This unit explains how firms producing differentiated products choose their price and quantity of output to maximize their owners’ profits. This unit covers important concepts relating to the costs of production including fixed and variable costs, as well as the technological and cost advantages of large-scale production. The demand curve is derived using willingness to pay, and students learn about how the degree of competition the firm faces affects the elasticity of demand and in turn the price the firm can charge and their markup over costs. The unit also illustrates how gains from trade are divided between producers and consumers and the concept of deadweight loss, and it includes a discussion of competition policy.
The main model in this unit illustrates price setting using constrained maximization, based on isoprofit curves and the demand curve the firm faces. Graphs are included which demonstrate how approaching this question using marginal cost and marginal revenue leads to the same outcome. The unit also includes a new game theory model which shows how firms with few competitors set prices strategically.
The Economy 2.0 replaces the upward sloping MC curve from The Economy 1.0 with a constant marginal cost curve. A 3-D profit function is introduced to help explain isoprofit curves. The material has also been reorganized within the unit to promote clarity.
This is the header we’ve chosen for Unit 7.
Firms diversify their products in a bid to maximise their profits.