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Diagrams and Definitions<br />Section 2<br />
What is a market? <br /><ul><li>A market is any situation or place that enables the buying and selling of goods and servic...
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goo...
Change in Quantity Demanded<br />
Law of Demand<br />
Determinants of Demand: Price<br />
Determinants of Demand: Non-price<br />
 Determinants of Demand<br />
Change in Demand<br />
Movements versus Shifts<br />Change in Quantity Demanded<br />Change in Demand<br />
Veblen Goods<br />
GiffenGoods<br />
Expectations<br />
Supply<br />A schedule (curve) showing how much of a product producers will supply at each of a series of prices over a sp...
Law of Supply<br />
Why Does Supply Rise when Price Rises? <br />I can make more profit!<br />
Determinants of Supply: Price<br />
Change in Quantity Supplied<br />
Determinants of Supply: Non-price<br />
 Determinants of Supply<br />
Change in Supply<br />
Movements Versus Shift  <br />Change in Quantity Supplied<br />Change in Supply<br />
Equilibrium<br />
Consumer and Producer Surplus<br />
Price<br />Consumer Surplus<br />A + B = Maximum Willingness to Pay for Qo<br />What is paid<br />D<br />Quantity<br />Con...
Price<br />Producer Surplus<br />What is paid<br />Minimum Amount Needed to Supply Qo<br />Quantity<br />Producer Surplus<...
Price<br />Quantity<br />Consumer and Producer Surplus<br />S<br />Consumer Surplus<br />Po<br />Producer Surplus<br />D<b...
Price<br />New Consumer Surplus<br />Original Consumer Surplus<br />Loss in Surplus: Consumers paying more<br />P1<br />Lo...
Price Ceilings<br />
Price Floor<br />
Price Ceiling & Price Floor<br />
Price Support/Buffer Stock Schemes<br />Governments intervene when there are extreme price fluctuations brought about by s...
Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quant...
Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quant...
Elasticities<br />Price elasticity of demand PED<br />Cross elasticity of demand XED<br />Income elasticity of demand YED<...
Price Elasticity of Demand (PED)<br />
Range of PED values<br />
Price Inelastic Demand<br />
Price Elastic Demand<br />
Range of PED<br />
Extreme Cases<br />
Perfectly Elastic Demand<br />
Perfectly Inelastic Demand<br />
Unit Elastic Demand<br />
 Determinants of PED<br />
Determinants of PEDIncome<br />
Determinants of PESTime<br />
Determinants of PESSpare Capacity<br />
Impact on Total Revenue of Firms<br />Total revenue is the amount paid by buyers and received by sellers of a good. TR = P...
Taxation <br />Governments levy taxes to raise revenue for public projects <br />Critics of taxation argue that:<br />Taxe...
Indirect Tax Specific Tax<br />
Indirect Tax Ad Valorem Tax<br />
Tax Incidence<br />Tax incidence is the manner in which the burden of a tax is shared among participants in a market.<br /...
Tax and Relatively Inelastic Demand<br />
Tax and Relatively Inelastic Demand<br />Price for Buyers = .35<br />Price for Sellers<br />= .2<br />(150m X .35)<br />(1...
Tax and Relatively Inelastic Demand<br />Before Tax Buyers paid .25<br />After Tax Buyers pay .35 <br />Buyers contribute ...
Tax and Relatively Elastic Demand<br />
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 o...
Total Revenue and Price Elastic Demand<br />
Total Revenue and Price Inelastic Demand<br />
Some Practical Applications of PED<br />With an elastic demand curve, an increase in the price leads to a decrease in quan...
Theory of the Firm The Goal<br />Provide advice <br />about the following:<br />The best price<br />The best output<br />T...
Variable Costs (VC)are the focus as Fixed Costs (FC)cannot change in the short term.<br />
Ways to Measure Output<br />
The Total Product Curve<br />
Average and Marginal Product Curves<br />
Diminishing Average Returns<br />
Diminishing Marginal Returns<br />
Total Costs (TC) = total cost to produce a certain output. TC = TFC + TVC<br />Total Fixed Costs (TFC) = total cost of fix...
Average Fixed Costs (AFC)<br />Average Variable Costs (AVC) <br />Total Fixed Costs (TFC)<br />Marginal Cost (MC) = increa...
TFC, TVC and TC<br />
Cost Curves<br />
LRAC A firm altering all its factors to meet increasing demand<br />
Economies and Diseconomies of Scale<br />
Economies and Diseconomies of Scale<br />
Financial Savings<br />Transport Savings<br />Bulk Buying of Inputs<br />Technology<br />Economies of Scale<br />Specializ...
Control and Communication<br />Alienation/work satisfaction<br />Diseconomies of Scale<br />
Total Revenue<br />
Marginal Revenue<br />
Revenue Curves: Perfectly Elastic Demand<br />Price<br />D=AR=MR<br />5<br />Output<br />
Accounting Profit<br />
Economic Profit<br />
Determining the Shut Down Price and the Break Even Price<br />
Shut Down Price<br />
Profit Maximizing Level of Output<br />
Profit Maximizing Level of Output with Perfectly Elastic Demand<br />
Profit Maximizing Level of Output with Normal Demand<br />
Profit Maximizing Level of Output with Normal Demand<br />
Normal Profit Normal Demand<br />
Abnormal Profit Normal Demand<br />
Loss Normal Demand<br />
Is it always about profit?<br />
Profit, Sales and Revenue Maximization?<br />
Section 2 definitions diagrams
Section 2 definitions diagrams
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Transcript of "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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