Understanding demand curve

The demand curve is a fundamental concept in economics that graphically represents the relationship between the price of a
good or service and the quantity demanded of that good or service, all other factors being equal. It is a graphical
representation of consumer behavior in response to changes in price.

In the demand curve, price is represented on Y-axis, while quantity demanded is represented on X-axis on the graph.

Law of Demand:

the higher the price, the lower the quantity demanded, and the lower the price, the higher the quantity demanded

Types of demand curve:

1.) Individual demand curve - Graphical representation of individual demand schedule. It is a curve that shows the different
quantities of a product demanded by an individual customer.

2.) Market demand curve - visual representation of a market demand schedule. It represents the aggregate demand of all the
consumers in the market at a different price of a particular product or commodity.

Downward Sloping Curve:

The demand curve typically slopes downward from left to right. This means that as the price of the good or service increases
(moving to the left along the horizontal axis), the quantity demanded decreases, and as the price decreases (moving to the
right along the horizontal axis), the quantity demanded increases.

Profit maximization

The Concept of Profit Maximization is a condition where profit would be maximum when the difference between the total
revenue and total cost is maximum. It refers to the process of making decisions and taking actions that result in the highest
possible level of profit or financial gain. Profit is typically defined as the difference between total revenue (the money earned
from selling goods or services) and total costs (the expenses incurred in producing and delivering those goods or services).

Two conditions:

1.) Marginal Cost (MC) equals Marginal Revenue (MR):

This condition suggests that to maximize profits, a firm should produce the quantity of goods or services where the marginal
cost (the cost of producing one additional unit) equals the marginal revenue (the additional revenue generated by selling one
more unit). In other words, a firm should keep producing as long as the additional revenue from selling one more unit is
greater than or equal to the additional cost of producing that unit. When MC = MR, profit is maximized.

2.) Price Elasticity of Demand:

This condition takes into account the price elasticity of demand, which measures how responsive the quantity demanded of
a product is to changes in its price. To maximize profits, a firm should set its price and output level where the price elasticity
of demand is equal to 1 (unitary elasticity). This means that a small change in price will result in a proportionate change in
quantity demanded. In such a situation, the firm can adjust prices without significantly affecting total revenue.

Two types of approach:

1.) The marginal revenue and cost approach

Marginal Revenue (MR): Marginal revenue represents the additional revenue generated by selling one more unit of a
product or service. In other words, it measures the change in total revenue resulting from producing and selling an additional
unit. MR can vary depending on market conditions and pricing strategies.

Marginal Cost (MC): Marginal cost represents the additional cost incurred by producing one more unit of a product or
service. It measures how production costs change as output levels increase. MC is typically influenced by factors like labor,
materials, and overhead costs.

To achieve profit maximization using the marginal revenue and cost approach:
If MR > MC: This indicates that selling one more unit generates more revenue than it costs to produce, resulting in an
increase in profit. In this scenario, the firm should increase its production and sales.

If MR < MC: This implies that producing one more unit costs more than the revenue it generates, leading to a decrease in
profit. In this case, the firm should reduce its production and sales.

If MR = MC: When marginal revenue equals marginal cost (MR = MC), the firm has reached the point of profit maximization.
At this output level, the firm is producing the quantity of goods or services where the additional revenue earned from selling
one more unit exactly covers the additional cost of producing that unit. This maximizes the firm's profit.

2.) The total revenue and cost approach

Total Revenue (TR): Total revenue represents the overall income generated by selling a certain quantity of goods or services.
It is calculated by multiplying the price at which each unit is sold (P) by the quantity (Q) of units sold. The formula for total
revenue is TR = P × Q.

Total Cost (TC): Total cost is the sum of all expenses incurred in producing a specific quantity of goods or services. It includes
both variable costs (costs that vary with changes in production levels) and fixed costs (costs that remain constant regardless
of production levels). The formula for total cost is TC = VC + FC, where VC represents variable costs and FC represents fixed
costs.

To achieve profit maximization using the total revenue and cost approach:

Calculate Profit: Profit is calculated as the difference between total revenue and total cost. The formula for profit is Profit =
TR - TC.

Determine the Output Level: To maximize profit, a firm must identify the level of output (Q) at which the difference
between TR and TC is the greatest. This is the point where profit is maximized. Mathematically, profit is maximized when the
marginal cost (MC) equals the marginal revenue (MR), which is the rate at which TR changes as Q changes.

If MR = MC: When MR equals MC, the firm is producing and selling the quantity of goods or services where the additional
revenue earned from selling one more unit equals the additional cost of producing that unit. This is the point of profit
maximization.

Graphs;

Profit maximization can be visually represented using graphs that illustrate the relationship between total revenue (TR), total
cost (TC), and profit as a function of the level of output (quantity produced and sold).

1.) The marginal revenue and cost approach using graphs

To maximize profits the firms should produce level of output closest to point where MC = MR. But, sometimes MC and MR
curves cross at two different points. in this case, profit-maximizing output level is the one at which MC curve crosses MR
curve from below.

2.) The total revenue and cost approach using graphs

To maximaze profit, firm should produce quantity of output where the vertical distance between TR and TC curves is greatest
and TR curve lies above TC curve.

Average costs in profit maximization:

Different types of average costs are irrelevant in profit maximization.

Problems with this approach:

- ATC includes many costs that are fixed in short-run-including cost all fixed inputs such as factory and equipment and design
staff

- ATC changes as output increases

Correct approach is to use the marginal cost and to consider increases in output one unit at a time.
 Notes to remember

While total revenue represents the total amount of money earned by a business (sales multiplied by the prices of products
and services), marginal revenue refers to the increase in revenue achieved by selling one additional unit of a product or
service.

The demand curve is a fundamental tool that businesses use to make pricing decisions and determine their optimal output
levels to maximize profit. By analyzing the demand curve, firms can assess how changes in price, quantity, and consumer
behavior impact their revenue and, ultimately, their profitability. Profit maximization often involves finding the right balance
between setting a price that maximizes revenue and producing an optimal quantity to minimize costs.

Demand curve: The total revenue and cost approach using graphs:

The marginal revenue and cost approach using graphs: Sometimes MC and MR curves cross at two different points: