concepts ch.2 foe

8/4/2019 Concepts Ch.2 FOE

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Basic Concepts

Demand

Supply

Price Elasticity

Utility

Production

Cost

Revenue

Profit


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Demand

Requisites:

a. Desire for specific commodity.

b. Sufficient resources to purchase thedesired commodity.

c. Willingness to spend the resources.

d. Availability of the commodity at(i) Certain price (ii) Certain place (iii)Certain time.


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Determinants of Demand

Products Own Price

Consumer Income

Prices of Related Goods

Tastes

Expectations


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SUPPLY

Supply means that quantity of any

commodity , which a seller is ready to sell

in the market at a certain time and at a

certain price.


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Determinants of Supply

Products Own Price

Input prices

Technology


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Elasticity

Elasticity: the responsiveness of quantity to a changein another variable

Price Elasticity of Demand: the responsiveness of

quantity demanded to a change in price Price Elasticity of Supply: the responsiveness of

quantity supplied to a change in price

Income Elasticity of Demand: the responsiveness of

quantity demanded to a change in income Cross Price Elasticity of Demand: the

responsiveness of quantity demanded of one good to achange in the price of another good


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The Mathematical Representation of Elasticity

Elasticity =%Q

%P

=

Q

P

Q

P


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Types of Elasticity

Elastic : the condition of demand when the

percentage change in quantity is larger than

the percentage change in price

Inelastic: the condition of demand when

the percentage change in quantity is smaller

than the percentage change in price

Unitary Elastic: the condition of demand

when the percentage change in quantity is

equal to the percentage change in price


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Marginal value

The marginal value of a dependent variable is

the change in this dependent variable

associated with a 1-unit change in a particularindependent variable


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Utility

Utility - The benefit or satisfaction that a person gets from the

consumption of a good or service.

Total utility - The total benefit or satisfaction that a person gets

from the consumption of goods and services.

Marginal utility - The change in total utility resulting from a

one-unit increase in the quantity of a good consumed.


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Production

Optimum combination of factors of

production to produce any commodity.


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13

Short Versus Long Run

The short run is a period of time sufficiently

short that only some of the variables can be

changed.

The long run is a period of time that all

variables can be changed.


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Cost

Cost means the expenses that are incurred in order toproduce a commodity.

Variable Costs

These costs exist only if production occurs. E.g., fuel for tractor, seed, etc.

Fixed Costs

These cost exist whether production occurs ornot.

E.g., depreciation on tractors and buildings, etc.


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CostFirms total cost - The sum of the costs of all the

inputs it uses in production.

Total fixed cost- The total cost of fixed inputs.

Total variable cost- The cost of the variable inputs.

Marginal cost- The increase in total cost forincreasing output by one unit.


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Cost

Average fixed cost(AFC) - Total fixed cost per

unit of output.

Average variable cost (AVC) - Total variable

cost per unit of output.

Average t

otal c

ost(ATC) - Total cost per unit ofoutput.


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Revenue

Revenue (TR) is defined as the output price(p ) multiplied by the quantity (Y).

Average revenue (AR) equals total revenuedivided by output (Y), i.e., TR/Y.

Marginal Revenue is the change in totalrevenue divided by the change in output,

i.e., (TR/(Y.


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Profit

The excess of income from the sale of

production over his costs of production isthat we generally call profit.

Profit = Total Revenue Total Cost


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Types of Profit

Profit

Gross Profit Net Profit


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Gross profit

What is commonly called Profit is gross

profit. Generally by profit we mean that part

of income of firms which is available to

them after all the payments to the three

factors of production.

In other words, Gross profit is the excess of

revenue over total explicit costs.


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Net Profit

Net profits are the profits which accrue to

an entrepreneur for his functions as an

entrepreneur. These functions include risk

bearing ability, innovating spirit etc.

According to Snider, The economist

defines profits as the excess of sales receipt

over explicit plus implicit expenses ofproduction.

concepts ch.2 foe

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