supply Explained
Profit
- Profit is total revenue minus total cost. Total cost includes explicit and implicit costs. Economic profit occurs when total revenue is greater than total cost. Normal profit occurs when total revenue is equal to total cost. Economic loss occurs when total revenue is less than total cost.
- The firm’s goal is to maximize profit. The firm will choose the profit-maximizing level of output where marginal revenue equals marginal cost.
- If the firm is not at the output where marginal revenue equals
Core Economic Principles and Market Concepts
1. People Face Trade-offs
Efficiency: The property of society getting the maximum benefits from its scarce resources.
Equality: The property of distributing economic prosperity fairly among the members of society.
2. The Cost of Something Is What You Give Up
Opportunity Cost: Whatever must be given up to obtain some item, or the last best alternative forgone.
3. Rational People Think at the Margin
Rational decision-making involves comparing marginal benefits and marginal costs: Marginal Benefits ≥ Marginal
Read MoreEconomics Essentials: Goods, Demand, Supply, and Market Equilibrium
Economics Essentials: Goods, Demand, and Supply
A normal good means the coefficient multiplying income is positive. If it was negative, then it would be an inferior good.
Complementary and Substitute Goods
Complementary goods: If the price of one good increases, demand for both complementary goods will fall. Look at the coefficient.
Substitute goods: If the coefficient multiplying the good is positive, this means the other good’s demand will increase.
Demand and Supply Functions
Deriving a demand function:
Read MoreUnderstanding Demand, Supply, and Elasticity in Economics
Demand, Supply, and Elasticity in Economics
Demand – relationship between the quantity of a good that consumers are willing to buy and the price of the good. Qd=Qd(P)
Substitutes – Two goods which satisfy the same need and can replace each other in consumption. For substitutes, an increase in the price of one leads to an increase in the quantity demanded of the other (e.g., Colgate and Blend-a-med toothpaste).
Complements – Two goods which are consumed together. For complements, an increase in the
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