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)

Law of diminishing marginal utility

Law of Diminishing Marginal Utility:

Psychologically,intensity of desire for a commodity tends to decrease as more and more units of a commodity are consumed.

        Law of diminishing marginal utility states that as more and more units of a commodity are consumed,marginal utility derived from every additional unit of a good must decline.It is also called fundamental psychological law.

      Marshall  has stated the law of diminishing Marginal utility as follows:

"The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has". The law of diminishing marginal utility is based on two important facts:

1) The total wants of a man are virtually unlimited.as an individual goes consuming more and more units of a commodity,intensity of his want for the commodity goes on falling that is, When saturation point is reached Marginal utility of good implies that individual has all that he wants of the good in question.

2) the second fact is that the goods are not perfect substitutes for each other in the satisfaction of various particular wants. And when a consumer consumes more and more units of a good,intensity of his particular want for good diminishes.

 ( as can be seen in the figure as more and more units are consumed the marginal utlity continue declines.)





(Blog 7)

consumers equilibrium and demand,total utility,marginal utility with diagram

Consumer Equilibrium And Demand-Utility,Total utility,Marginal utility

Utility:   In economics the term utility refers to that quantity of a commodity by virtue of which our wants are satisfied. In other words want satisfying power of a good is called utility.

Total utility: Total  utility is the sum total of utility derived from the consumption of all units of a commodity.

Marginal utilty: marginal utility refers to additional utility on account of the consumption of an additional unit of a commodity. Marginal utility at nth stage is measured as difference of total utility at nth stage and total utility at n-1th stage  that is, MUn=TUn-TUn-1.

it should be noted that Total utility is maximum when marginal utility is Zero. And total utility starts declining when Mariginal utility is negative.

(blog 6)

production possibility curve with diagram

 Production Possibility Curve

Production possibility curve or production possibility Frontier represents graphically alternative production possibilities facing an economy.  it is also called opportunity set. production possibility curve shows different combinations of two goods which can be produced with the given resources on the assumption that:

1) resources are fully and efficiently utilised.

2) techniques of the production remains constant

            The production possibility curve is a curve showing alternative production possibilities of two goods with the given resources and techniques of production. it is also called production possibility boundary. thus we conclude that with full employment and working with production efficiency,  an  economy must always give up something of one good to obtain some more or another.

the combinations of two words lying inside the production possibility curve are attainable. As can be seen in the figure,the combination "A" is attainable while as combination "x" can not be attained.



(blog 5)

choice and oppurtunity cost

  Choice And Opportunity Cost

Since the resources are scarce, no economy can produce enough goods and services to satisfy all wants of people. Scarcity of resources in relation to the wants of the people gives rise to the problem of choice. A society has therefore to make a choice about what goods and services and in what quantities should be produced with the given resources. 

    

                  On the other hand the opportunity cost of anything is the next best alternative that is given for it or it is the value of next best alternative good or service that is given up for it. While making a choice a rational decision maker be it a consumer and producer or government must decide on the basis of the opportunity cost calculations. For example given its budgetory resources if government of a country decides to increase its defence expenditure to provide or produce guns for it is defence forces,it will have to curtail its expenditure on agriculture,education and health care.

(blog 4)

Central problems of an economy what to produce how to produce for whom to produce

the word micro is derived from word "Micros" meaning small. Thus micro economics deals with small units of an economy.

 The problems what to produce how to produce and for whom to produce  arise in every economy

   What to produce:

this means that what goods and in what quantity  are to be produced by society. Guns or butter has been the popular way of describing this dilemma caused by the scarcity of resources. But this choice between war goods and goods for civilian access consumption is not the only problem of choice faced by the society. The society has to choose among thousands of consumer goods themselves and decide about allocation of resources between them. Once the society has decided which good shall be produced it must then give proper weights to each of the good it selects to produce. The fact that resources are scarce means that society cannot produce unlimited amount of even the selected goods. Therefore the society must decide how much wheat how many hospitals how many schools and how many metres of cloth are to be produced. The scarcity of resources forces us to make a choice what goods and in what quantity is to be produced. This will determine the allocation of scarce resources among them.

How to produce

this means with what method or techniques a society will decide to produce goods. Usually there are various alternative techniques of producing a commodity and the society has to choose among them. Each technique using a different combination of resources like labour and capital. Labour intensive technique will be used if the labour in the market is abundant and the capital intensive technique will be used if the capital is  abundant. Obviously the choice between Different techniques would depend on the available supplies of different factors of production and their relative prices.

For whom to produce:

 For whom to produce means who will get how much for consumption. In other words it means how the national product is to be distributed among the members of the society. productive resources and the resulting output being scarce we cannot satisfy all wants of the people. Therefore a society has to decide who should get how much from the total output of goods and services. Obviously in a free market economy who would get how much of national output depends on his money income that is the people having higher purchasing power will get more of it.

Micro economics origin and meaning

the word micro is derived from word "Micros" meaning small. Thus micro economics deals with small units of an economy such as an individual consumer,individual firm,individual industry etc...

micro-oeconomics is concerned with the behaviour of individual consumers,factor owners,firms and individual industries and markets.It is through their interaction that microeconomic theory explains how prices of products and factors are determined and how resources are allocated between various products.

               In microeconomic theory it is assumed that full employment of resources  such as labour and capital prevails and analysis how they are allocated amoung different products. Further,it explains whether resource allocation achieved is economically efficient.

What is economics?

hello friends this is my first blog and in this blog i am gonna explain you what economics is all about.

The word economics has been derived from two latin words  "Oikos" which means Household and "Nomos"  which means management

thus Economics is a branch of social science which is  concerned with the production, consumption, and transfer of wealth.
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in our next blog we will discuss what Micro_economics  and  Macro_economics deal with and then we will discuss some difficult and very important topics....