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.