Basic Concepts

 Demand  Supply  Price  Elasticity  Utility  Production  Cost  Revenue  Profit

Demand
The willingness and ability of buyers to purchase a given amount of goods or services, over a range of prices, over a given period of time.

Demand
Requisites: a. Desire for specific commodity. b. Sufficient resources to purchase the desired commodity. c. Willingness to spend the resources. d. Availability of the commodity at (i) Certain price (ii) Certain place (iii) Certain time.

Determinants of Demand
Products Own Price Consumer Income Prices of Related Goods Tastes Expectations

SUPPLY
Supply means that quantity of any commodity , which a seller is ready to sell in the market at a certain time and at a certain price.

Determinants of Supply
Products Own Price Input prices Technology

Elasticity
 Elasticity: the responsiveness of quantity to a change

in another variable  Price Elasticity of Demand: the responsiveness of quantity demanded to a change in price  Price Elasticity of Supply: the responsiveness of quantity supplied to a change in price  Income Elasticity of Demand: the responsiveness of quantity demanded to a change in income  Cross Price Elasticity of Demand: the responsiveness of quantity demanded of one good to a change in the price of another good

The Mathematical Representation of Elasticity

% Q Elasticity = % P =

Q Q P P

Types of Elasticity
 Elastic : the condition of demand when the

percentage change in quantity is larger than the percentage change in price  Inelastic: the condition of demand when the percentage change in quantity is smaller than the percentage change in price  Unitary Elastic: the condition of demand when the percentage change in quantity is equal to the percentage change in price

Marginal value
The marginal value of a dependent variable is the change in this dependent variable associated with a 1-unit change in a particular independent variable

Utility
Utility - The benefit or satisfaction that a person gets from the consumption of a good or service. Total utility - The total benefit or satisfaction that a person gets from the consumption of goods and services. Marginal utility - The change in total utility resulting from a one-unit increase in the quantity of a good consumed.

Production
Optimum combination of factors of production to produce any commodity.

Short Versus Long Run

 The short run is a period of time sufficiently

short that only some of the variables can be changed.  The long run is a period of time that all variables can be changed.

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Cost
Cost means the expenses that are incurred in order to produce a commodity.  Variable Costs  These costs exist only if production occurs.  E.g., fuel for tractor, seed, etc.  Fixed Costs  These cost exist whether production occurs or not.  E.g., depreciation on tractors and buildings, etc.

Cost
Firms total cost - The sum of the costs of all the inputs it uses in production. Total fixed cost - The total cost of fixed inputs. Total variable cost - The cost of the variable inputs. Marginal cost - The increase in total cost for increasing output by one unit.

Cost
Average fixed cost (AFC) - Total fixed cost per unit of output. Average variable cost (AVC) - Total variable cost per unit of output. Average total cost (ATC) - Total cost per unit of output.

Revenue
 Revenue (TR) is defined as the output price

(p ) multiplied by the quantity (Y).  Average revenue (AR) equals total revenue divided by output (Y), i.e., TR/Y.  Marginal Revenue is the change in total revenue divided by the change in output, i.e., (TR/(Y.

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Profit
 The excess of income from the sale of

production over his costs of production is that we generally call profit.  Profit = Total Revenue Total Cost

Types of Profit
Profit
Gross Profit Net Profit

Gross profit
 What is commonly called Profit is gross

profit. Generally by profit we mean that part of income of firms which is available to them after all the payments to the three factors of production.  In other words, Gross profit is the excess of revenue over total explicit costs.

Net Profit
 Net profits are the profits which accrue to

an entrepreneur for his functions as an entrepreneur. These functions include risk bearing ability, innovating spirit etc.  According to Snider, The economist defines profits as the excess of sales receipt over explicit plus implicit expenses of production.