So what's the microeconomics we really need to cover here? Well, we need to cover the relationship between price and quantity. Now, it's probably very intuitive to you that these things are often related to each other. You charge less, you sell more. Well, let's quantify that just a little bit. So if I put price up here and I put quantity, let's just write down a very basic, what's often called a demand schedule, where let's say if I charge $10 for an item, I sell 100 of them. If I decided to charge $5 for an item, I would sell, let's say 300 of them and if I decided to lower the price all the way down to $2, let's say I get a big demand boost at that point and I sell 1,000 of them. Now an interesting question would be, what's the best price to charge? To answer that you've gotta have a little bit more information. For example, you've got to know how much each of the items cost you to make. And let's just say that it cost for $1, let's keep it very simple, and this is what's called marginal cost so it's not total cost. It means that each item you sell cost you $1 to manufacture and distribute and get out into the public's hands. So, now, with this information, can I pick the best price? Well, it turns out I can pick the best price and I do that by constructing what's called a profit function. So if I write profit up here, intuitively what profit is, is how much you sell of something multiplied by how much you make on each unit that you sell. So in this situation, I'm selling 100 of whatever I am selling here and how much do I make on that? Well, I make the price minus the cost also known as the margin. So here, I am make 10 minus $1 and this overall is going to equal $900. Now what about the next price $5? Over there, I sell 300 but I make 5-1 and that equals but what is that equal, that's 4 times 300, that's $1200. And finally, if I decide to charge $2, what I'm going to sell is a 1,000 of these things. I'm going to sell a whole lot, but on each unit, I'm only going to make $1, because my price is $2, and my cost is $1. And, in that situation I'm going to make, I think it's obvious, I'm going to make a $1,000. So, let's look at all these prices and decide which one's the best. Well, in this simple demand schedule with this kind of simple math, what this suggest is the price of $5 is the best. Because, it leads to the highest profit, $1,200. Now, another way to think about this is not a demand schedule like this but may be a little bit more graphically. And what we can do is and if you've had a microeconomics class you've seen things that look like this before. So if I draw a graph and on the x axis I put quantity, and on the y axis I put price. I can take each one of these price and quantity combinations and graph them on this graph. So, for example, at $10, I'm going to sell 100 units of this, okay? At $5, I am going to sell 300 units of this. And here is my $2. If I go way down here at $2, I am going to come very far out on the graph, and I'm going to sell 1,000 units of these. So these are each price-quantity combinations. And, as we saw before, the one that makes the most money is this $5 and 300 combination. So I'm going to put here p star. And p star means the price at which you make the most amount of money. Now what's interesting is that you don't know whether there might be another price on this graph that is even better than $4 or, pardon me, $5, because you don't know the relationship between all the different prices and quantity combinations in between. I just drew this funny little line. Really, we don't know what that looks like, but maybe it's possible that there's another price somewhere on this graph that would even be more profitable. But we don't know that because this is all the demand information we have. In order to understand all the different possibilities between the dots, we would have to do something called assume a functional form. And what that means is, we have to write quantity as some function of price, and then estimate the general relationship between price and quantity. And we will do that coming up shortly.