A market is any situation or place that enables the buying and selling of goods and services and factors of production. A market may be a physical location (a street market), it may also be a virtual one (internet buying and selling) or a national one (the market for teachers or doctors). Triple A
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce good and services.
Demand A schedule (curve) that shows the quantity of a good that consumers are able and willing to buy at a certain price during a specified period of time.
Change in Quantity Demanded
Law of Demand
Determinants of Demand: Price
Determinants of Demand: Non-price
Determinants of Demand
Change in Demand
Movements versus Shifts Change in Quantity Demanded Change in Demand
Supply A schedule (curve) showing how much of a product producers will supply at each of a series of prices over a specific period of time.
Law of Supply
Why Does Supply Rise when Price Rises? I can make more profit!
Determinants of Supply: Price
Change in Quantity Supplied
Determinants of Supply: Non-price
Determinants of Supply
Change in Supply
Movements Versus Shift Change in Quantity Supplied Change in Supply
Consumer and Producer Surplus
Price Consumer Surplus A + B = Maximum Willingness to Pay for Qo What is paid D Quantity Consumer Surplus B Po A Qo
Price Producer Surplus What is paid Minimum Amount Needed to Supply Qo Quantity Producer Surplus S Po Qo
Price Quantity Consumer and Producer Surplus S Consumer Surplus Po Producer Surplus D Qo
Price New Consumer Surplus Original Consumer Surplus Loss in Surplus: Consumers paying more P1 Loss in Surplus: Consumers buying less Po D Qo Q1 Change in Consumer Surplus: Price Increase Quantity
Price Ceiling & Price Floor
Price Support/Buffer Stock Schemes Governments intervene when there are extreme price fluctuations brought about by seasons factors (agricultural products) and/or economic factors (commodities).
Price Lost Consumer Surplus New Consumer Surplus Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Too High a Price (Price Floor) S PH Price Floor Po D Qo QL
Price Lost Consumer Surplus New Consumer Surplus Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Too Low a Price (Price Ceiling) S Po PL Price Ceiling D Qo QL
Elasticities Price elasticity of demand PED Cross elasticity of demand XED Income elasticity of demand YED Price elasticity of supply PES
Price Elasticity of Demand (PED)
Range of PED values
Price Inelastic Demand
Price Elastic Demand
Range of PED
Perfectly Elastic Demand
Perfectly Inelastic Demand
Unit Elastic Demand
Determinants of PED
Determinants of PEDIncome
Determinants of PESTime
Determinants of PESSpare Capacity
Impact on Total Revenue of Firms Total revenue is the amount paid by buyers and received by sellers of a good. TR = P x Q With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases. With an elastic demand curve, an increase in price leads to a increase in quantity that is proportionately smaller. Thus, total revenue decreases.
Taxation Governments levy taxes to raise revenue for public projects Critics of taxation argue that: Taxes discourage market activity. When a good or service is taxed, the quantity sold is smaller.
Indirect Tax Specific Tax
Indirect Tax Ad Valorem Tax
Tax Incidence Tax incidence is the manner in which the burden of a tax is shared among participants in a market. How this burden is shared depends on elasticity.
Tax and Relatively Inelastic Demand
Tax and Relatively Inelastic Demand Price for Buyers = .35 Price for Sellers = .2 (150m X .35) (150m X .2) (150m X .15)
Tax and Relatively Inelastic Demand Before Tax Buyers paid .25 After Tax Buyers pay .35 Buyers contribute 15 m to Revenue (150 X .1) Price for Buyers = .35 Price for Sellers = .25
Tax and Relatively Elastic Demand
Summary The incidence of a tax refers to who bears the burden of a tax. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. The incidence of the tax depends on the price elasticities of supply and demand. The burden tends to fall on the side of the market that is less elastic.
Total Revenue and Price Elastic Demand
Total Revenue and Price Inelastic Demand
Some Practical Applications of PED With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
Theory of the Firm The Goal Provide advice about the following: The best price The best output The most profit To breakeven price The shutdown price
Variable Costs (VC)are the focus as Fixed Costs (FC)cannot change in the short term.
Ways to Measure Output
The Total Product Curve
Average and Marginal Product Curves
Diminishing Average Returns
Diminishing Marginal Returns
Total Costs (TC) = total cost to produce a certain output. TC = TFC + TVC Total Fixed Costs (TFC) = total cost of fixed assets used in a given time period. Total Variable Costs (TVC) = total cost of the variable assets that a firm uses in a given period of time.
Average Fixed Costs (AFC) Average Variable Costs (AVC) Total Fixed Costs (TFC) Marginal Cost (MC) = increase in TC of producing an extra unit of output Total Costs TC Average Total Costs (ATC) Total Variable Costs (TVC)
TFC, TVC and TC
LRAC A firm altering all its factors to meet increasing demand
Economies and Diseconomies of Scale
Economies and Diseconomies of Scale
Financial Savings Transport Savings Bulk Buying of Inputs Technology Economies of Scale Specialization Advertising and promotion
Control and Communication Alienation/work satisfaction Diseconomies of Scale