1. Lecture 3 Nature of Economic Profit Economic Relationships Demand & Supply

2.  Difference between the revenues earned from the sale of goods and services and the costs incurred in earning these revenues Profit = Revenues – Costs

3.  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

4.  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.

5. 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: AdvertisementRs 60,000 RentRs 1,00,000 TaxesRs 60,000 Employee SalariesRs 4,50,000 SuppliesRs 40,000 Calculate the Business and Economic Profit.

6.  Explicit costs  Advertisement: Rs 60,000  Rent: Rs 1,00,000  Taxes: Rs 60,000  Employee SalariesRs 4,50,000  SuppliesRs 40,000 Total Rs 7,10,000

7. 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

8.  Business Profit= 2,90,000  Economic Profit= -3,60,000

10. y = f(x) y = f(x,z,w)

11.  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 TOTALAVERAGEMARGINAL

15. TOTAL PRODUCT 0 10 20 30 40 50 60 70 01234567891011 Rate of Labor Input Total Product AVERAGE & MARGINAL PRODUCT FUNCTIONS -5 0 5 10 15 20 01234567891011 Rate of Labor Input Average & Marginal Product Average Product Marginal Product

16. TOTAL PRODUCT 0 10 20 30 40 50 60 70 0 1234567891011 Rate of Labor Input Total Product AVERAGE & MARGINAL PRODUCT FUNCTIONS -5 0 5 10 15 20 01234567891011 Rate of Labor Input Average & Marginal Product Average Product Marginal Product Slope = 8.1 E Slope = 4

17. TOTAL PRODUCT 0 10 20 30 40 50 60 70 0 1234567891011 Rate of Labor Input Total Product AVERAGE & MARGINAL PRODUCT FUNCTIONS -5 0 5 10 15 20 01234567891011 Rate of Labor Input Average & Marginal Product F Average Product Marginal Product Slope = 8.1 E Slope = 4

18. DEMAND AND SUPPLY

20.  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 Demand  price of the product  level of income and wealth  prices of other products  tastes and preferences  expectation of future income

21. Individual Consumer’s Demand Qd X = f(P X, I, P Y, 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 Qd X = P X = I = P Y = T =

22.  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

23.  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

24. Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes a decrease in quantity demanded.

25. Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 A decrease in price causes an increase in quantity demanded.

26.  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 Goods  Inferior Goods  Change in the Price of Related Goods  Substitute Goods  Complementary Goods SHIFT IN DEMAND CURVE

27. Quantity Price P0P0 Q0Q0 Q1Q1 An increase in demand refers to a rightward shift in the market demand curve. SHIFT IN DEMAND CURVE

28. Quantity Price P0P0 A decrease in demand refers to a leftward shift in the market demand curve. Q2Q2 Q0Q0

29.  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 supply  price of the product  cost of production price of required inputs technologies  prices of related products

30.  Supply schedule- A table showing how much of a product firms will supply at different prices SUPPLY SCHEDULE

31.  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.

32. Quantity Price P1P1 Q1Q1 P0P0 Q0Q0 A decrease in price causes a decrease in quantity supplied.

33. Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes an increase in quantity supplied.

34.  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

35. Quantity Price P0P0 Q1Q1 Q0Q0 An increase in supply refers to a rightward shift in the market supply curve. SHIFT IN SUPPLY CURVE

36. Quantity Price A decrease in supply refers to a leftward shift in the market supply curve. P0P0 Q0Q0 Q2Q2

37.  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

38.  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