Choosing a Price

7.1 of The Economy 1.0 & The Economy #4

What is the demand curve?

-The curve that shows the quantity that will be bought at each possible price

What is the formula of profit?

Profit = (Price x Quantity sold) - (Unit Cost x Quantity sold)

Profit = Total Revenue - Total Costs

How can surveys allow for demand curves to be estimated?

-Demand curves simply show how many people would be willing to buy X at a price £Y.

-Thus, simply asking people, for example, would you pay £1000 to spend 10 mins in space travel, allows us to see the consumer demand for space flight

What does an iso-profit curve show?

-All of the points of price and quantity that give the same level of profit. Follows the same logic as an iso-cost and an indifference curve.

How can one find, using the iso-profit and demand curve, the point such that profit is maximised?

-Its so back - The MRT = MRS !!!!!!!

-Because the iso-profit curve has MRS in its slope, and the demand curve has MRT in its slope, it is simple stuff after that

Why can the slopes of the Iso-profit and demand curve represents MRS and MRT

-Iso-profit curve represents a trade-off one is willing to make between the price and quantity. If a higher price and small quantity led to the same amount of profit, you’d be indifferent

-Slope of the demand curve represents a trade-off one is constrained to make. The demand curve allows a transformation between quantity and price.

Given this, how will the firm’s profit function look as it produces?

-Before reaching point E, you are climbing the profit function

-At E, you are at the peak

-After E, you are falling off the mountain

-When you pass the iso-profit curve/line of £0, you are drowning