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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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.
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