Robin Naylor, Department of Economics, Warwick 1 Topic 2: Firm Behaviour Lecture 11 The circular flow model once more Agent: Households 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 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 – bX 2 Now draw the TR curve. Topic 2 Lecture 11

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

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

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 – bX 2 X X p TR D Demand is elastic Demand is inelastic X=a/2b MR MR = a – 2bX

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 X X p TR D Demand is elastic Demand is inelastic X=a/2b MR The relationships between: Demand TR MR should all now be clear to you.

Robin Naylor, Department of Economics, Warwick Topic 2: Lecture Now read B&B 4 th Ed., pp ; ; 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.