Demand, Revenue, Cost, &

Profit
Demand Function D(q)
p =D(q)
In this function the input is q and output p
q-independent variable/p-dependent variable
[Recall y=f(x)]

p =D(q) the price at which q units of the good can be
sold

Unit price-p
Most demand functions- Quadratic [ PROJECT 1]
Demand curve, which is the graph of D(q), is generally
downward sloping
Why?

Demand Function D(q)
As quantity goes down, what happens to
price?
-price per unit increases
As quantity goes up, what happens to
price?
-price per unit decreases


Example
Demand Function
y = -0.0000018x
2
- 0.0002953x + 30.19
$0
$8
$16
$24
$32
0 1,000 2,000 3,000 4,000
q
D
(
q
)


Define the demand function to be
D(q) = aq
2
+ bq + c, where a = 0.0000018,
b = 0.0002953, and c = 30.19.
Example problem( Dinner.xls)
Restaurant wants to introduce a new buffalo
steak dinner
Test prices (Note these are unit prices)


If I want the demand function, what is our
input/output?
Recall p=D(q)



Price $14.95 $19.95 $24.95 $29.95
Number sold per week 2,800 2,300 1,600 300
Revenue Function R(q)
R(q)=q*D(q)
The amount that a producer receives from
the sale of q units
Recall p=D(q)
What is p?
-unit price per item
Revenue= number of units*unit price
Example
Revenue Function
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 1000 2000 3000 4000
q
R
(
q
)
Sample Data Points
q D(q) R(q)
0 $30.19 $0.00
8 $30.19 $241.50
16 $30.18 $482.96
24 $30.18 $724.37
32 $30.18 $965.72
40 $30.18 $1,207.01
Cost Function
A producers total cost function, C(q), for the production of q units is given
by
C(q) = C
0
+ VC(q)
=fixed cost + variable cost
[here VC(q)-variable cost for q units of a good]
. Hence, they assume that there are constants u and v such that
VC(q) = uln(q) + v, over a range of values for q between 1,000 and
4,000.

Recall:fixed cost do not depend upon the
amount of a good that is produced
Example
Fixed Cost
C
0
$9,000.00
Variable Costs
Number of Dinners(q) Cost-VC(q)
1,000 $21,000.00
2,000 $30,000.00
3,000 $36,000.00
D, R, C, & P, Expenses & Profit
Variable Costs Function
y = 13581.51Ln(x) - 72929.37
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 1,000 2,000 3,000 4,000
q
V
C
(
q
)
Cost Function
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 1000 2000 3000 4000
q
C
(
q
)
Note that VC
and C are only plotted
over the intervals where
the logarithmic model is
believed to apply.
Cost function

The total weekly cost function, over that range, for the
buffalo steak dinners is
C(q) = C
0
+ VC(q) = 9,000 + 13,581.51ln(q) 72,929.37
= 63,929.37 + 13,581.51ln(q)








Profit Function
let P(q) be the profit obtained from
producing and selling q units of a good
at the price D(q).
Profit = Revenue Cost
P(q) = R(q) C(q)

D, R, C, & P, Expenses & Profit
Profit Function
-$6,000
-$4,000
-$2,000
$0
$2,000
$4,000
$6,000
0 1000 2000 3000 4000
q
P
(
q
)
Revenue and Cost Function
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
0 1000 2000 3000 4000
q
D
o
l
l
a
r
s
Revenue
Cost
Project Focus
How can demand, revenue,cost, and profit
functions help us price 12-GB drives?
Must find the demand, revenue and cost
functions

Important Conventions for units
Prices for individual drives are given in
dollars.
Revenues from sales in the national
market are given in millions of dollars.
Quantities of drives in the test
markets are actual numbers of drives.
Quantities of drives in the national
market are given in thousands of drives.

Projected yearly sales
-National market
We have the information about the Test markets
& Potential national market size





Show marketing data.xls (How to calculate)
) ' (
] 1 [
] 1 [
1 ) ' ( s K market national of size
market test of size
sales market test
market test for s K sales national =
Demand function-Project1
D(q)
D(q) gives the price, in dollars per drive
at q thousand drives
Assumption Demand function is
Quadratic
The data points for national sales are
plotted and fitted with a second degree
polynomial trend line
Coefficients- 8 decimal places

Demand Function (continued)







D(q) =-0.00005349q
2
+ -0.03440302q + 414.53444491
Marketing Project
Demand Data
y = -0.00005349x
2
- 0.03440302x + 414.53444491
$0
$100
$200
$300
$400
$500
0 400 800 1,200 1,600 2,000 2,400 2,800
Quantity (K's)
P
r
i
c
e
Revenue function- Project1
R(q)
R(q) is to give the revenue, in millions of
dollars from selling q thousand drives
Recall D(q)- gives the price, in dollars per
drive at q thousand drives
Recall q quantities of drives in the
national market are given in thousand of
drives
Revenue function-R(q)
Revenue in dollars= D(q)*q*1000
Revenue in millions of dollars = D(q)*q*1000/1000000
= D(q)*q/1000
Why do this conversion?
Revenue should be in millions of dollars
Revenue function
Revenue Function
$0
$100
$200
$300
$400
$500
0 400 800 1,200 1,600 2,000 2,400 2,800
q (K's)
R
(
q
)

(
M
'
s
)
Total cost function-C(q)
C(q)-Cost, in millions of dollars,of producing q
thousand drives

Fixed Cost
(M's)
$135.0 Marginal Cost
1 First 800 $160.00
2 Second 400 $128.00
3 Further $72.00
Variable Costs (M's)
Batch Size (K's)
Total cost function-C(q)
Depends upon 7 numbers
q(quantity)
Fixed cost
Batch size 1
Batch size 2
Marginal cost 1
Marginal cost 2
Marginal cost 3

Cost Function
The cost function, C(q), gives the relationship
between total cost and quantity produced.





User defined function COST in Excel.

>

+
s <

+
s < +
=
200 1 if
000 1
200 1 72
2 314
200 1 800 if
000 1
800 128
263
800 0 if
000 1
160
135
, q
,
) , q (
.
, q
,
) q (
q
,
q
) q ( C
Marketing Project
How to do the C(q) in Excel
We are going to use the COST
function(user defined function)
All teams must transfer the cost function
from Marketing Focus.xls to their project1
excel file
Importing the COST function(see class
webpage)
Revenue & Cost Functions
Revenue & Cost Functions
$0
$100
$200
$300
$400
$500
0 400 800 1,200 1,600 2,000 2,400 2,800
q (K's)
(
M
'
s
)
Revenue
Cost
Main Focus-Profit
Recall P(q)-the profit, in millions of dollars
from selling q thousand drives
P(q)=R(q)-C(q)
Profit Function
The profit function, P(q), gives the relationship
between the profit and quantity produced and sold.
P(q) = R(q) C(q)
Profit Function
-$20
-$10
$0
$10
$20
$30
$40
$50
$60
$70
0 400 800 1,200 1,600 2,000
q (K's)
P
(
q
)

(
M
'
s
)
29
Goals
1. What price should Card Tech put on the drives,
in order to achieve the maximum profit?
2. How many drives might they expect to sell at
the optimal price?
3. What maximum profit can be expected from
sales of the 12-GB?
4. How sensitive is profit to changes from the
optimal quantity of drives, as found in Question 2?
5. What is the consumer surplus if profit is
maximized?
30
Goals-Contd.
6. What profit could Card Tech expect, if they price the
drives at $299.99?
7. How much should Card Tech pay for an advertising
campaign that would increase demand for the 12-GB drives by 10%
at all price levels?
8. How would the 10% increase in demand effect the
optimal price of the drives?
9. Would it be wise for Card Tech to put $15,000,000 into
training and streamlining which would reduce the variable production
costs by 7% for the coming year?
Whats next?
So far we have graphical estimates for
some of our project questions
We need now is some way to replace
graphical estimates with more precise
computations