Economics Coursework

VII. When nominal sales revenue is at its maximum point, does this also mean that profits for the sellers of oil are at a maximum point?

In order to understand if when sales revenue is at its maximum point then profits for the sellers of oil are at a maximum point, we have to understand these two concepts which are profit and revenue. Consecutively, we will first define these two terms so as to understand how these can be maximised and finally how they are related.

The sole real objective of an oil seller is to generate massive amount of profits so as to make the firm grow by increasing its output and decreasing its costs as defined by the theory of economies of scale. So what is profit?

Profit can be defined as the excess of total revenue over total cost during a specific period of time. Total revenue being the quantity of output produced times the selling price of a single output and total cost being the quantity of output produced times the cost of a single output.

In order to achieve maximum profit, oil sellers have to determine the best combination of price and quantity that generates the biggest profit.

A commonly used method is the use of the marginal cost (MC)-marginal revenue(MR) principle. As noted above, marginal profit equals marginal revenue minus marginal cost. Marginal cost and revenue being defined as the extra cost or revenue incurred in producing one additional unit of output.

Therefore, profit maximization is achieved when MC equals MR. That is because, until the intersection of MR and MC, oil sellers will have collected positive profit .But , this will change if any further production takes place as MC will become greater than MR resulting in negative marginal profit.

As we have seen, achieving maximum revenue is not the same thing as maximum profit as profit can only be maximised when marginal revenue achieves a desired level in conjunction with marginal cost. As a result we can conclude that when revenue is at its maximum point, profit is not maximised as the cost of production will be greater than the revenue generated without regard to profit margins.

VIII. Looking at the price elasticity for oil you have just calculated, how would you describe the demand for oil by consumers?

The Price Elasticity of Demand (PEoD) or Price Elasticity measures the rate of response of quantity demanded due to a price change.

In order to understand the values we calculated earlier, we will first look at how price elasticity values must be interpreted so as to interpret them in a second part.

The value of the price elasticity must be analyzed compared to two important values which are 1 and 0.

Indeed, as stated on Wikipedia (2006),