In this study, the main objective of the firm is to determine output and price level; we have taken the time series data of the firm and have applied the ordinary least square technique. We find out the equilibrium point of the firm where marginal revenue is equal to marginal cost and at that point firm earn the maximum profit and we also determine the price level of the firm. The output level that the firm should produce would be of 3922 units, at this point its total cost is 1131611, total revenue is 1115890, marginal revenue is 308.6689, marginal cost is 308.6702 and optimal price is 284.5206. Keywords: Price and Output Determination, Empirical Study, MR = M

Naveed Cheema, Hafiz Fasahat

Umair Siddiqui, Muhammad Junaid Qureshi

English

International Institute for Science, Technology and Education (IISTE): E-Journals

Information and Knowledge Management                                                                                                                                        www.iiste.org ISSN 2224-5758 (Paper) ISSN 2224-896X (Online) Vol.5, No.9, 2015  115 How Much Output should be Produced by the Firm? An Analysis  Muhammad Junaid Qureshi M. S. Economics, National College of Business Administration and Economics, Lahore, Pakistan.  Umair Siddiqui MBA Student, Institute of Management Sciences, Bahauddin Zakariya University, Multan, Punjab, Pakistan  Hafiz Fasahat MBA Student, Institute of Management Sciences, Bahauddin Zakariya University, Multan, Punjab, Pakistan  Naveed Cheema MBA Student, Institute of Management Sciences, Bahauddin Zakariya University, Multan, Punjab, Pakistan  Abstract In this study, the main objective of the firm is to determine output and price level; we have taken the time series data of the firm and have applied the ordinary least square technique. We find out the equilibrium point of the firm where marginal revenue is equal to marginal cost and at that point firm earn the maximum profit and we also determine the price level of the firm. The output level that the firm should produce would be of 3922 units, at this point its total cost is 1131611, total revenue is 1115890, marginal revenue is 308.6689, marginal cost is 308.6702 and optimal price is 284.5206. Keywords: Price and Output Determination, Empirical Study, MR = MC 1. Introduction A firm consists of all the actual potential buyers and sellers of a particular product. Firm’s structure refers to the competitive environment in which the buyers and sellers of the product operates. The best level of output of the firm is at the point where plant to produce the best level of output. If profits can be earned in industry more, firms will enter in the industry in the long run until all profits are eliminated.    If input prices are constant the firm supply curve obtained by the horizontal summation of the competitive firm supply curve. In this study we bring together demand analysis and production and cost analysis in order to analyses how price and output are determined. We begin this study by identifying the various industries. We examine and show how the equilibrium price and quantity are determined and also how the firm determines the optimum level of output. The process by which price and outputs are determined in the real world is strongly affected by the structure of the firm. The main objective of the firm is to determine the output and to know how much level of output there it will be profit maximize. If the marginal cost is above the marginal revenue then the firm will face loss. In this situation firm can shut down its production units Apart from introduction, the rest of the paper is arranged as follows: section II portrays review of the literature; section III discusses data and methodological issues. Results are interpreted in section IV. Finally, conclusions and policy implications are given in section V.  2. Literature Review Faith (2005) presented a study to determine the output level and price level using the time series data. Keeping in view the importance of estimation of output and price level we presented some empirical evidences. At Keynesian theory assert that various micro economics factors, include process of production bottlenecks, law of diminishing returns and wage bargaining are the main determinants of the price level. Keynes owns formulation about the theory of the price level initiates the transmission mechanism of money to economic activity. An increase in money supply leads to decrease in the interest rate, which in turn leads to increase in investment. For the period of 1980 to 2000, they used multivariate co integration technique. They conclude that the pricing behavior of the sub sector of the Turkish manufacturing industry by using Johnson’s co integration analysis. In Information and Knowledge Management                                                                                                                                        www.iiste.org ISSN 2224-5758 (Paper) ISSN 2224-896X (Online) Vol.5, No.9, 2015  116 accordance with the expectation of the Keynesian it has been found that prices and demand and unit wage cost demonstrated integration relation in 14 out of16 sub sectors. William (2011) used binary flow chart to study price stimulation. The elements uncovered include both market factors and organizational factors. Testing the model for predictive accuracy and simulative ability is reviewed. Marketing implications include a legitimate defense against charges of collusion in price setting in an oligopoly and better understanding of market reaction to organizational components. They concluded that the implications for marketing policy and strategy overlap those of organizational theory and those of organizational behavior theory of the firm. Prominent in the market area are possible defense against charges of collusive in price settings of collusive in price setting 3. Data and Methodology The data of 26 quarters has been collected from the company and this collected data will be put in Microsoft excel then we will use E-View to analyze this data. In this study we will take the data of time series and will use the technique least square.  Price and output will be determined at point when;  Marginal Revenue = Marginal Cost Marginal cost can be calculated by; MC=∆TC/∆Q Marginal revenue can be calculated by; MR=∆TR/∆Q Total revenue and total costs can be estimated by the following function.  TR = f (Q, Q2) TC = f (Q, Q2, Q3) Where Q is output produced, MR is marginal revenue, MC is marginal costs, TR shows total revenue of the firm and TC shows total cost. After calculating the above Total Cost and Total Revenue function we put the different value of output 0 to 5000 units and can have Total Revenue & Total cost, Marginal revenue& Marginal Cost values and prices.  4. Results and Discussion Based on the industrial data, estimated Total Revenue and Total cost function as written as below:   TR = 155591 + 180.6697 Q + 0.0163 Q2 TC = 9152.73 + 239.1203 Q + 0.018278 Q2 - 0.0000016 Q3. We have put the value of output from 0 to 5000 in above the functions and find out the values of total Revenue, Total Cost, Marginal Revenue, Marginal Cost and Prices. The output level should be 3922 where the profit of firm would be maximized.  Information and Knowledge Management                                                                                                                                        www.iiste.org ISSN 2224-5758 (Paper) ISSN 2224-896X (Online) Vol.5, No.9, 2015  117 Table 1 Q TC TR MR MC AR 0 9152.73 155591 --- --- --- 500 133082.4 250016.9 188.8517 247.8593 500.0337 1000 264951 352624.7 205.2157 263.7373 352.6247 1500 403558.7 463414.6 221.5797 277.2153 308.943 2000 547705.3 582386.4 237.9437 288.2933 291.1932 2500 696191 709540.3 254.3077 296.9713 283.8161 3000 847815.6 844876.1 270.6717 303.2493 281.6254 3500 1001379 988394 287.0357 307.1273 282.3983 3700 1063079 1048092 298.4905 308.4979 283.2681 3900 1124820 1109099 305.0361 308.7051 284.3844 3922 1131611 1115890 308.6689 308.6702 284.5206 3950 1140253 1124556 309.4871 308.64234 284.6976 4000 1155682 1140094 310.7635 308.5864 285.0235 4500 1309524 1299976 319.7637 307.6833 288.8835 5000 1461704 1468040 326.3093 306.2585 293.6079        In the diagram we take the output in the horizontal and take the prices in vertical axis and we show the MR curve with margin lines and MC with straight lines and AR with dots, in this diagram the equilibrium output level 3922 where the Marginal revenue is equal to marginal costs, at this point firm earn the profit and firm determine the price 285.   Figure 1              5. Concluding Remarks In the study, we have concluded that firm should produce 3920 units of output where marginal revenue is equal to marginal cost. At this point, firm earns the maximum profit. We have also found total cost of the firm that is 0100200300400500600Q10002500370039505000650080009500MRMCARInformation and Knowledge Management                                                                                                                                        www.iiste.org ISSN 2224-5758 (Paper) ISSN 2224-896X (Online) Vol.5, No.9, 2015  118 1131611, total revenue is 1115890, marginal cost is 308.6702, marginal revenue is 308.6689 and optimum price is 284.5206.    References www.google.com www.sciencedirect.com Hall, R.L, and Hitch, C.J.  Price theory and business behavior . Oxford economics papers, May 1939, 2, 12-45 http://en.wikipedia.org/wiki/output_price level  Appendix Table A Dependent Variable: TR Method: Least Squares Sample(adjusted): 1 49 Included observations: 48 Excluded observations: 1 after adjusting endpoints Variable Coefficient Std. Error t-Stat. Prob.   C 155591 83185.63 1.870407 0.0679 QD 180.6697 68.88954 2.6226 0.0119 QD*QD 0.016364 0.0081 2.020157 0.0493 R-squared 0.731873     Mean dependent var 541439.9 Adjusted R-squared 0.719956     S.D. dependent var 874600.5 S.E. of regression 462831.3     Akaike info criterion 28.98857 Sum squared resid 9.64E+12     Schwarz criterion 29.10552 Log likelihood -692.7258     F-statistic 61.41545 Durbin-Watson stat 2.467074     Prob(F-statistic) 0.0000    Information and Knowledge Management                                                                                                                                        www.iiste.org ISSN 2224-5758 (Paper) ISSN 2224-896X (Online) Vol.5, No.9, 2015  119 Table B Dependent Variable: TC Method: Least Squares Sample(adjusted): 1 49 Excluded observations: 1 after adjusting endpoints Variable Coefficient Std. Error t-Stat. Prob.   C 9152.73 21599.8 0.423741 0.6738 QD 239.1203 38.24534 6.252274 0 QD*QD 0.018278 0.011187 1.633861 0.1093 QD*QD*QD -1.60E-06 7.45E-07 -2.153755 0.0367 R-squared 0.970054     Mean dependent var 403545.5 Adjusted R-squared 0.968058     S.D. dependent var 652815 S.E. of regression 116673.1     Akaike info criterion 26.25025 Sum squared resid 6.13E+11     Schwarz criterion 26.40468 Log likelihood -639.1311     F-statistic 485.9086 Durbin-Watson stat 1.133852     Prob(F-statistic) 0.0000   The IISTE is a pioneer in the Open-Access hosting service and academic event management.  The aim of the firm is Accelerating Global Knowledge Sharing.  More information about the firm can be found on the homepage:  http://www.iiste.org  CALL FOR JOURNAL PAPERS There are more than 30 peer-reviewed academic journals hosted under the hosting platform.   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How Much Output should be Produced by the Firm? An Analysis

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How Much Output should be Produced by the Firm? An Analysis

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