Suppose that through laziness and/or sheer stupidity, Densa Inc. always falls 10 percent short of producing the profit-maximizing output. Would higher product price lead to greater output? Does this result suggest why economists are not overly concerened about wheather the profit-maximizing assumption is exactly correct?
To determine whether a higher product price would lead to greater output in the given scenario, we need to understand how changes in price affect profit-maximizing output.
In general, the profit-maximizing output occurs when marginal revenue equals marginal cost. By increasing output, a firm can increase its revenue but also its costs. Therefore, the firm will keep increasing output until the marginal revenue from selling an additional unit is equal to the additional cost of producing that unit.
Now, in the case of Densa Inc., if the company falls 10 percent short of producing the profit-maximizing output, it implies that its current output is below the level at which marginal revenue equals marginal cost. This is because the firm could have produced more and earned additional profit.
If we increase the product price, it would directly impact the firm's revenue. However, the effect on output depends on the price elasticity of demand. If the demand for the product is elastic, meaning price changes have a significant impact on quantity demanded, then increasing the price could lead to a decrease in total output.
On the other hand, if the demand is inelastic, meaning price changes have a minimal impact on quantity demanded, then increasing the price may result in greater output, as the potential increase in revenue might outweigh the decrease in quantity demanded.
In either case, the important point to note is that even if Densa Inc. always falls short of producing the profit-maximizing output, economists may not be overly concerned for a few reasons:
1. Market Forces: In a competitive market, if Densa Inc. consistently fails to produce the profit-maximizing output, it creates an opportunity for other firms to enter the market and potentially capture the unrealized profit. Ultimately, market forces should push the firm toward producing the profit-maximizing output or risk losing market share.
2. Optimization: While economists strive to understand and analyze profit-maximizing behavior, they also recognize that real-world firms may not always achieve it due to various factors like laziness or inefficiency. However, the profit-maximizing assumption provides a benchmark for understanding and evaluating economic behavior, even if firms fall short of it.
3. Trade-Offs: Profit-maximization is not the sole objective for all firms. Firms may have other objectives like market share expansion, brand building, or social responsibility. These objectives might lead firms to deviate from the profit-maximizing output levels. Economists understand that firms make trade-offs based on their own judgments and objectives, and this diversity contributes to a dynamic and evolving market system.
In summary, the impact of a higher product price on output depends on the elasticity of demand. While economists strive to understand profit-maximizing behavior, they recognize that firms may deviate from it due to various reasons. This deviation does not overly concern economists as market forces, optimization, and trade-offs can influence firms' behavior and the overall market dynamics.