In my textbook, it said (this is for SRAS and AD, but I'm also going to apply this a bit fo microeconomics.. sorry for mixing, but my question applies in both ways, I believe) "The average price level will need to increase too, from P1 to P2, to allow firms to cover the increased production costs associated with increased volumes of output"
- When I was doing some math regarding all of this I realized that for a firm to "cover its cost" (maintain the same amount of profit as before) it could actually lower prices and then maintain the same amount of profit (due to the increase in quantity counteracting my hypothesized lowering of prices)
Here is my math, which has allowed me to come to this conclusion: A firm sells 10 tomatoes for ¥10. Revenue is (¥10x10) = ¥100. Each tomato costs ¥5, so I do (¥5x10) to get ¥50 as a cost. Thus, profit is ¥100-¥50= ¥50. Farmer wants to maintain his profit of ¥50.... let's say now he increases his quantity supplied or output to 20 tomatoes. the cost is now (¥5x10)x2 = ¥100 (I did x2 cuz its 20 tomatoes now). For the farmer to maintain profit of ¥50 he prices the 20 tomatoes at ¥7.50 (less than previous price of ¥10), so that Revenue(¥7.50x20=¥150) and Cost(¥5x10x2=$100). Thus ¥150-¥100 is ¥50 for profit. profit maintained, but price was lowered to ¥7.50
I know I'm wrong, but I'm not able to understand the logic behind this. If anyone could help me with my specific questions or direct me to any online resources, that would be awesome. Thank you!