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Marginal Analysis and Elasticity of Demand: Tony U

1. The document discusses marginal analysis and elasticity of demand. It provides examples to illustrate key concepts of marginal cost, marginal revenue, profit maximization, and elasticity. 2. Marginal analysis is used to determine the profit-maximizing level of production where marginal revenue equals marginal cost. Elasticity measures the responsiveness of quantity demanded to price changes. 3. The examples show how to calculate marginal costs, revenues, profits, and elasticity using demand and cost functions. The profit-maximizing output and elasticity values are determined for various scenarios.

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151 views31 pages

Marginal Analysis and Elasticity of Demand: Tony U

1. The document discusses marginal analysis and elasticity of demand. It provides examples to illustrate key concepts of marginal cost, marginal revenue, profit maximization, and elasticity. 2. Marginal analysis is used to determine the profit-maximizing level of production where marginal revenue equals marginal cost. Elasticity measures the responsiveness of quantity demanded to price changes. 3. The examples show how to calculate marginal costs, revenues, profits, and elasticity using demand and cost functions. The profit-maximizing output and elasticity values are determined for various scenarios.

Uploaded by

李华夏
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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9.

Marginal Analysis and Elasticity of Demand


Tony U
University of Macau

Outline

1 Marginal Analysis

2 Elasticity of Demand

Marginal Analysis

Marginal Analysis

Recall the cost function C (x) and revenue function R(x),


Marginal cost: the rate of change of C (x) with respect to x or
C (x), at the production level of x units.
C (x) the additional cost of producing the (x + 1)st unit

-1-

Marginal Analysis

Marginal Revenue: the rate of change of R(x) with respect to


x or R (x), at the sales level of x units.
R (x) the additional revenue derived from the sales of the
(x + 1)st unit.
Marginal profit: approximately equal to the additional profit of
producing and selling one more unit (P (x) = R (x) C (x)).

-2-

Marginal Analysis

Example 1
Suppose that the cost of producing x units of some product is
1 3
2
3 x 5x + 30x + 10 dollars, while the revenue received from the
sale of x units is 39x x 2 dollars. At what value(s) of x will the
marginal revenue equal the marginal cost?

-3-

Marginal Analysis

Example 1
Suppose that the cost of producing x units of some product is
1 3
2
3 x 5x + 30x + 10 dollars, while the revenue received from the
sale of x units is 39x x 2 dollars. At what value(s) of x will the
marginal revenue equal the marginal cost?
Sol.: C (x) = x 2 10x + 30, R (x) = 39 2x. Thus the value of
x such that R (x) = C (x),
x 2 10x + 30 = 39 2x
x 2 8x 9 = 0
x = 1(rejected) or

-3-

x = 9(units)

Marginal Analysis

In a free enterprise economy a firm will set production in such a


way as to maximize its profit.
Maximum profit: at a product level for which marginal
revenue equals marginal cost.

-4-

Marginal Analysis

Example 2

Refer to Example 1; at what level of production the profit is


maximized.

-5-

Marginal Analysis

Example 2

Refer to Example 1; at what level of production the profit is


maximized.
Sol.: The level of production is 9 units.

-5-

Marginal Analysis

Example 3
It is estimated that the demand for steel approximately satisfies the
equation p = 256 50x (p in dollars, and x in million tons), and
the total cost of producing x million tons of steel is
C (x) = 182 + 56x million dollars. Using differentiation to
determine the production level for which the profit is maximized.
What is the price at that production level?

-6-

Marginal Analysis

Example 3
It is estimated that the demand for steel approximately satisfies the
equation p = 256 50x (p in dollars, and x in million tons), and
the total cost of producing x million tons of steel is
C (x) = 182 + 56x million dollars. Using differentiation to
determine the production level for which the profit is maximized.
What is the price at that production level?
Sol.: The revenue function R(x) = px = 256x 50x 2 , the
production level for which the profit is maximum,
R (x) = C (x)
256 100x
x

= 56
= 2(million tons)

The price is p = 256 50(2) = 156 dollars.


-6-

Marginal Analysis

Average Cost and Marginal Cost

Suppose C (x) and AC (x) denote the total cost and average cost
respectively. The average cost is
AC (x) =

C (x)
,
x

for all x

moreover, the minimum average cost should equal the marginal


cost,
C (x)
= AC (x). for some x
C (x) =
x

-7-

Marginal Analysis

Example 4

Suppose the total cost in dollars of manufacturing x units of a


certain commodity is C (x) = 3x 2 + x + 48.
a. Determine the average cost function, AC (x).
b. Determine the production level for which the marginal cost is
equal to the average cost.

-8-

Marginal Analysis

(a) Determine the average cost function, AC (x).

-9-

Marginal Analysis

(a) Determine the average cost function, AC (x).


Sol.: AC (x) =

48
C (x)
= 3x + 1 + .
x
x

-9-

Marginal Analysis

(a) Determine the average cost function, AC (x).


Sol.: AC (x) =

48
C (x)
= 3x + 1 + .
x
x

(b) Determine the production level for which the marginal cost is
equal to the average cost.

-9-

Marginal Analysis

(a) Determine the average cost function, AC (x).


Sol.: AC (x) =

48
C (x)
= 3x + 1 + .
x
x

(b) Determine the production level for which the marginal cost is
equal to the average cost.
Sol,: The production level
C (x) = AC (x)
6x + 1 = 3x + 1 +
3x 2

48
x

= 48

x = 4(units) or

x = 4(rejected)

-9-

Elasticity of Demand

Elasticity of Demand

Elasticity of Demand: measure how a change in the price of a


product will affect the quantity demanded.
the ratio of the resulting percentage change in quantity
demanded to a given percentage change in price
=
=

% change in quantity
% change in price
q/q
p
1
=
.
p/p
q p/q

-10-

Elasticity of Demand

If p = f (q) is the demand function, the point elasticity of demand


of this demand function:
=

p
1
p
1
p 1
=
= dp
q0 q p/q
q limq0 p/q
q
lim

dq

Elastic demand: || > 1


Inelastic demand: 0 < || < 1
Unitary or unit elasticity of demand: || = 1

-11-

Elasticity of Demand

Example 5

Suppose that p = 600 q is the demand function of a commodity


for 0 q 600.
a. Express the elasticity as a function of the demand q.
b. Calculate the elasticity of demand when the price is 200 and
interpret the result.
c. At what price is the elasticity of demand unitary?

-12-

Elasticity of Demand

(a) Express the elasticity as a function of the demand q.

-13-

Elasticity of Demand

(a) Express the elasticity as a function of the demand q.


Sol.:

dp
dq

= 1, thus is
=

p
1
600

=1
.
q 1
q

-13-

Elasticity of Demand

(a) Express the elasticity as a function of the demand q.


Sol.:

dp
dq

= 1, thus is
=

p
1
600

=1
.
q 1
q

(b) Calculate the elasticity of demand when the price is 200 and
interpret the result.

-13-

Elasticity of Demand

(a) Express the elasticity as a function of the demand q.


Sol.:

dp
dq

= 1, thus is
=

p
1
600

=1
.
q 1
q

(b) Calculate the elasticity of demand when the price is 200 and
interpret the result.
Sol.: p = 200, 200 = 600 q, q = 400, thus
=1

600
= 0.5,
400

The price increased by 1%, the demand decreases by 0.5%.


-13-

Elasticity of Demand

(c) At what price is the elasticity of demand unitary?

-14-

Elasticity of Demand

(c) At what price is the elasticity of demand unitary?


Sol.: The quantity demand
||

600

1

q

600 
1
q
600
q
q

= 1
= 1
= 1
= 2
= 300,

thus the price of the elasticity of demand unitary is


p = 600 300 = $300.
-14-

Elasticity of Demand

Example 6
The demand equation for a certain product is q = p 2 35p + 400
where p (in dollars) is the price per unit and q is the quantity of
units (in thousands) demanded.
a. Find the point elasticity of demand when p = 15
b. Use this elasticity to estimate the percentage change in
demand if the price of $15 is decreased to $13.5. Hence
estimate the change in demand.
Note that

dp
1
= dq .
dq
dp

-15-

Elasticity of Demand

(a) Find the point elasticity of demand when p = 15

-16-

Elasticity of Demand

(a) Find the point elasticity of demand when p = 15


Sol.: q = 2p 35, (p) is
(p) =

p 1

q dp
dq

dq 1
dp qp

2p 35
p 35 + 400
p

2p 2 35p
p 2 35p + 400

(15) = 0.75.
-16-

Elasticity of Demand

(b) Use this elasticity to estimate the percentage change in


demand if the price of $15 is decreased to $13.5. Hence estimate
the change in demand.

-17-

Elasticity of Demand

(b) Use this elasticity to estimate the percentage change in


demand if the price of $15 is decreased to $13.5. Hence estimate
the change in demand.
Sol.: Price decreases from $15 to $13.5. That is the price
decreased by 10%, by using the definition of elasticity of demand:
% change in quantity
% change in price
% change in quantity
0.75 =
10%
% change in quantity =7.5%
=

The change in demand is


q(15) 7.5% = (152 35 15 + 400) 7.5% = 7.5(thousands)
-17-

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