Question

1) How does elasticity and its relationship with total revenue apply?

2) What about the firms process for maximizing profits. How can that affect things?

3) What is the difference between profits and revenues?

Questions from chapters 4&5:

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2016). Managerial economics and organizational architecture. Boston: McGraw-Hill Irwin.

Answer 1

1) The elasticity determines how consumers respond when price of that commodity changes. Hence the firm who are having the inelastic demand of their good tend to have higher markup as per the below equation.

P – MC/P = 1/e

P= price, MC= marginal cost, e= elasticity of demand

Markup is the value of the profit added above the marginal cost. So the lower the elasticity would lead to higher markup and higher revenue.

2) The way firms maximize profit affect other things, like quantity demanded, consumer surplus, producer surplus.

In case monopoly, the profit maximizing condition is p=mc that that leaves very less consumer surplus and high producer surplus. wherese, in case of perfect competition, it is MR=MC that has the maximum consumer surplusand lowest producer surplus.

3) Profits are the absolute income generated by the process of production and trade wherese revenue is the total amount received, we can call it sales amount also. It consists, profit, wages, various costs etc.