Economics

Part 1 (a) - Using diagrams explain the profit maximizing point is where MR=MC.

In the world of economics the general assumption is that firms seek to maximize profits. The profit maximizing rule states that profit = total revenue – total cost. Basically, this implies that profit is maximized where marginal revenue equals marginal cost. The extra revenue gained by selling one or more unit is called marginal revenue. Marginal cost is the cost of producing that one or more unit of output. Therefore, a firm will maximize their profits when they can minimize their cost and produce at an output where Marginal revenue (MR) = Marginal cost (MC). This is illustrated in the figure 1 below.

Figure 1 – MR=MC

[Student 2015]

To the left of Q1 shows that MR is greater than MC what this means is that producing this additional unit contributes to the increase in profits. Where MR is less than MC, as shown to the right of Q1 indicates that producing that extra unit will increase cost causing profit levels to fall. Profit maximization cannot be achieved at any point after Q1 because marginal cost is greater than marginal revenue. Therefore, the logical business owner will stop producing where the profit maximizing point is MR=MC.

Part 1 (b) – Examine the impacts of a minimum price on a certain consumer good.

Minimum prices are price floors set by the government which simply mean that suppliers cannot sell their goods at higher price. They can however sell at a lower price if they so desire. Generally, price floors are used to set minimum wages as it pertains to labour and also as a support to farmers within the agriculture field of business.

In the case of agricultural goods, the government may decide to impose price floors in order to stabilize the prices consumers pay. Prices tend to fluctuate depending on the outcome of harvesting. In the instance when goods are plentiful i.e. when supply is high, farmers will be able to sell their goods are lower prices which is favourable for the consumer. On the other hand, when harvesting is futile i.e. supply is low; farmers will have to increase prices causing a decline in sales which is unfavourable to the farmer. At some point, both farmer and consumer will encounter periods where they will not be satisfied.

Figure 2 – Minimum Price

[Student 2015]

Figure 2 above illustrates in times of good harvest the supply curve shifts to the right, prices decrease and consumers are happy. When harvest is bad the supply curve shifts to the left, prices increase and consumers are unhappy. The only way to curb this would be for the government to set a minimum price which must be above equilibrium price in order to satisfy the needs and wants of both farmer and consumer. The government will have to strategize in order to facilitate the times when sales levels are undesirable. Some ways in which this can be accomplished: are by buying the surplus and distributing to schools to assist in feeding programs or simply investing in proper storage to preserve these excess goods in order to accommodate consumers when supply is low, e.g. In the event of natural disasters which hamper the availability of crop. Another option would be to buy these goods and export them at minimum price.

Part 1 (c) – Why is the concept of price elasticity of demand of interest to the owner of a retailer?

Price elasticity of demand

Price elasticity of demand measures the sensitivity of quantity demanded as price changes of a good or service. Demand for a product can be either price elastic or price inelastic. This can be determined by the following formula:

Price Elasticity of Demand (Ed) = % Change in Quantity Demanded/ % Change in Price

Price elastic demand

If quantity demanded is Price elastic, this means that means a change in price will directly affect the demand for a good or