Section 2 definitions diagrams
description
Transcript of Section 2 definitions diagrams
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Section 2
Diagrams and Definitions
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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.
What is a market?
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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.
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Change in Quantity Demanded
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Law of Demand
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Determinants of Demand: Price
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Determinants of Demand: Non-price
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Determinants of Demand
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Change in Demand
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Movements versus Shifts
Change in Quantity DemandedChange in Demand
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Veblen Goods
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Giffen Goods
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Expectations
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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.
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Law of Supply
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Why Does Supply Rise when Price Rises?
I can make more profit!
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Determinants of Supply: Price
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Change in Quantity Supplied
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Determinants of Supply: Non-price
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Determinants of Supply
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Change in Supply
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Movements Versus Shift
Change in Quantity Supplied Change in Supply
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Equilibrium
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Consumer and Producer Surplus
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Consumer Surplus
Price
Quantity
D
Po
Qo
A + B = Maximum Willingness to Pay for Qo
What is paid
Consumer Surplus
A
B
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Minimum Amount Needed to Supply Qo
Producer Surplus
Price
Quantity
Po
Qo
What is paid
Producer Surplus
S
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Consumer and Producer Surplus
Price
Quantity
Po
Qo
S
Producer Surplus
Consumer Surplus
D
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Original Consumer Surplus
Change in Consumer Surplus: Price Increase
Quantity
New Consumer Surplus
Loss in Surplus: Consumers paying more
Loss in Surplus: Consumers buying less
Price
D
Po
Qo
P1
Q1
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Price Ceilings
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Price Floor
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Price Ceiling & Price Floor
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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).
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Loss in Efficiency Too High a Price (Price Floor)
Price
Quantity
Po
Qo
S
D
QL
New Consumer Surplus
PH
New Producer Surplus
Lost Consumer Surplus
Lost Producer Surplus
Price Floor
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New Producer Surplus
New Consumer Surplus
Loss in Efficiency Too Low a Price (Price Ceiling)
Price
Quantity
Po
Qo
S
D
QL
PL
Lost Consumer Surplus
Lost Producer Surplus
Price Ceiling
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ElasticitiesPrice
elasticity of
demand PED
Cross elasticity
of demand
XED
Income elasticity
of demand
YED
Price elasticity of supply
PES
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Price Elasticity of Demand (PED)
P rice e las tic ity o f d em an d =P ercen tag e ch an g e in q u an tity d em an d ed
P ercen tag e ch an g e in p rice
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Range of PED values
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Price Inelastic Demand
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Price Elastic Demand
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Range of PED
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Extreme Cases
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Perfectly Elastic Demand
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Perfectly Inelastic Demand
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Unit Elastic Demand
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Determinants of PED
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Determinants of PEDIncome
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Determinants of PESTime
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Determinants of PESSpare Capacity
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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.
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• 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.
Taxation
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Indirect Tax Specific Tax
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Indirect Tax Ad Valorem Tax
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• 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 Incidence
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Tax and Relatively Inelastic Demand
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Tax and Relatively Inelastic Demand
Price for Buyers = .35
Price for Sellers= .2 (150m X .2)
(150m X .15)
(150m X .35)
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Tax and Relatively Inelastic Demand
Price for Buyers = .35
Price for Sellers = .25
Before Tax Buyers paid .25After Tax Buyers pay .35 Buyers contribute 15 m to Revenue (150 X .1)
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Tax and Relatively Elastic Demand
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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.
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Total Revenue and Price Elastic Demand
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Total Revenue and Price Inelastic Demand
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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.
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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
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Variable Costs (VC)are the focus as Fixed Costs (FC)cannot change in the short term.
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Ways to Measure Output
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The Total Product Curve
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Average and Marginal Product Curves
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Diminishing Average Returns
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Diminishing Marginal Returns
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Total Costs (TC) = total cost to produce a certain output. TC = TFC + TVC
Total Variable Costs (TVC) = total
cost of the variable assets
that a firm uses in a given period of
time.
Total Fixed Costs (TFC) = total cost
of fixed assets used in a given time period.
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Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Total Costs
TC
Average Fixed Costs
(AFC)
Average Variable
Costs (AVC)
Average Total Costs
(ATC)Marginal
Cost (MC) = increase in
TC of producing an extra unit of output
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TFC, TVC and TC
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Cost Curves
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LRAC A firm altering all its factors to meet increasing
demand
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Economies and Diseconomies of Scale
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Economies and Diseconomies of Scale
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Economies of Scale
Specialization
Bulk Buying of Inputs
Financial Savings
Transport Savings
Technology
Advertising and
promotion
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Diseconomies of Scale
Control and Communication
Alienation/work satisfaction
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Total Revenue
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Marginal Revenue
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Revenue Curves: Perfectly Elastic Demand
5
Price
Output
D=AR=MR
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Accounting Profit
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Economic Profit
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Determining the Shut Down Price and the Break Even
Price
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Shut Down Price
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Profit Maximizing Level of Output
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Profit Maximizing Level of Output with Perfectly Elastic
Demand
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Profit Maximizing Level of Output with Normal Demand
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Profit Maximizing Level of Output with Normal Demand
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Normal Profit Normal Demand
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Abnormal Profit Normal Demand
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Loss Normal Demand
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Is it alw
ays a
bout p
rofit?
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Profit, Sales and Revenue Maximization?
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