Reflection – What I have learned about the “explain” question

In my most recent summative examination in IB HL Economics, I feel I have failed to effectively elaborate upon the question. In explaining the differences between profit maximization and sales revenue maximization, I missed the explanation between the two ideas as goals of a firm. An example of this is that while it may seem most sensible for a firm to maximize it’s profit, a goal aiming at long run production increase could choose to increase it’s sales revenue in order to lower cost, exploiting an economy of scale and marginal return increase. This is represented on a normal cost curve diagram as the cost of the product shifts downward along the AC curve. As well as this sales revenue maximization is a goal of the firm in increasing market shares, as lowering cost will result in the firm being able to gain more customer loyalty and temporarily boost sales. This idea as a goal of a firm is especially important in a monopolistic competition style market, where consumer loyalty and lowering prices is important in controlling market shares.

May 13, 2008: Paper 2 “Using at least one diagram, explain the difference between profit maximization and sales revenue maximization as goals of the firm.”

Essential Definitions and Diagrams:

Profit Maximization: Profit Maximization is the point at which MC and MR on the revenue and cost graph are equal. At this point, the firm is maximizing the profit it is generating from the sales of it’s products. At this point, a specific price and quantity are determined which allow for the firm to maximize it’s profits.

Sales Revenue Maximization: Sales Revenue Maximization is the point at which MR is equal to zero. At this point the firm is not wasting any materials and is therefore being environmentally friendly. This can be considered a goal for the firm, as it results in the firm maximizing the initial revenue from sales (while not necessarily generating a profit).

 

Normal Profit: Normal Profit is when a firm is spending as much money as they are receiving from revenue. On the normal cost curve diagram, this point is where AC is equal to AR. At this point the firm is generating no profit, but is not in danger of having to shut down, either, as shown in Figure 3 below.

 

 

Abnormal Profit: Abnormal Profit is when a firm is receiving more money from revenue than they are spending on production. On the normal cost curve diagram, this point is where AR is greater than AC. This point in shown below in Figure 4, with the highlighted box representing the profit earned by the firm after production costs.

 

Monopolistic Competition

Here is my group’s final presentation for Monopolistic Competition. We ran into a few problems with this presentation, but found that we were able to still present effectively and convey our ideas. Feel free to use the powerpoint for any type of Monopolistic Competition review necessary.

IB HL Economics Semester I Final Portfolio Review

Here’s my portfolio powerpoint I used to help me review all the concepts we have covered in the first semester. I feel that this post is more for myself than for anyone else to read, as it’s just another way of keeping a tab on my work so I can keep it all backed-up online. The benefit of putting it on my blog of course is that it’s free for you, the readers, to use as a review tool. I tried to keep the real-world examples for all of the definitions consistent and easy to read. I hope this can be used as a learning tool for anyone out there looking into the field of economics. Cheers.

Theory of the Firm Review and Definitions

Here is my final review for the Theory of the Firm. Over the last week I have worked in putting together this powerpoint in order to help myself review the definitions and terms. However, upon completion I figured it would also serve as a good tool for helping others study. Feel free to use it and share it on your own blog, as I would really appreciate the reference.

Concepts of the ‘Law of the Firm’ and Tennis Balls

Friday in class we practiced an activity in which our class practiced the some of the concepts of the Law of the Firm. In the game we had two buckets, and a variable amount of workers responsible for moving the balls from one bucket to another. For every ball moved, one product was produced. This process would be repeated with increasing amounts of variable factors, in this case workers. This activity allowed us to form a table consisting of many Law of the Firm concepts. Three of these concepts are the law of increasing return, the law of constant return and the law of diminishing return. The law of increasing return states that for the first few factors of variable cost (workers in our activity) added, the increase in output will be greater than the increase in cost. The law of constant return states that for the following factors of  variable cost added, the increase in output will be equal to the increase in cost. The law of diminishing return states that for the final factors of variable cost added, the increase in output will be less than the increase in cost. According to these concepts, we can set a price for our products, and determine how many workers we should use to produce a set amount of product in order to maximise our revenue to cost ratio, similar to real business.