Economics Part 3 - Cost Minimization and Profit maximization


Economics Demand and Supply Analysis: The Firm

Volume 2, Study Session 4 – Reading 15- Economics.


Hello candidate. Welcome to the sixteenth lesson of the Simplilearn CFA Level I tutorial.

In the previous lesson we learned the basic concept of the consumer theory i.e. how preferences of consumers are defined and how the preferences get converted into demand functions. The preference of a consumer or the satisfaction derived by a consumer from a bundle of good is defined by utility a function. We studied the graphic portrayal of utility functions using indifference curves and maps. After that we studied how utility derived from the budget changes in light of the changes in the income of consumers and changes in the price of goods. We also defined normal and inferior goods and how the demand functions is different for them.

So, we have studied how individuals behave in an economy i.e. we learned about the demand side of microeconomics. In this lesson we will study the supply side of microeconomics i.e. how producer or suppliers behave in an economy.


Today we will discuss the topic ‘Demand and supply analysis – the Firm’. In the last lesson we would learned about the demand and supply functions, now in this lesson we will learn various firm theories about cost, revenue and profit.

This reading mainly focuses on the theory of the firm, i.e. the demand and supply analysis of goods and services by profit maximizing firms. The profit is the difference between revenue and the cost. Here, in this reading our main focus is on the cost side of the profit maximizing firms under perfect competition.

As per the learning outcome statement, after this lesson the candidate should all be able to calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent; calculate and interpret total, average, and marginal revenue; describe the firm’s factors of production; calculate and interpret total, average, marginal, fixed, and variable costs; describe breakeven and shutdown points of production; explain how economies of scale and diseconomies of scale affect costs; describe approaches to determining the profit-maximizing level of output; distinguish between short-run and long-run profit maximization; distinguish among decreasing-cost, constant-cost, and increasing-cost industries and describe the long-run supply of each.