Comments

  1. avatar says

    Hi Mr Moffat. Grand lecture as usual, thankyou.
    A question if I may.
    If we ignored the incremental drops to 15.5 and 15.0 and went straight from 16.0 to 14.5, marginal revenue ($4200) would then be higher than marginal cost ($4080). You could take 15.5 and 15.0 out of the equation altogether, the rest of the variables would be the same and a drop to 14.5 would appear to be justified using the optimal pricing approach.
    If you took out the variables when S.P. pu is 14.5, at an S.P. pu of 14.0, the drop from 16.0 pu would show both marginal revenue and marginal cost at $5400.
    What am I missing?

    • Avatar of johnmoffat says

      Hi, and thank you for the compliment :-)

      In anser to your question, think about the graph that I draw on the screen – the profit goes up initially and then it starts going down. We want maximum profit.

      If I said to you which is better, a profit of 20 or a profit of 30, then obviously 30 is better.
      However if I then said to you than in between the two you could make a profit of 40, then what would you say then?

      :-)

      • avatar says

        Thank you for taking the time to reply.
        What you’ve written makes sense, the point at which profit is at a maximum is clear based on the variables provided.
        I’ve revisited my workings and, although the sums appear to work when you apply the workings over a range of variables, e.g. 16.0 straight drop to 14.0 as opposed to 16.0 to 15.5 etc, I suspect that I’m overthinking it and comparing apples to oranges.
        Is it fair to say that the tabular approach only gives the ‘correct’ answer when all variables are treat as individuals (per SP) and not as an accumulation or over a range?
        Thanks again

      • Avatar of johnmoffat says

        You are correct in saying that the tabular approach only gives the correct answer when dealing with specific prices – not over a range.
        In the past both tabular and equation approaches have been examiner (separately – not together) with equations being the more common of the two. However it will be made very clear which approach is wanted.

  2. avatar says

    I am not sure if I missed something, but when trying to find marginal revenue and marginal cost, you asked that we pretend that we didn’t know what total profit would be. Well then I started thinking that fixing the selling price at 15.50 would be the better option since marginal revenue of 1,500 exceeds marginal cost 1,380 by 120. When the selling price is fixed at 15, marginal revenue of 1,400 exceeds marginal cost of 1,360 by only 40. So what point did I fail to grasp?

    • Avatar of johnmoffat says

      If marginal revenue is higher than marginal cost, the the difference is extra profit.

      If you get 40 extra profit then it is worth dropping the selling price. (Even if it was just $2 extra then it would be worth it)

  3. avatar says

    Sir, I’m sorry but I didn’t understand the part where you said Maximum profit occurs when Marginal Revenue= Marginal Cost. If they are the same then we can’t be making profits? I’m a bit confused….

  4. avatar says

    Dear John,
    I note your every lecture on my pc. But can you let me know which writing tablet and stylus(pen) you use to write on the screen? so I can write easily. The current one that I have is awful. Which software you use to record the screen??

    Btw I am big fan of yours lectures :)

    Many Thanks

  5. Avatar of mario123 says

    There is a small description of opportunity cost plus in the notes, but it was nowhere to be found in the lecture. Sir can you please give a detailed explanation of what it is, accompanied with an example and its relevance in exams?

      • Avatar of johnmoffat says

        The idea is very simple. Suppose you are going to produce a new product and are trying to decide on a selling price.
        The materials used are in short supply and currently they are all used making another product which generates a contribution of $5 per unit.
        Each unit of the new product will use 2 kg of material, whereas the existing product uses 1 kg of material per unit.

        If we make the new product then every unit produced will mean that we are unable to produce 2 units of the existing product (because of the short supply of material).
        Since the existing is generating $5 per unit and we will lost 2 units, each unit of the new product will have to generate $10 per unit.

        Therefore the selling price will have to be at least the cost of production plus $10 for it to be worth producing.

        (The extra $10 is an opportunity cost – we are not actually spending $10 but we would be losing $10 elsewhere.)

        The idea is more relevant for other topics – for example in transfer pricing – and it is dealt with in more detail with examples in those chapters and lectures.

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