Consumers in a market are willing and desire to pay only a certain price for goods or services. The willing price and demand for goods and services by consumers depicts the demand for these goods and services in the market. The law of demand implies that an increase in the prices of goods and services will negatively affect the demand for these products. Consequently, a decrease in prices will increase demand (Arnold, 2010) . Demand is a function of quantity of products consumers demand and the price they are willing to buy the goods.
Price and Quantity in Demand
Using the function of demand, the table below indicates the maximum profit, price and quantity for justcookbooks;
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| Price | Quantity | Elasticity | Total Revenue | Total Cost | Economic Profit |
|
$10 |
35,000 |
--- |
$350,000 |
$766,000 |
($416,000) |
|
$15 |
32,500 |
0.1852 |
$487,500 |
$716,000 |
($228,500) |
|
$20 |
30,000 |
0.2800 |
$600,000 |
$666,000 |
($66,000) |
|
$25 |
27,500 |
0.3913 |
$687,500 |
$616,000 |
$71,500 |
|
$30 |
25,000 |
0.5238 |
$750,000 |
$566,000 |
$184,000 |
|
$35 |
22,500 |
0.6842 |
$787,500 |
$516,000 |
$271,500 |
|
$40 |
20,000 |
0.8824 |
$800,000 |
$466,000 |
$334,000 |
|
$45 |
17,500 |
1.1333 |
$787,500 |
$416,000 |
$371,500 |
|
$50 |
15,000 |
1.4615 |
$750,000 |
$366,000 |
$384,000 |
|
$55 |
12,500 |
1.9091 |
$687,500 |
$316,000 |
$371,500 |
|
$60 |
10,000 |
2.5556 |
$600,000 |
$266,000 |
$334,000 |
|
$65 |
7,500 |
3.5714 |
$487,500 |
$216,000 |
$271,500 |
|
$70 |
5,000 |
5.4000 |
$350,000 |
$166,000 |
$184,000 |
From the above table, the law of demand is evident as the higher, the prices the lower the quantity demanded. However, as the prices increase, the economic profit also increases, as the revenue is more than the total costs incurred.
Implicit Costs and Economic Profit
Implicit costs refer to costs that have occurred but are not reported as an expense in accounting. These costs are opportunity costs where a business foregoes resources without any explicit compensation for the resources. Implicit costs are outflows with no measurable inflow. A firm will utilize its resources and forego the possibility of earning income. Economists include these costs in the total costs, as they are outflows to a firm. To an economist, both direct and indirect costs are total costs that reduce the total revenue of a firm to determine the economic profit. In an economic view, though implicit costs are opportunity costs, they are part of the total costs as the firm injects some resources like wages in the production process (Sexton , Exploring Economics, 2008) .
Price Elasticity of Demand
Price elasticity of demand is the responsiveness of quantity demanded to changes in the prices of goods or services. We determine this elasticity by dividing the percentage change in quantity demanded with the percentage change in the prices of goods or services. The price elasticity of demand will change as prices increase as this elasticity is affected by the shift in prices. In a demand curve, when prices increase, the quantity demanded will decrease. Therefore, when price increases, there is a percentage change in both the prices and quantity hence changes in price elasticity of demand. Price elasticity of demand will change as price increase as there is a change in the variable of demand (Sexton, Exploring Macroeconomics, 2015) .
Profit Maximization Rule
The profit maximization rule relates to the economic state when marginal revenue is equal to marginal costs. Marginal revenue is the bonus revenue when a firm sells an extra unit of a product or a service. Marginal cost, on the other hand, is the extra cost incurred from manufacturing an extra unit of a product or service. When a firm sells more, it attains bonus revenue (MR) and an extra cost (MC). Marginal revenue less marginal costs is equal to marginal profit, therefore, when marginal revenue is more than the marginal costs; the firm makes a positive marginal profit and the firm can produce more. However, when the marginal revenue is equal to the marginal cost, the marginal profit is zero meaning that the quantity produced at this point will maximize profit. A firm will have more profits and can increase its output when the MR is more than the MC but when the MR=MC, increasing or decreasing output levels will produce lower profits hence this is the maximum profit point of a firm (Anderson & Ross, 2005) .
References
Anderson, W., & Ross, R. (2005). The Methodology of Profit Maximization: An Australian Alternative. The Quarterly Journal of Austrian Economics, 8 (4), 31-44.
Arnold, R. (2010). Macroeconomics (9th ed.). Mason, OH: Cengage Learning.
Sexton , R. (2008). Exploring Economics (4th ed.). Mason, OH: Thomson.
Sexton, R. (2015). Exploring Macroeconomics. Mason, OH: Cengage Learning.
