Embed Size (px)
DESCRIPTION
Revenue is the income earned by a firm through its normal course of business Costs – Explicit costs are the actual out of pocket expenditures of the firm to purchase/ hire the inputs it requires in production Implicit costs refer to the value of the inputs owned and used by the firm in its own production processes
Citation preview
Lecture 3
•Nature of Economic Profit•Economic Relationships•Demand & Supply
NATURE AND FUNCTION OF PROFIT Difference between the revenues earned
from the sale of goods and services and the costs incurred in earning these revenues
Profit = Revenues – Costs
Revenues and Costs Revenue is the income earned by a firm
through its normal course of business
Costs –Explicit costs are the actual out of
pocket expenditures of the firm to purchase/ hire the inputs it requires in production
Implicit costs refer to the value of the inputs owned and used by the firm in its own production processes
Definitions of Profit Accounting/Business Profit: Total
revenue minus the explicit or accounting costs of production.
Economic Profit: Total revenue minus the explicit and implicit costs of production.
Example: A recent graduate has received a scholarship of Rs 4,00,000 to study
abroad. But he decides to start his own business where he has invested his own savings of Rs 2,00,000 which were earning interest @ 5% p.a. He also used a building he owns that has been rented for Rs 20,000 per month. Revenue in the new business during first year is Rs 10,00,000 and other expenses are:
Advertisement Rs 60,000Rent Rs 1,00,000Taxes Rs 60,000Employee Salaries Rs 4,50,000Supplies Rs 40,000
Calculate the Business and Economic Profit.
Explicit costs
Advertisement: Rs 60,000 Rent: Rs 1,00,000 Taxes: Rs 60,000 Employee Salaries Rs 4,50,000 Supplies Rs 40,000 Total Rs 7,10,000
Implicit costs
Scholarship= Rs 4,00,000
Rs.200000 invested in business can earn interest in the bank account @ 5% per year=
Rs 10,000
Rent= 20,000 x 12=240,000
Total=650,000
Business Profit= 2,90,000
Economic Profit= -3,60,000
Economic Relationships
Economic Relationships
y = f(x)
y = f(x,z,w)
Total Product - total number of goods produced during a specified period of time using a particular input
Average product - the average output per unit of input used
AP = TP / L Marginal product - is the change in the TP
corresponding to one unit change in the input.MP = TP / L
TOTAL AVERAGE MARGINAL
Number of Total Average Marginal Workers Product Product Product
(L) (Q) (AP) (MP)0 0 0 01 2 2.0 22 5 2.5 33 9 3.0 44 14 3.5 55 22 4.4 86 40 6.7 187 57 8.1 178 63 7.9 69 64 7.1 110 63 6.3 -1
Number of Total Average Marginal Workers Product Product Product
(L) (Q) (AP) (MP)0 0 0 01 2 2.0 22 5 2.5 33 9 3.0 44 14 3.5 55 22 4.4 86 40 6.7 187 57 8.1 178 63 7.9 69 64 7.1 110 63 6.3 -1
Number of Total Average Marginal Workers Product Product Product
(L) (Q) (AP) (MP)0 01 2 2.0 22 5 2.5 33 9 3.0 44 14 3.5 55 22 4.4 86 40 6.7 187 57 8.1 178 63 7.9 69 64 7.1 110 63 6.3 -1
TOTAL PRODUCT
0
10
20
30
40
50
60
70
0 1 2 3 4 5 6 7 8 9 10 11Rate of Labor Input
Tota
l Pro
duct
AVERAGE & MARGINAL PRODUCT FUNCTIONS
-5
0
5
10
15
20
0 1 2 3 4 5 6 7 8 9 10 11Rate of Labor InputA
vera
ge &
Mar
gina
l Pro
duct
Average Product
Marginal Product
TOTAL PRODUCT
0
10
20
30
40
50
60
70
0 1 2 3 4 5 6 7 8 9 10 11Rate of Labor Input
Tota
l Pro
duct
AVERAGE & MARGINAL PRODUCT FUNCTIONS
-5
0
5
10
15
20
0 1 2 3 4 5 6 7 8 9 10 11Rate of Labor Input
Ave
rage
& M
argi
nal P
rodu
ct
Average Product
Marginal Product
Slope = 8.1
ESlope = 4
TOTAL PRODUCT
0
10
20
30
40
50
60
70
0 1 2 3 4 5 6 7 8 9 10 11Rate of Labor Input
Tota
l Pro
duct
AVERAGE & MARGINAL PRODUCT FUNCTIONS
-5
0
5
10
15
20
0 1 2 3 4 5 6 7 8 9 10 11Rate of Labor InputA
vera
ge &
Mar
gina
l Pro
duct
F
Average Product
Marginal Product
Slope = 8.1
ESlope = 4
DEMAND AND SUPPLY
BASICS OF DEMAND, SUPPLY AND EQUILIBRIUM
DEMAND SIDE OF THE MARKET Effective Desire (Desire backed by
purchasing power) Demand for a commodity by a consumption
unit is the quantity that it is willing and able to buy in a given period of time at a given price
Determinants of Demandprice of the product level of income and wealthprices of other productstastes and preferencesexpectation of future income
Individual Consumer’s DemandQdX = f(PX, I, PY, T)
quantity demanded of commodity X by an individual per time period
price per unit of commodity X
consumer’s income
price of related (substitute or complementary) commodity
tastes of the consumer
QdX =
PX =
I =
PY =
T =
Demand Schedule- A table showing how much of a given product a consumption unit would be able to willingly buy at different prices
Demand Schedule for telephone calls
Price per Calls per call monthP Q0 30
0.5 253.5 77 310 115 0
DEMAND SCHEDULE
Law of Demand A decrease in the price of a good, all other
things held constant, will cause an increase in the quantity demanded of the good.
An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.
Assumption income, wealth, tastes and preferences,
prices of other products and future expectations are constant
Change in Quantity Demanded
Quantity
Price
P0
Q0
P1
Q1
An increase in price causes a decrease in quantity demanded.
Change in Quantity Demanded
Quantity
Price
P0
Q0
P1
Q1
A decrease in price causes an increase in quantity demanded.
Shift in Demand is represented by a movement of the entire demand curve.
Factors affecting the demand curve: Change in Buyers’ Tastes Change in Buyers Incomes
Normal GoodsInferior Goods
Change in the Price of Related GoodsSubstitute GoodsComplementary Goods
SHIFT IN DEMAND CURVE
Quantity
Price
P0
Q0 Q1
An increase in demand refers to a rightward shift in the market demand curve.
SHIFT IN DEMAND CURVE
Quantity
Price
P0
A decrease in demand refers to a leftward shift in the market demand curve.
Q2 Q0
SUPPLY SIDE OF THE MARKET Supply is the amount of product that a firm
would be willing and able to offer for sale at a particular price during a given period of time.
Determinants of supplyprice of the productcost of production
price of required inputstechnologies
prices of related products
Supply schedule- A table showing how much of a product firms will supply at different prices
Supply Schedule for telephones in a month
Price per production unit per monthP Q
600 80500 60400 40300 20200 0
SUPPLY SCHEDULE
Law of Supply A decrease in the price of a good, all other
things held constant, will cause a decrease in the quantity supplied of the good.
An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.
Change in Quantity Supplied
Quantity
Price
P1
Q1
P0
Q0
A decrease in price causes a decrease in quantity supplied.
Change in Quantity Supplied
Quantity
Price
P0
Q0
P1
Q1
An increase in price causes an increase in quantity supplied.
Shift in Supply Curve is represented by a movement of the entire supply curve.
Factors affecting the supply curve Change in Production Technology Change in Input Prices Change in the Number of Sellers
SHIFT IN SUPPLY CURVE
Quantity
Price
P0
Q1Q0
An increase in supply refers to a rightward shift in the market supply curve.
SHIFT IN SUPPLY CURVE
Quantity
Price
A decrease in supply refers to a leftward shift in the market supply curve.
P0
Q0Q2
Change in price of a good or service leads to Change in quantity demanded movement along a demand curve
Change in income, preferences, or prices of related goods and services
leads to Change in demand shift of demand curve
Shift of Demand Versus Movement Along a Demand Curve
Change in price of a good or service leads to Change in quantity supplied movement along a supply curve
Change in costs, input prices, technology, or prices of related goods and services
leads to Change in supply shift of supply curve
Shift of Supply Versus Movement Along a Supply Curve
