MARKET DEMAND Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved.

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Presentation transcript:

MARKET DEMAND Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

Profits l Profit is the difference between money earned from selling a good, and money paid to produce the good. l Money earned from selling a good is called Revenue, or Total Revenue.

Profits l Money used to pay for inputs to produce a good are called Costs, or Total Costs l Profits = Total Revenue - Total Costs or (PR = TR - TC) l A company is assumed to want to behave in such a way as to maximize profits.

Revenue l Total Revenue = Price * Quantity or (TR = P * Q). l For example, if I sell 100 units of a good at a price of $5.00 then my total revenue equals $5 * 100 or $500.

Revenue l Average Revenue = Total Revenue/ Quantity or AR = TR/Q. l For example, if I earn $50.00 from selling 10 units of a good, my Average Revenue = $50.00/10 = $5.00. Notice that Average Revenue is the same as the Price.

Revenue l Revenue is complicated by the fact that often the price of a good and the quantity sold are related. l This relationship is called Demand.

Revenue l The relationship between Price and Quantity is assumed to be inverse. l That is, as the Price increases, the Quantity sold decreases. Conversely, as the Price decreases, the Quantity increases.

WAYS OF SHOWING DEMAND l The relationship between price and quantity sold, which is called demand, can be shown as a table, a graph, or an equation l Each way shows the same information in a different form.

MARKET DEMAND FOR VIDEO RENTALS FOR EXAMPLE

DEMAND AS A GRAPH

DEMAND SHOWN AS AN EQUATION The equation: l Quantity Demanded = (Price) fits the data for the demand for video rentals shown in the table and graph. l Do you see why the table, graph, and equation are all equivalent ways to show demand.