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Intermediate Economics Chapter Nine Notes

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ECON 2310
Johanna Goertz

Chapter Nine Excluding 96Profit Maximization y Profit Maximizing Quantities and Prices o A firms profitis equal to its revenue R less its cost C that is RCo The firms profit maximization problem is to find the quantity or price that results in the largest possible profito In very competitive industries a firm that does not maximize profit will simply fail to surviveo Choosing Price versus Choosing QuantityA products demand function states how many units buyers will demand at each price It takes the form Quantity demanded DPrice Holding fixed all of the factors other than price that might affect demand for the product consumer tastes consumer income and the prices of substitutes Reading the demand curve in reverse tells a manager the price she needs to charge PQ to sell quantity Q This relationship is known as the products inverse demand function a function of the form Price PQuantity Demandedo Maximizing ProfitIf the firm wants to sell Q units it must charge price PQ Its revenue R when it sells Q units is therefore R PQ x QTo earn the greatest possible profit the firm should choose the sales quantity that maximizes revenue less cost where both revenue and cost depend on how much the firm decides to sellRQCQ PQ x QCQThe be
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