The new iPhone costs approximately $600. About 4 million iPhones are sold per month. This means that in a given month we might expect Apple to have 2.4 billion dollars in revenue from the iPhone. But that money is not all profit. We have to subtract all of the costs of production to find Apple's monthly profit.

• Profit is revenue minus cost.

There are two types of cost.

• Marginal costs (MC) are the costs of producing each iPhone.
• Fixed costs (FC) are costs incured on a regular basis regardless of how many phones are sold. For example, employee salaries and facility costs are fixed costs.

The demand curve shows the relationship between the price of an item and the quantity demanded, the number of iPhones people are willing to buy. To make things simple for this example we will assume the demand curve is linear.

Use the tool below to find the price that will maximize Apple's profit. Try changing the values of the intercept, marginal costs, and fixed costs. Then discuss the questions below.

Discussion questions:

1. What is the meaning of the intercept of the demand curve?
2. Suppose the intercept is $1200, fixed cost is ----, and marginal cost is 300. How much should Apple charge for the iphone to maximize their profits?
3. Which of the three varables have no effect on the price that achieves the maxium profit?

"Price and profit" by Glenn Henshaw, LaGuardia Community College, CUNY is licensed under CC BY-NC 4.0