Supply and Demand and Profit

Topics: Costs, Microeconomics, Economics Pages: 3 (948 words) Published: February 28, 2011
The main goal of most businesses is to make a profit. However, profit is calculated using total revenue and total costs. Therefore, businesses must consider the revenue along with the costs corresponding to the specific number of output in order to increase profit accurately. Firms or industries can increase profit in two ways: firms or industries can take advantage of a market with increasing demand, or firms or industries can find a way to lower the total costs of production.

When demand within a market increases, the equilibrium price of the product increases along with the quantity sold at the equilibrium price. If the market structure is a perfect competition, an increase in demand allows firms or industries to raise the price of the product as well as sell more of the product at the higher price. In this instance, total revenue increases and if the increase in total revenue is greater than the increase in total costs, the firm has succeeded in increasing its profit. However, this is assuming the increase in supply from an increase in the number of firms in the market does not surpass the initial increase in demand for the product. For instance, the movie retail industry has shown a trend of increasing demand and shows a growth in demand greater than the growth in demand of the movie rental industry. Blockbuster has been a firm well established in the movie rental industry but has noticed other firms such as Wal-Mart taking advantage of the growth in demand of movie sales. Blockbuster has started integrating movie sales into their firm alongside movie rentals. Because the movie retail market is a competitive market, Blockbuster can easily enter this market and hopefully, increase the firm’s profit with the market’s increase in demand. Because Wal-Mart already offers movies at a relatively low price, Blockbuster could not raise its price of movies higher than Wal-Mart in order to compete in the market. However, the increase in demand for movie sales...
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