1.2 Break-Even Analysis and Market Equilibrium

1.2 Break-Even Analysis and Market Equilibrium

Two types of costs: 1. Fixed costs: 2. Variable costs: Total cost: Revenue: Profit: Linear Model

Let xdenote the number of units of a given product produced by a firm. Linear cost model:

Linear revenue model:

Profit:

When the number of goods produced, x, is small, the profit P(x) is negative and the manufacturer is at a LOSS.

Example: (J.D.Kim) A manufacturer of garbage disposals, has a monthly fixed cost of 150 dollars and a production cost of 30 dollars for each garbage disposal manufactured. The unit sell for 60 dollars each.

1. Find the cost function.

2. Findthe revenue function.

3. Find the profit function.

Supply and Demand

Let xbe the number of goods prodced and pbe the price of a good.

Demand equation/curve: If a firm wants to sell more goods, this can be accomplished by decreasing prices.

Supply equation/curve: gives the price necessary for suppliers to make availablexunits to the market. Suppliers of any good want to sell more product of the price is higher.

Equilibrium point/quantity/price:

Example: If the demand equation is p_d(x) = −1₃x+10 and the supply equation is

ps(x) = 1₂x+3, find the equilibrium quantity. (We will see how to solve this with a

Quadratic Models

Quadratic polynomial: Quadratic equation:

Vertex is the point (h,k) where

h= k=

Where does the quadratic come from?

Demand curve pd(x) =−cx+b

⇒Revenue r(x) = p_d(x)·x=−(cx+b)·x= −cx2+bx

Break-Even Analysis

Example: The weekly demand for shampoo produced by a small company is 32 bottles at a price of $5.00 each. If the price is lowered by $2, then the demand increases to 48 bottles. Also, the producers of the shampoo have weekly fixed costs of $150, and it costs them $0.18 to make each bottle of shampoo.

a) Find the price-demand function, p(x), where x is the number of shampoo bottles sold.

c) Find the company’s cost function.

d) Find the company’s profit function.

e) What is the company’s revenue if 50 bottles are sold?

Finding Function Values

1) Enter the function intoY₁ by pressing Y = .

2) On the home screen ( 2nd , MODE ), callY₁by pressing VARS , Y-VARS , FUNCTION ,and 1 . Then, open parenthesis, type the input value, and close parenthesis. You should

have something likeY1(2). Press ENTER .

f) Find the company’s break-even point (find the break-even point using the intersect function on the calculator, the quadratic formula, and using the zero function on the calculator). Round to the nearest integer if necessary.

i) Intersect Function:

1) Press Y = and enter the left side of the equation into Y₁ and the right side into Y₂. (Make sure your Stat Plots 1, 2, and 3 are off –unhighlighted.)

2) Try ZOOM , 6 ; ZOOM , 0 ; or WINDOW (adjust) and then GRAPH . (Remem-ber, you must be able to see the intersection point in your window.)

3) Press 2nd , TRACE , and 5 .

4) Move your cursor close to the intersection point, and press ENTER for the first curve, ENTER for the second curve, and then ENTER again for “Guess?”.

iii) Zero Function

1) Enter the function into Y₁ by pressing Y = . (Make sure your Stat Plots 1, 2, and 3 are off –unhighlighted.)

2) Try ZOOM , 6 ; ZOOM , 0 ; or WINDOW (adjust) and then GRAPH . (Re-member, you must be able to see where the function crosses the x-axis, i.e. where the function equals 0.)

3) Press 2nd , TRACE , and 2 .

4) The calculator will prompt you for the LeftBound. Use your left or right arrow key to move the cursor to the left of where the function crosses thex-axis and hit ENTER . The calculator will then prompt you for the RightBound. Move the cursor to the right of where the function crosses the x-axis and hit ENTER .

Example: (courtesy of Heather Ramsey) The market research department for a com-pany that manufactures widgets established the price-demand function to be p(x) =

2000−60x, where p(x) is the wholesale price per widget in dollars at which xwidgets can be sold. This company has fixed costs that amount to $4,000, and the production cost per widget is $500.

a) Find the company’s break-even point.

b) Find the output that will produce the maximum revenue, and find the maximum revenue. Round to the nearest integer if necessary.

Market Equilibrium

Example: At a price of $2.50 per bushel of a certain crop, a company will supply 8.5 million bushels, and the demand is 9.8 million bushels. If the price per bushel increases by $0.80, then supply increases to 10.5 million bushels, and demand drops to 7.8 mil-lion bushels.

a) Find the demand equation (i.e., price-demand function).

b) Find the supply equation.

Linear Depreciation

Example: A printer purchased in 2010 for $2,000 depreciates linearly over 10 years. If the printer has a scrap value of $200, what will it be worth in 2015? What is the rate of depreciation?