Econ - Profit Maximisation

Question Sheet

Listed below are the Three Questions that will be answered in this Assignment.

1. Using diagrams explain the profit maximizing point is where MR = MC.
2. Examine the impacts of a minimum price on a certain consumer good.
3. Why is the concept of price elasticity of demand of interest to the owner of a retailer?

Question A – Profit Maximising Point

Profit Maximisation is a procedure many companies look into for the best way to produce Output to maximize its revenue. In order to do so companies may have to adjust some factors such as purchase prices and production costs this process may help the company reach their Profit goal.

Total Revenue refers to the total amount of money a company earns from the sales of its products while Total Cost means the cost of all factors that deals with the manufacturing of the final product. Profit can be defined as Total Revenue minus Total Cost. In Diagram 1 shown below the Business is making a profit because the Total Revenue (TR) earned is greater than the Total Cost (TC) for producing the product.

Diagram 1

[pic 1]

Marginal Revenue is the additional money generated by a company for selling one additional unit of output while Marginal Cost is the expenditure for producing an additional unit of output. At the point where Marginal Revenue (MR) equals Marginal Cost (MC) the company experiences Profit Maximisation.

Diagram 2

[pic 2][pic 3]

In diagram 2 above shows at the points where the Marginal Cost curve (MC) is greater than the Marginal Revenue curve (MR) the company will make a loss if they produce products at this point. At the points where the Marginal Revenue curve is greater than the Marginal Cost curve the company will make a profit. For example if the company produce one (1) unit it will increase the output and it will bring extra revenue than it costs to produce that will be MR>MC, therefore the company will achieve to produce the unit and it will be beneficial than having added expenditure, however if the same unit costs more to produce than to bring in extra revenue it will be considered being a loss MR

Question B – Minimum Price

Government may intervene to set a Price Floor for a certain product in the market this price floor is referred to as Minimum Price. It is set to ensure that price does not fall below the minimum level.

 In order for a Price Floor to be effective it must be set above the Equilibrium Price, if this is not done it will have no impact in the Market.

A Government set a price floor for Alcoholic Beverages to prevent retailers to sell alcohol less than the set price, the motive is to clamp down on vehicular accidents caused by drunk driving, violence and being health conscious of alcohol consumption by doing this consumers might not want to pay the high price for alcohol thus the demand for alcohol will decrease while suppliers will want to sell more alcohol to make additional profit thus increasing supply. Minimum pricing will cause an impact on the irresponsible drinkers an also be a disadvantage for the occasional consumers.