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Topic 2: Firm Behaviour Lecture 11

Topic 2: Firm Behaviour Lecture 11. The circular flow model once more. Agent: Households. Demand. Supply. Market: Goods/Services. Market: Inputs. Agent: Firms. Demand. Supply. Topic 2 Lecture 11. Economic Profit, Revenue and Cost

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Topic 2: Firm Behaviour Lecture 11

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  1. Topic 2: Firm Behaviour Lecture 11 • The circular flow model once more Agent: Households Demand Supply Market: Goods/Services Market: Inputs Agent: Firms Demand Supply Robin Naylor, Department of Economics, Warwick

  2. Topic 2 Lecture 11 Economic Profit, Revenue and Cost Firm Objective: Profit-maximisation Profit = Total Revenue – Total Cost (Normal Profit if TR – TC = 0) Total Cost includes the Opportunity Costs of the Owner (and hence is one reason for definitions of costs and profits to vary from the accountant’s definition) Let’s look first at Revenues and then at Costs Robin Naylor, Department of Economics, Warwick

  3. Topic 2 Lecture 11 Revenues The Firm’s Revenues depend on the Demand Curve it faces: p=p(X) e.g.: p = a – bX Total Revenue is given by TR = p(X)X e.g.: TR = (a – bX)X = aX – bX2 Now draw the TR curve. Robin Naylor, Department of Economics, Warwick

  4. Topic 2 Lecture 11 Revenues TR = (a – bX)X = aX – bX2 p TR X Now draw the TR curve. TR Why does the TR curve rise and then fall . . . ? X Robin Naylor, Department of Economics, Warwick

  5. Topic 2 Lecture 11 Revenues TR = (a – bX)X = aX – bX2 This has to do with price elasticity of demand . . . p Demand is elastic Demand is inelastic D TR X TR X=a/2b X Robin Naylor, Department of Economics, Warwick

  6. Topic 2 Lecture 11 Robin Naylor, Department of Economics, Warwick

  7. Topic 2 Lecture 11 Revenues TR = (a – bX)X = aX – bX2 p Demand is elastic Demand is inelastic D TR X MR MR = a – 2bX TR X=a/2b X Robin Naylor, Department of Economics, Warwick

  8. Topic 2 Lecture 11 Robin Naylor, Department of Economics, Warwick

  9. Topic 2 Lecture 11 Robin Naylor, Department of Economics, Warwick

  10. Topic 2 Lecture 11 Robin Naylor, Department of Economics, Warwick

  11. Topic 2 Lecture 11 Robin Naylor, Department of Economics, Warwick

  12. Topic 2 Lecture 11 Revenues The relationships between: Demand TR MR should all now be clear to you. p Demand is elastic Demand is inelastic D TR X MR TR X=a/2b X Robin Naylor, Department of Economics, Warwick

  13. Topic 2: Lecture 11 Now read B&B 4th Ed., pp. 444-447; 451-452; 455 (but don’t worry about issues (especially the mathematical material) which go beyond what you have seen in lecture notes or seminar exercise sheets) Note that on these pages, B&B often refer to the firm as a ‘monopolist’ while in my lectures I do not use the term ‘monopolist’ – I simply refer to ‘the firm’. Implicitly, I’m talking about a monopoly firm because I’m assuming that there is just one firm in the market (notice that I never refer to the existence of competitor firms). A firm is a monopolist when there are no other firms supplying output in the market. Robin Naylor, Department of Economics, Warwick

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