Understanding Market Dynamics: Supply, Demand, and Production
Understanding Market Dynamics
Profit, Revenue, and Costs
Profit is the difference between revenue and costs.
Revenue: The amount received from selling goods or services. It’s calculated by multiplying the number of units sold by the selling price per unit.
Costs: Expenses associated with producing goods and services.
Maximizing Business Objectives
There are two ways to maximize income:
- Maximize Revenue: Focus on factors influencing revenue (unit sales price and quantity sold).
- Minimize Costs: Optimize the production process to reduce expenses.
Production Processes
Production involves transforming inputs into finished products using technology.
Elements of Production: Factors of production, technology, and final goods or services.
Types of Production Processes:
- Manual
- Mechanical
- Automated (human-programmed)
Efficiency
Technical Efficiency: Using the minimum resources necessary to produce a given output.
Economic Efficiency: Maximizing the value of output per unit of input cost.
Company Existence
Reasons for company existence:
- Production control
- Funding provision
- Cost reduction
Production Factors
Fixed Factors: Resources used over a long period.
Variable Factors: Resources that can change at any time.
Time Horizons:
- Very Short Term: All factors are fixed.
- Short Term: Some factors become variable.
- Long Term: All factors are variable.
- Very Long Term: All factors and technology are variable.
Efficiency in Technology
Technical Efficiency: Maximum output from given inputs.
Economic Efficiency: Minimum cost for given outputs.
Diminishing Returns
Law of Diminishing Returns: Increasing a variable factor while others remain constant eventually leads to decreasing marginal output.
Market
Market: A place or environment where goods, services, and factors of production are traded freely based on supply and demand.
Demand
Demand: The quantity of goods or services consumers are willing to buy at different prices.
Demand Curve
Demand Curve: A graph showing the relationship between price and quantity demanded.
Substitution Effect
Substitution Effect: As the price of a good increases, consumers substitute it with cheaper alternatives.
Price Effect
Price Effect: As the price of a good increases, consumers buy less due to reduced purchasing power.
Law of Diminishing Marginal Utility
Law of Diminishing Marginal Utility: Each additional unit of a good consumed provides less utility.
Movements and Shifts in Demand
Movements: Changes in price and quantity demanded along the demand curve.
Shifts: Changes in demand caused by factors other than price (e.g., income changes).
Supply
Supply: The quantity of goods or services producers are willing to offer at different prices.
Supply Curve
Supply Curve: A graph showing the relationship between price and quantity supplied.
Factors Affecting Supply
- Prices of production factors
- Technology
- Future expectations