Explaining and Predicting Prices

Change in Supply What shifts supply –Cost of Resources –Productivity –Technology –Taxes and Subsides –Expectations –Govt. Regulations –Number of Sellers See how it affects Equilibrium Price S1 S2 D Tax on Wheat

Change in Demand What shifts demand –Income –Tastes –Price of related goods –Expectations –Number of consumers See how it would affect Equilibrium Price D1 D2 S New weight loss fade that uses wheat

Change in Both Situations can arise that cause both to shift Example –Increase in wages caused an increase in demand (shift right) –Hurricanes in Gulf caused shortage of supply (shift left) S1 S2 D1 D2

Price Ceilings A maximum price that can be charged for a product Examples –Rent controls Creates Shortages –Could make landlord convert apt. to condos –Price no longer dictates supply –Makes landlords put in little upkeep to cover costs S D 1.2 mill apartment s available 2.2 mill people who want one

Price Floors Lowest level a price can be set for a product Examples –Minimum wage Creates Surpluses –Raises the poor’s income-equity –Increases unemployed be employers hirer less at the higher rate D S 14 million would want to work Company only want 8 million

The Cost of Doing Business

Measures of Cost There are 4 types of costs you need to be aware of and what they are –Fixed Cost (FC) –Variable Cost (VC) –Total Cost (TC) –Marginal Cost (MC)

Fixed Cost These are costs that occur even if you do very little as a company. It does not matter if you produce a lot, a little, or nothing at all. These cost are sometimes referred to as OVERHEAD Examples –Salaries (not hourly but yearly) –Rent of equipment and or property –Property taxes

Variable Costs Cost that can change when the business increases or decreases output. Examples: –Labor (hourly salaries) –Raw materials to make the product –Electricity –Freight charges

Total Cost This number is all of the cost the business faces in the course of its operation Calculation –Fixed Cost + Variable Cost = Total Cost

Marginal Cost It is the extra cost that occurs when you produce one more unit of an output. This cost is more useful for a business because it shows when you are operating at your most efficient Calculate –Change of Total Variable Cost when adding one unit/ Change of Total Product when adding one unit

Production ScheduleCosts Number of Workers Total Product Marginal Product Total Fixed Cost Total Variable Cost Total Cost Marginal Cost 000$25.00$0.00$ $25.00$40.00$65.00$ $25.00$80.00$105.00$ $25.00$120.00$145.00$ $25.00$160.00$185.00$ $25.00$200.00$225.00$ $25.00$240.00$265.00$ $25.00$280.00$305.00$ $25.00$320.00$345.00$ $25.00$360.00$ $25.00$400.00$ $25.00$440.00$ $25.00$480.00$ Production and Costs Total Cost = FC + TVC Marginal Cost = TVC2-TVC1 TP2-TP1

Marginal Analysis and Profit Maximization Show me the MONEY!!!!

Types of Revenue Revenue is another word for income or profit Two types that we look at –Total Revenue (TR) Total income from the sale of a product Total Units Sold (Q) x Price of that Unit (P) –Marginal Revenue (MR) extra money a business receives from the production and sale of one additional unit of output Change in Total Revenue (TR) Marginal Product (MP)

Production ScheduleRevenue Number of Workers Total Product Marginal Product Total Revenue Marginal Revenue 000$ $75.00$ $165.00$ $255.00$ $322.50$ $375.00$ $420.00$ $450.00$ $472.50$ $472.50$ $442.50$ $405.00$ $330.00$7.50 Production and Revenue TR = Q x P MR = TR2-TR1 MP2-MP1

Total Profit What the company earns after subtracting the costs of production Calculation –Total Revenue – Total Cost

Production, Costs, and Revenue Production ScheduleCostsRevenueProfit Number of Workers Total Product Marginal Product Total Fixed Cost Total Variable Cost Total Cost Marginal Cost Total Revenue Marginal Revenue Total Profit 000$25.00$0.00$25.00-$0.00--$ $25.00$40.00$65.00$4.00$75.00$7.50$ $25.00$80.00$105.00$3.33$165.00$7.50$ $25.00$120.00$145.00$3.33$255.00$7.50$ $25.00$160.00$185.00$4.44$322.50$7.50$ $25.00$200.00$225.00$5.71$375.00$7.50$ $25.00$240.00$265.00$6.67$420.00$7.50$ $25.00$280.00$305.00$10.00$450.00$7.50$ $25.00$320.00$345.00$13.33$472.50$7.50$ $25.00$360.00$ $472.50$7.50$ $25.00$400.00$ $442.50$7.50$ $25.00$440.00$ $405.00$7.50-$ $25.00$480.00$ $330.00$7.50-$ TP = TR - TC

Marginal Analysis A type of decision making that compares the extra benefits for an action to the extra costs of taking the action. Example –Adding more workers one at a time or evenly and comparing it to the extra benefit (MR) to the additional cost (MC) –MR>MC

Profit Maximization Level where Marginal Cost is closest to Marginal Revenue

Production, Costs, and Revenue Production ScheduleCostsRevenueProfit Number of Workers Total Product Marginal Product Total Fixed Cost Total Variable Cost Total Cost Marginal Cost Total Revenue Marginal Revenue Total Profit 000$25.00$0.00$25.00-$0.00--$ $25.00$40.00$65.00$4.00$75.00$7.50$ $25.00$80.00$105.00$3.33$165.00$7.50$ $25.00$120.00$145.00$3.33$255.00$7.50$ $25.00$160.00$185.00$4.44$322.50$7.50$ $25.00$200.00$225.00$5.71$375.00$7.50$ $25.00$240.00$265.00$6.67$420.00$7.50$ $25.00$280.00$305.00$10.00$450.00$7.50$ $25.00$320.00$345.00$13.33$472.50$7.50$ $25.00$360.00$ $472.50$7.50$ $25.00$400.00$ $442.50$7.50$ $25.00$440.00$ $405.00$7.50-$ $25.00$480.00$ $330.00$7.50-$175.00