In Week 1, we looked at the buying or demand-side of a market. In this week, we describe the supply-side of the market, which
consists of firms providing some good or service. Specifically, we will examine the relationship between how much firms want to sell or supply a good or service and the price for that product. We will also identify factors that increase or decrease supply for a product.
Review a list of all items due this week in your course’s syllabus.
Lesson 1: Behavior of Supply
In this lesson, we will describe supply for a firm, whether the firm is a single investor-owned provider or a single tax-exempt provider. We also will describe supply from the market point of view. There will be an analysis of the “quantity-quality” supply relationship as well as the “administrator-as-agent” supply model.
Learning Outcomes
By the end of this lesson, you will be able to:
Define total revenue (TR), marginal revenue (MR), the profit maximizing rule, and the output-maximization rule for both single investor-owned firms and tax-exempt agencies.
Calculate marginal revenue (MR), marginal cost (MC), and average total cost (ATC).
Identify profit-maximizing and output-maximizing levels of output.
Explain what happens to a supply curve when the quality of a product is increased.
Before attempting to complete your learning activities for this week, review the following learning materials:
Read the following in your Economics of Health and Medical Care textbook:
Chapter 6, “Behavior of Supply” (pp. 93–109)
These pages provide additional references to the behavior of supply.
Part I: Single Investor–Owned Firm
Financial activities in a given firm is characterized by different factors. Financial managers have the responsibility of ensuring that all these factors are taken into consideration for the overall firm’s viability. In most cases, financial managers have a challenging and a complex job trying to ensure profit maximization through the management of marginal revenues and total revenues. They always analyze financial data in relation to the above factors, monitor that financial status of the firm, prepare and enhance the implementation of the plans. Understanding total revenues, marginal revenues, and the profit maximization tool is necessary in ensuring effective financial management systems. Understanding the mathematical concepts of these factors is also necessary in enhancing deeper understanding of these concepts. The purpose of this assignment is to define total revenue (TR), marginal revenue (MR), and profit-maximization and to calculate MR, MC, and ATC for the table given.
Total Revenue: Total revenue, or TR for short is the total flow of income from selling a given quantity at an agreed upon price (Helmold, 2020). The value can be found by multiplying this number with both variables-the cost per unit sold as well as how many units have been produced; then taking out taxes that are owed on said products before finally adding them all together into one big sum which we call ‘TR’. The goal of any business is to make money (Ertugrul & Sahin, 2020). That’s why it pays off for a company in order have high revenue, which will lead them having more profit down the line when they distribute these funds among themselves or use some as an investment towards building up new technology that can help grow your company even further (Helmold, 2020). The total revenue can also be defined as the amount of money that a company brings in; it is calculated by multiplying how many items they sold with what each one cost to make or buy, then adding any additional taxes imposed on top like sales tax if applicable.
Marginal Revenue (MR): Marginal revenue is the extra money you get when your output changes by one unit. It’s both positive and negative- if it has a lot of MR, then there will be more change in TR following an increase from 1 to 2 units; however small those increases may seem at first glance (Bockelie & Belobaba, 2018). When the amount of money that a company is paid for every additional unit produced increases faster than its cost, it will be able to make more profit. This means there are opportunities available with production if they do not expand enough in order meet demand (Nomidis, 2018). Marginal revenue refers only one type which can either get higher or lower but always involves taking into account both variables.
Profit-Maximizing Rule: Profit-maximization rule is defined as the approaches that define both long run and short run processes by which a firm can determine the input, prices, and output levels that leads to the maximization of profits (Mert, 2018). The profit-maximizing rule is to maximize profits, which means that firms will take into account the opportunity cost of any given production decision. This includes all costs and fees associated with producing a good or service as well as any revenue lost due to lower sales volumes. It also takes into account direct expenses such as raw materials and labor but not taxes or interest on debt financing, because these are irrelevant for making decisions about how much output should be produced at any point in time.
Calculation of MR, MC, and ATC
Table 3.1.
Quantity of Visits (Q)
Total Revenue (TR)
Marginal Revenue (MR)
Total Costs (TC)
Marginal Cost (MC)
Average Total Cost (ATC)
0
0
–
50
–
–
1
200
200
175
125
175
2
400
200
350
175
175
3
600
200
550
200
183.33
4
800
200
800
250
200
5
1000
200
1100
300
220
Profit-maximizing level of output (Q)
The profit-maximizing level of output (Q) is a point where MR = MC
Therefore Q = 3
Part II: Tax-Exempt Agency
Definition of Output-Maximization Rule
The output-maximization rule is a principle in economics that holds that firms should produce at the level of output where marginal revenue (MR) is equal to marginal cost (MC). At this point, profits are maximized. This rule is based on the assumption that firms are seeking to maximize profits (Stripling et al., 2018). The law of supply and demand is an important concept when it comes to understanding how businesses operate. The marginal product tells us what will happen if one more producer enters the market- either they would increase total output or someone else’s price must go down because he cannot make enough profit with his existing level (Kamiguchi & Tamai, 2019). On another note, “marginal revenue” (MR) refers specifically to all revenues earned from selling a unit at its current lowest possible cost; whereas “profit maximization way means finding out which input gives you highest net results.”
The output-maximizing level of output (Q) in Table 3.1.
The output-maximizing level of output (Q) is a point where MR = MC
Therefore Q = 3
The Supply Curve for an Output-Maximizing Firm
The supply curve for an output-maximizing firm will shift to the right, meaning that firms are willing to offer more of a good at each price. This is due to increased production costs for firms who are on this curve (Min et al., 2019). The slope of the curve changes as well, because now there is an upward sloping “elastic” part which means that prices have less of an effect on how much a good can be produced or sold by an individual firm. In a profit maximizing situation, the company will produce where MR = MC (Feit & Berman, 2018). The slope of this line is determined by how much people are willing to pay for each additional unit produced which can be analyzed through total revenue and market size. The Firm’s optimal output occurs at point on their marginal curve because it maximizes profits while keeping consumers active in markets.
Conclusion
Financial activities in a given firm is characterized by different factors. Financial managers have the responsibility of ensuring that all these factors are taken into consideration for the overall firm’s viability. Total revenue, or TR for short is the total flow of income from selling a given quantity at an agreed upon price. Marginal revenue is the extra money you get when your output changes by one unit. It’s both positive and negative- if it has a lot of MR, then there will be more change in TR following an increase from 1 to 2 units; however small those increases may seem at first glance. Profit-maximization rule is defined as the approaches that define both long run and short run processes by which a firm can determine the input, prices, and output levels that leads to the maximization of profits.
Ertugrul, A. E., & Sahin, R. (2020). A new approach for airline revenue management: total revenue boundaries. Journal of Business Economics and Finance, 9(2), 62-67. https://doi.org/10.17261/Pressacademia.2020.1214
Kamiguchi, A., & Tamai, T. (2019). Public investment, public debt, and population aging under the golden rule of public finance. Journal of Macroeconomics, 60, 110-122. https://doi.org/10.1016/j.jmacro.2019.01.011
Min, J. S., Lim, S. Y., & Yoo, S. H. (2019). Economic output-maximizing share of combined heat and power generation: The case of South Korea. Energy Policy, 132, 1087-1091. https://doi.org/10.1016/j.enpol.2019.06.038
Stripling, E., vanden Broucke, S., Antonio, K., Baesens, B., & Snoeck, M. (2018). Profit maximizing logistic model for customer churn prediction using genetic algorithms. Swarm and Evolutionary Computation, 40, 116-130. https://doi.org/10.1016/j.swevo.2017.10.010
Assignment Rubric
Criteria
Ratings
Pts
Responses
5 to >4 pts
Meets Expectations
Answers to all questions are correct. Graphs are all properly labeled and axes all properly identified. All graphs are properly drawn. (If applicable.)
4 to >2 pts
Nearly Meets Expectations
Answers to most questions are correct. Graphs are mainly labeled correctly and axes are usually properly identified. (If applicable.)
2 to >0 pts
Does Not Meet Expectations
Answers to most questions are incorrect. Graphs are not labeled or axes are not properly identified. Graphs are not drawn properly. (If applicable.)
/ 5 pts
Explanations
5 to >4 pts
Meets Expectations
Provides thorough explanation of rationales and skillfully applies course materials to develop conclusions. There is always a close and strong connection between the explanations provided and the material from the lessons.
4 to >2 pts
Nearly Meets Expectations
Provides adequate explanation of rationales, but conclusions could be supported more strongly using course materials. There is a connection between explanations and concepts from the lessons but this connection is not always strong or clear.
2 to >0 pts
Does Not Meet Expectations
Neither provides adequate explanation of rationales nor uses available resources to substantiate conclusions. There is no close connection between the explanations provided and the concepts given in the lessons.
/ 5 pts
Structure and Mechanics
5 to >4 pts
Meets Expectations
Contains one or two errors in grammar, spelling, and/or APA format.
4 to >2 pts
Nearly Meets Expectations
Contains several errors in grammar, spelling, and/or APA format.
2 to >0 pts
Does Not Meet Expectations
Contains many errors in grammar, spelling, and APA format.
