Chapter 5 Section 3 by linzhengnd

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									Revenues
 Chapter 6 Section 3
Indiana Academic Standards
       for Economics

Standard  3.6
 Demonstrate how firms
 determine price and output
 through marginal analysis.
              Questions
1.   How do firms decide how many
     goods to produce?
2.   How do firms decide how much
     to charge for a good or service?
3.   How do firms decide how many
     workers to hire?
            Objectives
1.   What is Total Revenue?
2.   What is Marginal Revenue?
3.   Why does a business firm compare
     marginal revenue with marginal
     cost when deciding how many units
     of a good to produce?
4.   What is the Law of Diminishing
     Returns?
   your own words, what does
 In
 “marginal” mean?
       ADDITIONAL
      Formulas
Total Revenue
 TR = P x Q
Marginal Revenue
 MR = ∆ TR / ∆ Q
         Sample Problem
 Given:   P = $0.75
Situation 1       Situation 2
FC = $400         FC’ = $450
VC = $55          VC’= $70
Q = 700           Q’ = 850
 Find   the following for Situation 1 & 2:
TR, TC, AFC, AVC, ATC, MR, MC
        Situation 1 Answers
              Reg. Rounding



 TR=   0.75 x 700            = $525
 TC = 400+55                 = $455
 AFC = 400 / 700             = $0.57
 AVC = 55 / 700              = $0.08
 ATC = 455 / 700             = $0.65
      Situation 2 Answers
             Reg. Rounding



 TR’=  0.75 x 850           = $637.50
 TC’ = 450+70               = $520
 AFC’ = 450 / 850           = $0.53
 AVC’ = 70 / 850            = $0.08
 ATC’ = 520 / 850           = $0.61
 Marginal Revenue Answer
          Reg. Rounding



MR
=($637.50’-$525) / (850’-700)
=$112.5 / 150
= $0.75
  Marginal Cost Answer
         Reg. Rounding



MC
=($520’-$455) / (850’-700)
= $65 / 150
= $0.43
         Compare MR to MC
 If           DO IT!
       MR > MC =
              Make the Change
 If MR < MC = DO NOT DO IT!
        MR          MC
       $0.75       $0.43
             DO IT!
Do companies want to make
as much profit as possible?
            (Trick Question)

NO!
Would  you be willing to work
 for $1.00 per hour?
Why  not? It would allow you
 to earn more profit.
      Companies want to
  MAXIMIZE PROFITS
           using the
Law of Diminishing Returns
  Law of Diminishing Returns
   we add additional units of a
 If
 resource (labor) to a resource
 (capital) that is fixed in supply,
 eventually the additional output
 produced will decrease.
Law of Diminishing Returns
        Total ADDITIONAL
       Things    Things
Hour   Learned  Learned
 1       10      10
 2      25       15   Law of
                    Diminishing
 3      33        8   Returns
 4      40       7
      How many workers
       should you hire?
        Quantity ADDITIONAL
Workers Of Output  Output
   1       5        5
   2       11       6
   3       18       7   Law of
                      Diminishing
  4        23       5 Returns
  5        26       3
            Assessment
1.   What is Total Revenue?
2.   What is Marginal Revenue?
3.   Why does a business firm compare
     marginal revenue with marginal
     cost when deciding how many units
     of a good to produce?
4.   What is the Law of Diminishing
     Returns?

								
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