This paper answers five questions about a fictional company, to illustrate basic macroeconomic concepts. Included are perfect competition, monopoly and marginal analysis. Production to maximize profits is considered, as well as price and profit outcomes in different types of industry structures. There is text for five PPT slides as well.
CPI
Marginal analysis is "an examination of the additional benefits of an activity compared to the additional costs of that activity (Investopedia, 2012). The idea is that for the toothpaste division, the company would only produce more if the profits that it gains from producing more outweigh the costs associated with that increased production.
The number of cases needed to maximize profits is calculated as follows:
= 0.006Q
So 7000 cases is the point of profit maximization.
Based on the assumption that the toothpaste market is in a state of perfect competition, if CPI raised prices, nobody would buy our toothpaste. Demand would fall because our competitor's toothpaste would be cheaper and would be of equivalent quality. In perfection competition, companies do not have any leverage (Heakal, 2012).
If the market price of toothpaste rose to $54 per case, then the point at which profit is maximized would change. The new point would be as follows:
= 0.006Q
Q = 9000
So 9000 cases is the new point of profit maximization.
The output level changes because the company earns more money per case. Under that circumstance, it takes longer for the marginal cost to equal the price point, when the price point is higher.
4. Under conditions of perfect competition, companies have no leverage. Therefore, they cannot benefit from advertising. Consumers under perfect competition have perfect information and are not swayed by advertising or persuasive marketing. The brand has no value, either. Thus, there is no point to marketing if the market is subject to perfect competition (Riley, 2006).
5. If CPI monopolized the market, it would have the ability to set the price wherever it wanted. In all likelihood, CPI would increase the price, because doing so would increase the company's profit. The actual point of maximum profit would be determined by the price elasticity of demand, but for toothpaste certainly some increase in price would be viable. Given a price increase, CPI would increase the profits that it makes via the toothpaste division.
Slide 1
How many cases should we product to maximize profits?
42 = 0.006Q
Q = 7000
Slide 2
In perfect competition, producers have no leverage (Heakal, 2012)
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