Classical Economics

Classical economics

The total cost of production of a firm is given by adding up the variable costs and the fixed cost, according to the marginal cost theory of the firm as the level of production increases then the fixed costs is distributed to more units and therefore the cost of production is lower per unit.

The marginal cost therefore aids in choosing the most optimal level of production. Given that the demand curve of the industry is 255000 we can calculate the marginal cost and average cost and also determine the demand and supply curve:

The marginal cost and average cost below is the marginal cost and the average cost of a firm in the industry

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Classical Economics 3

MC=Q-2

Output

Total VARIABLE COST

FIXED COST

TOTAL COST

AVERAGE COST

MARGINAL COST

1

10

100

110

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110

-1

2

19

100

119

59.5

0

3

27

100

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127

42.333333

1

4

34

100

134

33.5

2

5

40

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100

140

28

3

6

45

100

145

24.166667

4

7

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50

100

150

21.428571

5

8

56

100

156

19.5

6

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9

63

100

163

18.111111

7

10

71

100

171

17.1

8

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11

80

100

180

16.363636

9

12

90

100

190

15.833333

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10

13

101

100

201

15.461538

11

14

113

100

213

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15.214286

12

15

126

100

226

15.066667

13

16

140

100

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240

15

14

17

155

100

255

15

15

18

171

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100

271

15.055556

16

19

188

100

288

15.157895

17

20

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206

100

306

15.3

18

21

225

100

325

15.47619

19

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22

245

100

345

15.681818

20

23

266

100

366

15.913043

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21

24

288

100

388

16.166667

22

The demand schedule for prices between $10 and $20:

price

quantity demanded

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Classical Economics 3

10

25500

11

23181.8182

12

21250

13

19615.3846

14

18214.2857

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15

17000

16

15937.5

17

15000

18

14166.6667

19

13421.0526

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20

12750

The supply curve and the demand curve are as follows;

The equilibrium point as per the graph is that the price is $17 and the equilibrium quantity is 15000 units. This point shows where we have equilibrium in the industries market where the demand and supply are equal.

Algebra calculation of the equilibrium point:

Given that our demand curve is equal to

Pq = 255000

Therefore our demand curve is as follows;

Q = 255000/P

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Classical Economics 3

Our supply is given by our marginal cost curve, our marginal cost curve is equal to MC = supply curve = q-2

Therefore because our equilibrium point is where

Quantity supplied = quantity demanded then our equation will be as follows

255000/p = (q-2)1000

We multiply by a thousand because we are considering all the firms

255000/p=1000q-2000

Multiply by p on both sides we get

255000=1000p squared -2000p

We divide by 1000

255=p squared – 2p

We solve this equation to equate it to zero as follows

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Classical Economics 3

P squared – 2p – 255 = 0

We can rewrite this as

P squared + 15 p – 17 p -255=0

P(P +15)- 17(p +15)=0

Because our equation is equal to zero then we can rewrite this as

(P+15)(p-17)=0

To equate to zero p can be equal to 17 or -15

Now because we should have a positive price then the price will be 17

The equilibrium quantity will be derived from the demand function where

Q = 255000/ p

Q = 255000/ 17

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Classical Economics 3

Q = 15000

Therefore our equilibrium price is $17 and our equilibrium quantity is 15000

b) the cost and demand curve of the individual firm

The X axis contains the quantity of goods while the Y axis is the cost of the goods, we draw the demand and cost curve as the number of units increase for a single firm in the industry.

References:

Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, New York

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