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Kashmir university UG 3rd semmester economics paper

• Kashmir university economics paper UG 3rd semmester batch 2016 (macro_economics)

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Revenue-Total revenue-Marginal revenue-Average revenue and their relationship

Revenue

The total amount of money reciepts or sales reciepts recieved by the company for goods sold or services provided during a certain time period.In words of Dooley,''The revenue of a firm is its sales reciepts from the sale of the product''

                   Thus,by selling a commodity whatever money a firm recieves is called its revenue.

1)Total revenue: The aggeregate revenue obtained by a firm from the sale of a particular quantity of output.Total revenue(TR) is calculated by multiplying the total units sold by the price per unit of the commodity 

       TR=P×Q, p=price and Q=number of units sold

2)Marginal revenue:Marginal revenue is the change in total revenue which results from the sale of an additional unit of a commodity.It is the change in total revenue on account of the sale of one more(or one less) unit of output. MR=TRn-TRn-1

3)Average Revenue: Average revenue reffers to revenue per unit of output sold.it is calculated by deviding TR and TQ

     AR=TR/TQ

Relation between Total revenue average revenue and marginal revenue

●So long as TR is increasing at constant rate,MR is constant

●When TR is increasing at diminishing rate,MR should be decreasing.

●When TR is maximum,MR is zero.

●If AR is constant MR is equal to to AR.

Cost and its types

Cost of production

Cost of production reffers to expenditure incurred by a firm on the factor inputs(land,labour,capital and entrepreneurship) as well as non-factor inputs (like raw material) for the production of commodity.

                 The functional relationship between cost and output is called cost function.It may be specified as C=f(Q) here c=cost of production,Q=quantum/amount of output.

             The cost function studies the functional relationship between cost(input) and output.It shows least combinations of inputs corresponding to different levels of output.

Fixed cost:Fixed costs are those costs which are independent of output this means that these costs don't change with the change in output.These cost are fixed amount which must be incurred by a firm in the short run whether the output is small or large,even if the firm close down for some time in the short run,the fixed cost remain in business.These include charges such as contractual rents,insurance fee,maintenance costs,property tax etc.

Variable cost: the expenditure incurred by the firm on the use of variable factors of production.These costs may change when the output changes.if the firm suffer losses then it may remove some factors of production like labour.Likewise,if the goal of a firm is to maximize or increase its output quantity then it may hire more factors like labour.Variable cost are  also called prime cost or direct cost. purchase of raw material,expenses on power electricity,wear and tear expenses are important examples of variable cost.

Total cost: This is the sum total of fixed cost and variable cost.Mathematically,

       TC=TFC+TVC 

TC stands for total cost,TFC for total fixed cost and TVC for total variable cost.

●Remmember

▪TFC is constant at all levels of output.

▪TVC increases as output increases.

Average cost: Average cost(AC) is the per unit cost of production.it is the sum total of AFC and AVC that is,AC=AFC+AVC.Average cost has two types:Average fixed cost (AFC) and Average variable cost (AVC)

Average fixed cost:It is the per unit cost of fixed factors of production.Average cost is obtained by deviding fixed cost by total units of output.Symbollically,

    AFC=TFC/Q

Average variable cost:Average variable cost(AVC) is the per unit cost of variable factors of production.Average variable cost is obtained by deviding Total variable cost(TVC) by total units of output(TQ) symbolically,

          AVC=TVC/TQ

Marginal cost: Marginal cost is the change in total cost when an additional unit of output is produced.MC can be obtained by comparing either the change in total cost or the change total variable cost (TVC). as output increases total fixed cost does not change therefore Marginal cost(MC) reflects only the change in total variable cost(TVC).

symbolically,

                         MCn=TCn-TCn-1

Price elasticity of supply-proportionate method and geometric method or point method

price elasticity of supply

Price elasticity of supply is a measurement of percentage change in quantity supplied of a commodity in response to some percentage change in its price.

                If we have to measure the extent of extension and contraction of supply,we should know price elasticity of supply.Price elasticity of supply measures percentage change in quantity supplied caused by a given percentage change in price of a commodity.there are two methods of measuring price elasticity of supply ie,Proportionate method and geometric method.

1)Proportionatemethod: According to this method,elasticity of supply(Es) is the ratio between percentage change in quantity supplied and percentage change in price of commodity.mathematically,

      Es=percentage change in quantity supplied/percentage change in price
symbolically,
                        Es=(-)♢Q/Q×p/♢p

Es stands for elasticity of supply,the symbol ♢stands for change,♢Q stands for change in quantity supplied,Q stands for original or initial quantity supplied,♢p stands for change in prices and P stands for initial or original price.
    change in price(♢P) is obtained by subtracting the newest price denoted as p' from the original price(p) that is ♢p=p-p'
simmillarly change in quantity supplied(♢Q) is obtained by subtracting newest quantity supplied denoted as Q' the from original quantity of commodity supplied that is ♢Q=Q-Q'

2)Geometric Method: this method is also called point method.According to this method elasticity of supply depends upon the origin of supply curve .Assuming the supply curve to be a straight line and positively sloped(upward sloped),We can conceive three possible situations of elasticity of supply:

●situation 1 (Es=1): When a straight line,positively sloped supply curve starts from the pont of origin 'O'.No matter what angle it makes,a straight line(upwards sloping from the origin always shows Es=1

●situation 2(Es<1): when a straight line supply curve shooting from x axis then we say Es<1

●situation 3(Es>1): when a staright line,positively sloped supply curve starts from y axis it always shows that Es>1,irrespective of the angle it makes.

in third figure supply curve is starting from y axis means Es>1

Supply function and determinants of supply

Supply function

Supply function studies the functional relationship between supply of a commodity and its various determinants(factors).supply of a commodity is a function of several factors as expressed in the following equation

Sx=f(Px,Pr,Nf,G,Pf,T,Ex,Gp) 

Sx stands for supply of commodity x,f is a functional relationship of Px ie,price of commodity x,Nf stands for no of firms,G stands for goal of the firm,Pf for price of factors of production,T stands for change in technology,Ex for expected future price and Gp for government policy.Now let us see how these determinanats affect supply of a commodity.

1)price of commodity(Px):there is a positive relationship between price of a commodity  and its quantity supplied.Generally higher the price,higher quantity of commodity is supplied.and lower the price of commodity lower quntity of commodity will be supplied.

2)price of related goods(Pr):suppose that good X  and good Y are related goods.Now let us suppose the price of good X rises then more quantity of X will be supplied and Lower quantity of good Y may be supplied.Thus the price of good X affects the supply of good Y.

3)Number of firms(Nf):Market supply of a commodity also depends upon number of firms in the market.Increase in number of  firms implies increase in market supply.obviously when there is a large number of firms producing a particular or related goods,the the market supply will increase.On the other hand if there is only one(monopoly) or few firms(oligopoly)in the market producing a particular or related goods then the supply of that commodity will be lower.

4)Goal of the firm: If Goal of the firm is to maximize profits,more quantity of the commodity will be offered at a higher price,on the other hand if the goal of the firm is to maximize sales(maximizes output or employment) more will be supplied even at the same price.

5)Price of factors of production:If the price if factors of production ie, land,labour and capital rises then more quantity of commodity will be produced and supplied.

6)Change in technology(T):change in technology also affects supply of the commodity.Improvement in technique of production reduces the cost production and thus more quantity of commodityvwill be supplied.

7)Expected future price(Ex):If the producer expects price of the commodity to rise in near future,current supply of the commodity will reduce or contract. Likewise, if fall in price is expected in near future,current supply will increase.

8)Government policy(Gp):Taxation and subsidy, these two policies effect market supply of the commodity.Increase in taxation tends to reduce supply.On the other hand,subsidies tends to increase supply of the commodity.

Supply:supply cuve,law of supply

Supply: supply reffers to the quantities of commodity that a seller is willing and able to sell at its different prices at a point of time.In other words supply reffers to a schedule showing various quantities of a commodity that the producers are willing and able to sell at different prices of the commodity at a point of time.

         According to law of demand other things remaining unchanged as the price of commodity rises its supply increases and if the price of commodity falls its supply decreases.

Supply curve:  supply curve is a graphic presentation of supply schedule indicating the positive relationship between price and quantity supplied.the supply curve slopes upwards which means when price of the commodity rises its supply increases.The supply curve has two aspects viz individual supply curve and Market supply curve both sloping upwards.Individual supply curve is a supply curve of an individual firm in the market and market supply curve is a graphic representation of market supply schedulr ie, all firms in the market simply called industry.thus industry consists of all firms in the market and its supply makes Market supply.

it can be seen from the figure the(both individual and market supply curve) price of the commodity is rising and its supply is increasing which causes supply curve to slope upwards 

Law of Demand-Assumptions

Law of demand

The law of demand expresses a functional relationship between price and quantity demanded.When the price of good rises its demand falls and when the price of a commodity falls its demand increases.In words of Marshall a classical economist "The law of demand is the price and quantity demanded related to each other inversely at higher price lower will be demanded and at lower price higher will be demanded.           A

B

As can be seen in the demand schedule A,the price is rising and the demand is falling.At lowest price ie,5 the higher quantity ie,90 units of animals are demanded.

In demand schedule B, the price is continously falling and the demand for apple is continously increasing which shows that there is an inverse relation between demand of the commodity and its price.But law of demand is applicable only when its satisfies the following conditions these are called assumptions of law of demand.

1)Tastes and preferences of the consumer remains constant ie, tastes and preferences remains unchanged.

2)There should be no change in the income of the consumer.this is because the change in consumers income would result a change in quantity demand no matter what price is prevailing in the market.Let us suppose the income of consumer increases then demand  of commodity may also  increase even when price of the commodity rises. this will leave law of demand inapplicable therefore it is kept constant.

3)price of related goods doesn't change.the price of substute goods or complementary goods changes this would have direct impact on related goods. let us take an example of substitude goods lifeboy and dettol. if the price of lifeboy increases its demand will fall and the consumer will move to dettol and therefore the demand of dettol may increase.this will leave law of demand inapplicable therefore it is kept constant or unchanged.

4)Consumer do not expect any change in the price of commodity in near future.if consumer expects that the price of the product in future will fall then he will buy less of the product in present and may postpone his consumption.Now if he expects the there will b a rise in price of the commodity in near future he will consume more of that commodity in present and less in future.This also leaves law of demand inapplicable therefore it is assumed to remain unchanged.

Demand curve-individual demand curve-market demand curve-demand function-law of demand

Demand curve-individual demand curve and market demand curve

Demand curve is simply a graphic representation of demand schedule which shows quantities of commodity demanded at various possible prices that is expressing the relationship between different quantities demanded at different prices of a commodity.According to Leftwitch "The demand curve represents the maximum quantities per unit of time that consumers will take at various prices."

      

           Individual demand curve is a curve showing different quantities of a commodity that one particular buyer is ready to buy at different possible prices of the commodity at a point of time.

            There are large number of buyers in the market therefore Market demand curve is the horrizontal summation of individual demand curves.it shows various quantities of a commodity that all the buyers in the market are ready to buy at different possible prices of commodity at a point of time.

Demand function

demand function shows the relationship between demand for a commodity and its various determinants which are as

 price of a commodity with a rise in price its demand falls and with a fall in price its demand increases as law of demand says.

2)substitute goods    other things remaining same let us suppose X and Y are substitue goods which means good X can be consumed in place of good Y and good Y can be consumed in place of X. now suppose the price of good X increases the demand for good X will fall the consumer will shift to good Y and therefore the demand for good Y will increases note that here we are not considering tastes and prefferences of the cosumer. in case of complementary goods the demand of one commodity increases the demand of other good also. example:car and petrol serve as complemantary goods.

3)Tastes and preferences   Tastes and preferences like habit,custom,fashion,culture for example a smoker smokes 2  cigarettes every day now if the price of cigarettes rises its demand will not fall.

4)Future Expectations  If the consumer expects that the price in future will rise he will buy more and more quantity of commodity in present at the existing price.Likewise,if he predicts that price in future will fall,he will buy less in present or may even postpone his demands.

5)income of the consumer when the income of the consumer increases the demand of commodity also increases.likewise?if the income decreases the demand for commodity also falls.

Law of demand 

Law of demand expresses a functional relationship between price and quantity demanded.When the price of a commodity rises its demand decreases and when the price of commodity falls its demand increases.Thus at lower price of commodity more will be demanded and at higher price of a commodity less of it will be demanded.

Demand and quantity demand meaning and difference

Demand and Quantity demand

In ordinary language Demand,desire or wish means one and same thing.But in science of economics demand is different from desire or wish.A desire of a an individual will become a demand only when he satisfies the three conditions:

1) desire to have commodity.

2) willingness to pay and

3)ability to pay.

DEMAND AND QUANTITY DEMAND:DIFFERENCE

Demand reffers to  various quantities of a commodity that a consumer is ready to buy at different possible prices of that commodity.Quantity demand on the other hand reffers to a specific quantity to be purchased againest a specific price of the commodity.

(blog9)

consumers equilibrium one commodity and several commodity case

CONSUMERS EQUILIBRIUM:ONE COMMODITY AND SEVERAL COMMODITY CASE

Consumers equilibrium refers to a situation of maximum satisfaction while he is spending his given income across different goods. In other words a consumer is in equilibrium when he regards is actual behaviour as the best possible under the circumstances and Feels no necessity to change his behaviour as long as circumstances remain unchanged.

                      The consumer is in equilibrium when given his income and market prices he plans his expenditure on different goods and services in such a manner that he maximizes his total satisfaction.

Consumers Equilibrium:One commodity Case

how much of a commodity a consumer buys so that he maximizes his satisfaction and attains the point of equilibrium.purchase of a commodity depends on three factors:

1)prices of the commodity

2)Marginal and total utility of the commodity.

3) Marginal utility of money.it is assumed that marginal utility of money is constant.

    A consumer strikes his equlibrium when 

Px=MUx/MUm   where MUx=marginal utlity of x commodity,Px is the price of commodity and MUm is marginal utility of Money.

Consumers equilibrium:Two commodity Case

The consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee sent on each good is equal. In other words in two commodity case a consumer will be in equilibrium position when the marginal utility of money expenditure on each good is the same.So a consumer will be in equilibrium in respect of the purchase of two goods X and Y when:

 MUX/PX =MUY/PY =MUm

     

          it implies that a consumer is maximizing his satisfaction from commodities X and Y when a rupee worth of marginal utility is the same for commodities X and Y.It is the same as marginal utility of money.

(blog 8)