Demand, Revenue, Cost, &

Profit
 Demand Function – D(q)
• p =D(q)
• In this function the input is q and output p
• q-independent variable/p-dependent variable
[Recall y=f(x)]

• p =D(q) the price at which q units of the good can be sold

• Unit price-p
• Most demand functions- Quadratic [ PROJECT 1]
• Demand curve, which is the graph of D(q), is generally
downward sloping
– Why?
 Demand Function – D(q)
• As quantity goes down, what happens to
price?
-price per unit increases
• As quantity goes up, what happens to
price?
-price per unit decreases
 Example
Demand Function
2
y = -0.0000018x - 0.0002953x + 30.19
$32
$24
D(q)

$16
$8
$0
0 1,000 2,000 3,000 4,000
q

Define the demand function to be

D(q) = aq2 + bq + c, where a = 0.0000018,
b = 0.0002953, and c = 30.19.
 Example problem( Dinner.xls)
• Restaurant wants to introduce a new buffalo
steak dinner
• Test prices (Note these are unit prices)
Price $14.95 $19.95 $24.95 $29.95
Number sold per week 2,800 2,300 1,600 300

• If I want the demand function, what is our

input/output?
• Recall p=D(q)
 Revenue Function – R(q)
• R(q)=q*D(q)
• The amount that a producer receives from
the sale of q units
• Recall p=D(q)
• What is p?
-unit price per item
• Revenue= number of units*unit price
 Example
Revenue Function
$50,000
$40,000
$30,000
R(q)

$20,000
$10,000
$0
0 1000 2000 3000 4000
q

Sample Data Points

q D(q) R(q)
0 $30.19 $0.00
8 $30.19 $241.50
16 $30.18 $482.96
24 $30.18 $724.37
32 $30.18 $965.72
40 $30.18 $1,207.01
 Cost Function
A producer’s total cost function, C(q), for the production of q units is given by
C(q) = C0 + VC(q)
=fixed cost + variable cost
[here VC(q)-variable cost for q units of a good]

. Hence, they assume that there are constants u and v such that VC(q)
= uln(q) + v, over a range of values for q between 1,000 and 4,000.

• Recall:fixed cost do not depend upon the amount

of a good that is produced
 Example
Fixed Cost
C0 $9,000.00

Variable Costs

Number of Dinners(q) Cost-VC(q)

1,000 $21,000.00
2,000 $30,000.00
3,000 $36,000.00
 D, R, C, & P, Expenses &
Profit Variable Costs Function
$50,000
y = 13581.51Ln(x) - 72929.37
$40,000
Note that VC
$30,000

VC(q)
and C are only plotted
over the intervals where $20,000
the logarithmic model is
$10,000
believed to apply.
$0
0 1,000 2,000 3,000 4,000
q
Cost Function
$50,000
$40,000
$30,000
C(q)

$20,000
$10,000
$0
0 1000 2000 3000 4000
q
 Cost function

• The total weekly cost function, over that range, for the
buffalo steak dinners is

• C(q) = C0 + VC(q) = 9,000 + 13,581.51ln(q)  72,929.37

= 63,929.37 + 13,581.51ln(q)
 Profit Function
• let P(q) be the profit obtained from
producing and selling q units of a good
at the price D(q).
• Profit = Revenue  Cost
• P(q) = R(q)  C(q)
 D, R, C, & P, Expenses &
Profit

Revenue and Cost Function Revenue

Cost
$60,000
$50,000
$40,000
Dollars

$30,000
$20,000
$10,000
$0
0 1000 2000 3000 4000
q Profit Function
$6,000
$4,000
$2,000
P(q)
$0
-$2,000 0 1000 2000 3000 4000

-$4,000
-$6,000
q
 Project Focus
• How can demand, revenue,cost, and profit
functions help us price 12-GB drives?
• Must find the demand, revenue and cost
functions
 Important – Conventions for units
 Prices for individual drives are given in
dollars.
•  Revenues from sales in the national
market are given in millions of dollars.
•  Quantities of drives in the test
markets are actual numbers of drives.
•  Quantities of drives in the national
market are given in thousands of drives.
 Projected yearly sales –
-National market
• We have the information about the Test markets
& Potential national market size

[test market 1 sales]

national sales( K ' s ) for test market 1   size of national market ( K ' s )
[ size of test market 1]

• Show marketing data.xls (How to calculate)

 Demand function-Project1
D(q)
• D(q) –gives the price, in dollars per drive
at q thousand drives
• Assumption – Demand function is
Quadratic
• The data points for national sales are
plotted and fitted with a second degree
polynomial trend line
• Coefficients- 8 decimal places
Demand Function (continued)
Demand Data

$500
$400 2
y = -0.00005349x - 0.03440302x + 414.53444491
$300
Price

$200
$100
$0
0 400 800 1,200 1,600 2,000 2,400 2,800

Quantity (K's)

D(q) =-0.00005349q2 + -0.03440302q + 414.53444491

Marketing Project
 Revenue function- Project1
R(q)
• R(q) is to give the revenue, in millions of
dollars from selling q thousand drives
• Recall D(q)- gives the price, in dollars per
drive at q thousand drives
• Recall q – quantities of drives in the
national market are given in thousand of
drives
 Revenue function-R(q)
• Revenue in dollars= D(q)*q*1000
• Revenue in millions of dollars = D(q)*q*1000/1000000

= D(q)*q/1000
• Why do this conversion?
Revenue should be in millions of dollars
 Revenue function
Revenue Function
$500

$400
R (q ) (M's)

$300

$200

$100

$0
0 400 800 1,200 1,600 2,000 2,400 2,800
q (K's)
 Total cost function-C(q)
• C(q)-Cost, in millions of dollars,of producing q
thousand drives

Fixed Cost
Variable Costs (M's)
(M's)
$135.0 Batch Size (K's) Marginal Cost
1 First 800 $160.00
2 Second 400 $128.00
3 Further $72.00
 Total cost function-C(q)
• Depends upon 7 numbers
– q(quantity)
– Fixed cost
– Batch size 1
– Batch size 2
– Marginal cost 1
– Marginal cost 2
– Marginal cost 3
 Cost Function
 The cost function, C(q), gives the relationship
between total cost and quantity produced.
 160q
 135  if 0  q  800
1,000
 128( q  800 )

C( q )  263  if 800  q  1,200
  1,000
314.2  72( q  1,200 ) if q  1,200
 1,000

 User defined function COST in Excel.

Marketing Project
 How to do the C(q) in Excel
• We are going to use the COST
function(user defined function)
• All teams must transfer the cost function
from Marketing Focus.xls to their project1
excel file
• Importing the COST function(see class
webpage)
 Revenue & Cost Functions
Revenue & Cost Functions
$500

$400
Revenue
$300
(M's)

Cost
$200

$100

$0
0 400 800 1,200 1,600 2,000 2,400 2,800
q (K's)
 Main Focus-Profit
• Recall P(q)-the profit, in millions of dollars
from selling q thousand drives
• P(q)=R(q)-C(q)
 Profit Function
 The profit function, P(q), gives the relationship
between the profit and quantity produced and sold.
 P(q) = R(q) – C(q)

Profit Function
$70
$60
$50
$40
P (q ) (M's)

$30
$20
$10
$0
-$10 0 400 800 1,200 1,600 2,000
-$20
q (K's)
 Goals
• 1. What price should Card Tech put on the drives,
in order to achieve the maximum profit?
• 2. How many drives might they expect to sell at
the optimal price?
• 3. What maximum profit can be expected from
sales of the 12-GB?
• 4. How sensitive is profit to changes from the
optimal quantity of drives, as found in Question 2?
• 5. What is the consumer surplus if profit is
maximized?

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 Goals-Contd.
• 6. What profit could Card Tech expect, if they price the
drives at $299.99?
• 7. How much should Card Tech pay for an advertising
campaign that would increase demand for the 12-GB drives by 10%
at all price levels?
• 8. How would the 10% increase in demand effect the
optimal price of the drives?
• 9. Would it be wise for Card Tech to put $15,000,000 into
training and streamlining which would reduce the variable production
costs by 7% for the coming year?

30
 What’s next?
• So far we have graphical estimates for
some of our project questions
• We need now is some way to replace
graphical estimates with more precise
computations