7.4 - demand and isoprofit curves for Beautiful  Cars. In the previous video I talked about the   cost structure of this company. In this video I'm  going to talk about the demand side and profit.   So for the demand curve we've got a typical  downward-sloping line: as the price   of Beautiful Cars drops, the demand for them goes  up - a very familiar straightforward demand curve.   Now let's scroll down and  talk about isoprofit curves. Let's start with the situation that our company  makes no profit at all. That can happen when the price that they're charging for their car is  the same as the average cost of production, therefore the average cost curve  here that we introduced from our previous video represents a case  where our firm makes no profit at all.  But if Beautiful Car starts to charge a  price that is higher than the average cost, a price that is higher than the unit cost,  the company starts to make profit and that is represented by these other isoprofit curves. Now  this isoprofit curve represents a scenario where our firm makes a total profit of $70,000 per day. This other curve represents a scenario where our company makes $150,000 of profit per day. Now let's introduce our marginal cost and think  about a specific scenario. In this scenario   our firm produces a small number of cars but makes  a lot of profit on each car that is selling and that scenario is G. In this case the company is  pricing each car around $7,000 dollars but each car is costing the company around $4,000 to produce so the company  is making a lot of profit on each car that is  selling and in total it makes a profit of $70,000 per day.   Now we can think of another strategy that the company can follow and makes the same amount of profit  per day, and that strategy is K. In that strategy the company produces a higher  number of cars but makes a a smaller profit on each car that is selling.  That's represented by a smaller gap between the price and the average cost curve. Now we can think  about another scenario again, H for instance.   Our company still produces a higher number of cars  but charges a higher price and therefore makes a higher profit - makes a total profit of $150,000 per  day. Now remember that all these isoprofit curves are hypothetical: they exist in the entrepreneur's  mind. Remember: they're like indifference curves -   they were hypothetical as well. We introduced them in Unit 3, and they existed in people's minds. This is also the same with isoprofit curves: they are inside the entrepreneur's head. The only curve that is real here is the average  cost curve and that is determined by the physical production constraint that exists out there. Now  the important question is: which of these   hypothetical scenarios is going to materialise? Which of these isoprofit curves is actually   going to happen? That depends on the customer  side - the demand side, so let's scroll down and add   the demand to our model. So we go to 7.5 'Setting  price and quantity to maximize profit'. If you scroll down you see that we have added the demand curve to our model. In this case the entrepreneur finds the point where the demand meets the  highest profit scenario. In other words the demand curve become tangential to the highest isoprofit curve and that is represented by point E. In this case Beautiful Cars were charged around  $5,000 for each of their cars and they end up producing 32 cars per day and in  total they make a profit of $63,360 per day. Now it's important to stress that the Beautiful Car company finds this price and quantity by trial and error. For instance let's assume at the beginning they produce   the same quantity of cars (32) but  they charge $4,000. What's going to happen? People are going to rush to buy  these cars and they find themselves that there are a lot of other people that want to buy their  cars, so there is an unmet demand at this price.  So they can think of two options: either  increasing their quantity to make more profit   or they produce the same quantity and charge more  for their cars. Let's assume that they go for the second option. They still produce the same  amount of cars (32) but they increase their price from around $4,000 to $5,000.  In this case they increase their profit from $33,000 per day to $63,000 per day. Now seeing this Beautiful Cars might think that  we can actually further increase our profit by   further increasing our price. Let's assume that  they decide to charge $7,000 for their cars. So they end up here. What's going  to happen? They're going to find out that not all of their cars are going to sell. In this  scenario there's not enough demand for their cars when they price their cars around $7,000. So what's  going to happen? They're going to go back and reduce their price and eventually  they're going to settle at point E. Let me add that at point E the slope of the demand curve - that  is the marginal rate of transformation is equal to  the slope of the isoprofit curve - that is the  marginal rate of substitution. Sounds familiar? This is the same kind of an economic problem  that we encountered in our previous units and we call it constraint maximization problem. This  is the case where the willingness to pay of someone matches the constraint that exists out there  and that represents the best possible scenario.