Hello. This is Jiku from Inishie R plusA blog. There is an equation: Revenue – Expenses = Profit.
In economics, the common way of thinking about revenue is production quantity x price.
However, in the real economy, it is not certain that the entire quantity produced will be sold as is, so it seems that the general formula for revenue is sales quantity x price.
If we could sell everything we produced, everyone would mass-produce Mercedes Benzes.
So, in this case, if the sales volume is Acheieve x (Ax) and the price is price (p), it becomes pAx. As for the cost, the production volume is multiplied by the cost per unit, so it is production volume (x) x marginal cost (MC).
So if you become an enlightened monk, who has no need for profit, then your profits will be zero.
You can’t imagine making zero profits, can you? If someone asks you to go shopping without any pocket money, you won’t be able to accept it. You’d want to at least buy one piece of candy.
In the end, revenue – cost = profit is pAx-xMC=π. And if profit is zero, then pAx=xMC, and sales pAx and costs xMC are equal.
If the production volume is 15 units, the sales volume is 10 units, and the marginal cost is $5, then p=xMC/Ax, so p=(15×5)/10=$7.5. In other words, in this case, if you set the price per unit at $7.5, you will not be in the black or the red, but your sales and costs will be the same, meaning your profit will be zero.
At this point, I’m going to jump ahead a little bit, but there is a concept in macroeconomics called the quantity theory of money. The formula MV=PT is where M is the money supply, P is the price level, V is the velocity of money, and T is real GDP.
If you get it, you’re smart. If you set PT=MV, you can reduce it to the formula Revenue = Cost. If you set p=P, T=Ax, M=x, V=MC, the two formulas will be the same.
Furthermore, if we use M: money stock M3, T: real GDP, P: CPI (Consumer Price Index), and V: multiplier effect, the story gets even more complicated. Both equations pAx=xMC and MV=PT are also related to the IS-LM model of macroeconomics.
From here, new ways of thinking will emerge through macroeconomics and microeconomics.
Going a step further, the equation p=MC is well known in microeconomics, but if P (price level) = V (multiplier effect), then M (money supply) = T (real GDP).
At this point, we can see that the current money stock M3 of 1500 trillion yen can be made equal to real GDP of 550 trillion yen, creating an efficient economic environment suited to market principles.
As an aside, money stock = credit multiplier x monetary base.
Monetary base = “Bank of Japan notes issued” + “currency in circulation” + “current account deposits at the Bank of Japan.”
That’s all. Well then.
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