CHAPTER1TO: The Theory of the Firm
CHAPTER10: The Theory of the Firm
Section 1: Introduction (1)The Break-Even Model a Associated with Accountancy a To find the level of output where profits are zero a no clear company objective in the break-even model a the break-even model assumes a constant variable cost per unit irrespective of the number of units that are made
Section 1 : Introduction ◼ (1) The Break-Even Model ❑ Associated with Accountancy ❑ To find the level of output where profits are zero ❑ No clear company objective in the break-even model ❑ The break-even model assumes a constant variable cost per unit irrespective of the number of units that are made
(2)The Linear Programming model Lp) a associated with management sciences a to have a very specific objective - for example to maximise profits a decision variables-- how many units of each product should be made in order to achieve the stated objective a LP technique then finds the optimal values of the relevant decision variables
◼ (2 ) The Linear Programming Model (LP) ❑ associated with Management Sciences ❑ to have a very specific objective - for example , to maximise profits ❑ decision variables -- how many units of each product should be made in order to achieve the stated objective. ❑ LP technique then finds the optimal values of the relevant decision variables
Section 2: The economist' s model Assumption a company is seen as producing one product only a company is to MAXIMISE PROFITS decision variable-- the level of product output To find the level of output, q the DECISION VARIABLE that maximises profit( the OBJECTIVE FUNCTION ) within the particular confines of the revenue and cost conditions which it faces
Section 2 : The Economist's Model ◼ Assumption ❑ company is seen as producing one product only ❑ company is to MAXIMISE PROFITS ❑ decision variable-- the level of product output ◼ To find the level of output , q ( the DECISION VARIABLE ) , that maximises profit ( the OBJECTIVE FUNCTION ), within the particular confines of the revenue and cost conditions which it faces
[A] Revenue Considerations - (a demand curve for its own single product p=500-2 How wide should the quantity (horizontal) axis be Should we have a range of g from 0-10? or g from 0-50? or g from 0-100? or g from0-700? or WHATEVER 0250
[A] Revenue Considerations ◼ (a) demand curve for its own single product ◼ p = 500-2q ◼ How wide should the quantity (horizontal) axis be ? Should we have a range of q from 0-10 ? or q from 0-50 ? or q from 0 - 100 ? or q from 0 - 700 ? or WHATEVER ? ◼ 0 250
Diagram 10.1 Dow nw ard Sloping De m and Curve 500 50 400 350 300 250 p=500·2q 200 150 100 50 100 25150175200 250 q-units of output
a(b)The Total Revenue Curve a TR= price x quantity pq Table 10.1 Evaluation of selected points TR 0 500 20 460 9200 30 440 13200 40 420 16800 200 100 20000 210 80 16800 220 60 13200 250 0 0
◼ (b) The Total Revenue Curve ❑ TR = price x quantity = pq
( TR starts at O when q equals O ii TR initially increases as q increases, but then decreases as q increases (iiTR equals 0 again, when q equals 250 a tR curve is not a straight line(nolinear equation tR=pxq=(500 -2q)q =500q-2q QUADRATIC equation
◼ (i) TR starts at 0 when q equals 0 ; ◼ (ii) TR initially increases as q increases , but then decreases as q increases ◼ (iii) TR equals 0 again , when q equals 250. ❑ TR curve is not a straight line (nolinear equation) ◼ TR = p x q = ( 500 - 2q ) q = 500q - 2q2 ◼ QUADRATIC equation
Diagram 10.2 Total Re ve nue curve 00 28000 TR=(500-2q 24000 20000 16000 12000 8000 4000 0 0255075100125150175200225250 q· units of output
a TR information is available from both types of diagrams but it comes in different ways for a demand curve diagram the tr associated with any particular output level is given by the area of the appropriate rectangle for a tR type diagram, the tR value for any output level is given simply by the height of the curve at that output level
❑ TR information is available from both types of diagrams but it comes in different ways : ◼ for a demand curve diagram , the TR associated with any particular output level is given by the area of the appropriate rectangle ; ◼ for a TR type diagram , the TR value for any output level is given simply by the height of the curve at that output level
