Q: Firms pricing and output

decisions are primarily determined

by their cost conditions. Comment
Thesis:
Pricing and output decisions are determined by cost
conditions
Thesis
Firms usually seek to maximise profits
Profit maximising output is where MC = MR
Hence, a firms cost conditions (i.e. MC) affects price and output
Exemplified by the different cost conditions of a big firm vs. a
small firm
Big firms reap substantial internal EOS lowered COP
lower MC than small firms (who do not reap internal EOS)
E.g. NTUC / Cold Storage versus small neighbourhood
provision stores
NTUC / Cold Storage able to reap managerial EOS bulk
purchasing (better deals from supplier)

Thesis
MC small firm
MC large firm
Output
Price / Cost / Revenue ($)
AR
MR
P1
P2
Anti-thesis: Changes in fixed
cost

Change in fixed costs only affects AC curve
Since MC curve doesnt shift, there is no change in the profit-
maximising output and price
Cost conditions have changed but no change in firms price and
output decisions
Cost/price/
revenue
Output
AC2
AC1

MC
AR MR
Q
P
Anti-thesis: Price Rigidity
In the case of an oligopolistic firm that has price rigidity, a change in
cost conditions would also not change the price and output decisions
of the firm.
This is because in an oligopoly, firms are mutually interdependent,
resulting in their rivals decisions affecting their own decisions and
vice versa.
When a firm reduces its price, rivals will likely follow suit to prevent a
loss in market power. When a firm increases its price, rivals are not
likely to follow as they gain in market power. kinked demand curve
As long as the change in cost conditions only shift the MC curve
between the ZX region, there will be no change in price or output.
Cost/price/
revenue
Output
MC2
MC1
MR
AR
P
Q
Z
X
Antithesis:
Pricing and output decisions also depend on demand
conditions
Antithesis:
Changes in demand also affects the pricing and output
decisions, ceteris paribus
Goods that are relatively price elastic lower prices, lower
output
Goods that are relatively price inelastic higher prices, higher
output
E.g. in the Japanese beer industry, beer companies Kirin, Asahi
and Suntorys beverages are close substitutes of each other,
hence their beverages are demand elastic
However, by engaging in R&D and producing an alternative
beverage, Happoshu, Kirins beverages became more demand
inelastic as there is no close substitute for Happoshu (a fizzy
alcoholic drink, different from beer)
This changed the pricing and output decisions of the firm due to
the change in demand conditions
Antithesis
MC large firm
Output
Price / Cost / Revenue ($)
P2
P1
AR1
MR2 AR2 MR1
Anti-thesis: Alternative Objectives of
firms
The price and output decisions of firms can also vary according to
what the firms objectives are.
The assumed objective of a firm in all the points mentioned above is
that the firm wants to maximize profit, so that is why it produces at
the point where MC = MR
However, if, for example, the firms objective is to maximize sales
revenue, they will choose to instead produce at the point where they
can maximize output while still being able to earn normal profits and
not make a loss.
This means that the price and output decisions made by a firm is not
just based on its cost conditions, but also on what objective they are
trying to achieve.

MC
AC
AR
MR
P2
P1
Q1 Q2
Cost/price/
revenue
Output
Conclusion
Cost conditions do play a part in affecting price and output, but
it is not the primary determinant
Governments can also intervene and affect the price and output
of firms* (not discussed in our presentation)
In reality, there is a complex interplay of different factors that
affect price and output that depends on the type of industry that
the firm exists in