Professional Documents
Culture Documents
1)Income
Milk and tea are complementary products. If tea prices increases, tea consumption decreases, I/e., milk prconsumption also
decreases
Milk and orange are substitutes. If orange juice price increases, people switch to drinking more milk, so milk consumption
increases
Factors that affect demand
Many other factors:
Taste/ Preferences
Seasonal effect…based on weather, we choose preferences..more tea consumption in winter than summer
Expectations….If we think milk price is going to increase, we will buy more, demand increases(Eg
Housing)
Derived Demand(For many business customers are other firms(Eg: Steal, cotton)
Supply Curve
Technology
Available of credit
Supply increases
Supply increases
Relevant markets:
Demand and supply curves provide a powerful tool with which to analyze market
conditions and possible changes in the business environment.
Elasticity in demand(Ed)
Measure of responsiveness.
(deltaQ/deltaP)=slope
3)Time to react
Sellers would like to sell when price is more than cost of producing..for more seller surplus
Buyers would like to buy as low price as possible..for more buyer surplus
Buyers Surplus
price= blue=30
Sellers surplus with supplier curve
Should consider 5
workers and quantity of
24 units for max profits
Introducing value of marginal product
What about economies of scope? Well, if you know that increasing the
size of your operations is going to give you higher productivity then it
sometimes makes sense to go and adopt or do things, produce things,
which are different from your current line of production.
For example, you might produce both cars and tractors because by doing
so, by producing these two different products jointly in one factory allows
you to benefit from economies of scale. So economies of scope is like
exploiting economies of scale or economies of size by producing more
than one output.
Costs in Language of Economics
Explicit costs: out of pocket costs
Costs in economics mean opportunity costs
Implicit costs: not usually thought of as costs
Cost of anything is what we have to give up
instead Cost of going to clg is fee we r going to pay,
travel,accomadation, food etc…explicit costs
Total cost:
Average cost:
Marginal cost
Avg costs in short run
according to the law of diminishing returns, marginal product in the short run must eventually decline. So, in
other words, what should happen then is that the marginal cost must after some point increase.
Linking avg and marginal costs
when the average variable cost is declining,
the marginal cost is less than the average
variable cost. And when the average
variable cost is increasing, the marginal cost
is higher than the average variable cost. And
of course, the two are the same—equal to
each other when the average variable cost is
at its minimum
Let FC=100..AFC=(100/4,100/9,…….)
AVC= VC/Q=(25/4,50/9,…..)
MC=(25/4,25/5,25/6…..)
ATC=AVC+AFC=(31.25,16.66…..)
Costs in the long run
SAC1= Short size restaurant
Product is homogenous
So, when you say that the product is homogeneous, it's not merely that it's physically the same. But it's
like perfectly substitutable, it's like you're selling the same stuff at the same location, at the same time
with. Okay so, homogeneity is a very fairly strong assumption.
Perfect information
Demand in a Perfectly Competitive Market
No profits no loss
In the end, what will happen? All those who are efficient,
who are inefficient are not making money will anyway
have to leave. The firms which are efficient, who have
the right costs, well, they will also find themselves in not
such a good position. They will—because price is equal
to minimum of average total cost, profits will be equal to
zero. So, there will be zero economic profits.
LRM
SRA
C
SRM C
C
Demand increases..profit increases..but in LR
competitive industry, those profit goes away AC