Profit Maximization of opportunity cost

Third and final part to the opportunity cost series, this also ties in rummage sale econ.

Demand for oranges is 3 times greater than demand for apples. People will buy 3 oranges or an apple. This equation is:

x=1/3 y with y being oranges and x being apples

For you mathletes, this will plot on a graph as a line going southeast.

Profit equation tells us that one apple is worth two oranges. The equation is:

x=2y with the variables being the same as above

At this point, you get your business manager/accounting person to do the math and figure out where profits will be maximized, but not before you ask what the supply equation is. Where the supply and demand equations (or curves) intersect along the profit equation, profit is maximized. You know what you can absolutely earn given your constraints.

DON'T WORRY. Some of you have MBAs, some of you don't. If I had more complex mathematical tools I would post a graph to illustrate this - I know I need one to understand it myself. Just knowing the terms and the concepts is good for now.

If the supply and demand equations intersect on the profit line, you know that is what you can potentially earn. If they hit above the profit line, it tells you that market's demand and supply are both greater than what you can profit (like coffee filters.) Think cheap items that everyone buys. If they hit below the profit line, demand and supply are both lower than what you can profit, meaning nobody really wants your product enough for you to make a profit (like knittted potholders.) Think expensive items nobody buys, or specialty shops that go out of business quick.