All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Overview: Output and Pricing Decisions

It is now time to continue our discussion of the output choices facing firms.  The logical structure of the analysis of the firm's choice is once again described in the diagram below, with the material that will be covered in this unit appearing in red. In the previous unit we looked at the production concepts (ex. marginal product) and the link between these and the cost concepts (ex. marginal cost) which gives us information on one of the components of the profit equation.  In this section we will begin by looking at the revenue component of the profit equation and introducing a few new concepts.  To do this we must begin with an analysis of demand for the firm's product which we will do while putting off until later a thorough discussion of the properties of that demand.

Once the new concepts have been introduced, we will then combine the cost and revenue sides of the equation to establish some rules, guidelines for the businesses when making their output and pricing decisions. These guidelines will ensure that the decisions being made by the firm are optimal - that there could be no other output/pricing choice that would generate more profit for the firm. As we did in the previous section, we will use both a tabular and graphical approach in our work and we will use the example of University to demonstrate the mechanics of the analysis.

The Logic of Business Choice

At the conclusion of this unit you should understand the decision rule MR = MC which will guide profit maximizing firms.  This is one of the concepts that you should take with you when you leave the course behind.

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