Section 2 definitions diagrams

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Section 2 definitions diagrams

  1. 1. Diagrams and Definitions<br />Section 2<br />
  2. 2. What is a market? <br /><ul><li>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
  3. 3. Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce good and services. </li></li></ul><li>Demand<br />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.<br />
  4. 4. Change in Quantity Demanded<br />
  5. 5. Law of Demand<br />
  6. 6. Determinants of Demand: Price<br />
  7. 7. Determinants of Demand: Non-price<br />
  8. 8. Determinants of Demand<br />
  9. 9. Change in Demand<br />
  10. 10. Movements versus Shifts<br />Change in Quantity Demanded<br />Change in Demand<br />
  11. 11. Veblen Goods<br />
  12. 12. GiffenGoods<br />
  13. 13. Expectations<br />
  14. 14. Supply<br />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.<br />
  15. 15. Law of Supply<br />
  16. 16. Why Does Supply Rise when Price Rises? <br />I can make more profit!<br />
  17. 17. Determinants of Supply: Price<br />
  18. 18. Change in Quantity Supplied<br />
  19. 19. Determinants of Supply: Non-price<br />
  20. 20. Determinants of Supply<br />
  21. 21. Change in Supply<br />
  22. 22. Movements Versus Shift <br />Change in Quantity Supplied<br />Change in Supply<br />
  23. 23. Equilibrium<br />
  24. 24. Consumer and Producer Surplus<br />
  25. 25. Price<br />Consumer Surplus<br />A + B = Maximum Willingness to Pay for Qo<br />What is paid<br />D<br />Quantity<br />Consumer Surplus<br />B<br />Po<br />A<br />Qo<br />
  26. 26. Price<br />Producer Surplus<br />What is paid<br />Minimum Amount Needed to Supply Qo<br />Quantity<br />Producer Surplus<br />S<br />Po<br />Qo<br />
  27. 27. Price<br />Quantity<br />Consumer and Producer Surplus<br />S<br />Consumer Surplus<br />Po<br />Producer Surplus<br />D<br />Qo<br />
  28. 28. Price<br />New Consumer Surplus<br />Original Consumer Surplus<br />Loss in Surplus: Consumers paying more<br />P1<br />Loss in Surplus: Consumers buying less<br />Po<br />D<br />Qo<br />Q1<br />Change in Consumer Surplus: Price Increase<br />Quantity<br />
  29. 29. Price Ceilings<br />
  30. 30. Price Floor<br />
  31. 31. Price Ceiling & Price Floor<br />
  32. 32. Price Support/Buffer Stock Schemes<br />Governments intervene when there are extreme price fluctuations brought about by seasons factors (agricultural products) and/or economic factors (commodities).<br />
  33. 33. Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quantity<br />Loss in Efficiency Too High a Price (Price Floor)<br />S<br />PH<br />Price Floor<br />Po<br />D<br />Qo<br />QL<br />
  34. 34. Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quantity<br />Loss in Efficiency Too Low a Price (Price Ceiling)<br />S<br />Po<br />PL<br />Price Ceiling<br />D<br />Qo<br />QL<br />
  35. 35. Elasticities<br />Price elasticity of demand PED<br />Cross elasticity of demand XED<br />Income elasticity of demand YED<br />Price elasticity of supply PES<br />
  36. 36. Price Elasticity of Demand (PED)<br />
  37. 37. Range of PED values<br />
  38. 38. Price Inelastic Demand<br />
  39. 39. Price Elastic Demand<br />
  40. 40. Range of PED<br />
  41. 41. Extreme Cases<br />
  42. 42. Perfectly Elastic Demand<br />
  43. 43. Perfectly Inelastic Demand<br />
  44. 44. Unit Elastic Demand<br />
  45. 45. Determinants of PED<br />
  46. 46. Determinants of PEDIncome<br />
  47. 47. Determinants of PESTime<br />
  48. 48. Determinants of PESSpare Capacity<br />
  49. 49. Impact on Total Revenue of Firms<br />Total revenue is the amount paid by buyers and received by sellers of a good. TR = P x Q<br /> With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.<br />With an elastic demand curve, an increase in price leads to a increase in quantity that is proportionately smaller. Thus, total revenue decreases. <br />
  50. 50. Taxation <br />Governments levy taxes to raise revenue for public projects <br />Critics of taxation argue that:<br />Taxes discourage market activity.<br />When a good or service is taxed, the quantity sold is smaller. <br />
  51. 51. Indirect Tax Specific Tax<br />
  52. 52. Indirect Tax Ad Valorem Tax<br />
  53. 53. Tax Incidence<br />Tax incidence is the manner in which the burden of a tax is shared among participants in a market.<br />How this burden is shared depends on elasticity. <br />
  54. 54. Tax and Relatively Inelastic Demand<br />
  55. 55. Tax and Relatively Inelastic Demand<br />Price for Buyers = .35<br />Price for Sellers<br />= .2<br />(150m X .35)<br />(150m X .2)<br />(150m X .15)<br />
  56. 56. Tax and Relatively Inelastic Demand<br />Before Tax Buyers paid .25<br />After Tax Buyers pay .35 <br />Buyers contribute 15 m to Revenue (150 X .1) <br />Price for Buyers = .35<br />Price for Sellers<br /> = .25<br />
  57. 57. Tax and Relatively Elastic Demand<br />
  58. 58. Summary<br />The incidence of a tax refers to who bears the burden of a tax.<br />The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.<br />The incidence of the tax depends on the price elasticities of supply and demand.<br />The burden tends to fall on the side of the market that is less elastic.<br />
  59. 59. Total Revenue and Price Elastic Demand<br />
  60. 60. Total Revenue and Price Inelastic Demand<br />
  61. 61. Some Practical Applications of PED<br />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.<br />
  62. 62.
  63. 63. Theory of the Firm The Goal<br />Provide advice <br />about the following:<br />The best price<br />The best output<br />The most profit<br />To breakeven price<br />The shutdown price<br />
  64. 64. Variable Costs (VC)are the focus as Fixed Costs (FC)cannot change in the short term.<br />
  65. 65. Ways to Measure Output<br />
  66. 66. The Total Product Curve<br />
  67. 67. Average and Marginal Product Curves<br />
  68. 68. Diminishing Average Returns<br />
  69. 69. Diminishing Marginal Returns<br />
  70. 70. Total Costs (TC) = total cost to produce a certain output. TC = TFC + TVC<br />Total Fixed Costs (TFC) = total cost of fixed assets used in a given time period. <br />Total Variable Costs (TVC) = total cost of the variable assets that a firm uses in a given period of time.<br />
  71. 71. Average Fixed Costs (AFC)<br />Average Variable Costs (AVC) <br />Total Fixed Costs (TFC)<br />Marginal Cost (MC) = increase in TC of producing an extra unit of output<br />Total Costs<br />TC<br />Average Total Costs<br />(ATC)<br />Total Variable Costs (TVC) <br />
  72. 72. TFC, TVC and TC<br />
  73. 73. Cost Curves<br />
  74. 74. LRAC A firm altering all its factors to meet increasing demand<br />
  75. 75. Economies and Diseconomies of Scale<br />
  76. 76. Economies and Diseconomies of Scale<br />
  77. 77. Financial Savings<br />Transport Savings<br />Bulk Buying of Inputs<br />Technology<br />Economies of Scale<br />Specialization<br />Advertising and promotion<br />
  78. 78. Control and Communication<br />Alienation/work satisfaction<br />Diseconomies of Scale<br />
  79. 79. Total Revenue<br />
  80. 80. Marginal Revenue<br />
  81. 81. Revenue Curves: Perfectly Elastic Demand<br />Price<br />D=AR=MR<br />5<br />Output<br />
  82. 82.
  83. 83. Accounting Profit<br />
  84. 84. Economic Profit<br />
  85. 85. Determining the Shut Down Price and the Break Even Price<br />
  86. 86. Shut Down Price<br />
  87. 87. Profit Maximizing Level of Output<br />
  88. 88. Profit Maximizing Level of Output with Perfectly Elastic Demand<br />
  89. 89. Profit Maximizing Level of Output with Normal Demand<br />
  90. 90. Profit Maximizing Level of Output with Normal Demand<br />
  91. 91. Normal Profit Normal Demand<br />
  92. 92. Abnormal Profit Normal Demand<br />
  93. 93. Loss Normal Demand<br />
  94. 94. Is it always about profit?<br />
  95. 95. Profit, Sales and Revenue Maximization?<br />

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