Chapter 1

Chapter 1
The Introduction
to Economic
© by Nelson, a division of Thomson Canada Limited

In this chapter you will…
 Define what economic is
 Define what scarcity is
 Describe types of economics
 Explain factors of production
 Examine economic systems
 Explain why study economic?
Chapter 1: Page 2
What is economic?
 Economics is the study of how people,
institutions and society make choices under
conditions of scarcity.
 Economics studies human relationship and
behaviors of people. The most important units of
study in economics are the behaviors of
households, businesses and government.
Chapter 1: Page 3
Scarcity defined
 Scarcity means that society has limited

resources and therefore cannot produce all
the goods and services people wish to
have.
 As a household cannot give every member
everything he or she wants.
 A society cannot give every individual
the highest standard of living to which he or
she might aspire/wish.
Chapter 1: Page 4
Scarcity
 Scarce resources, often referred to as the
factors of production.
 Production is the process that transforms
scarce resources into useful goods and
services.
Input > Process > Output
Labor Planning Goods/ Services
Capital Organizing
Material Leading
Technology Controlling
…………… (Transform)
Chapter 1: Page 5
Factors of Production
 There are 3 main factors of production such
as:
 Natural resources or Land
 Human resources or Labor
 Capital goods or Capital
 Many economists include entrepreneurship
as a fourth factor of production.
Chapter 1: Page 6
Natural resources Or Land
 Natural resources are the gifts of nature such
as
 Rivers
 Sunlight
 Fish and other animals
 Natural forests, and
 Soil / Land
Chapter 1: Page 7
Human Resources Or Labor
 Human resources are the people who are
involved in production including:
 Teachers
 Carpenters
 Electricians
 Economists
Etc., (et cetera)
Chapter 1: Page 8
Capital Goods or Capital
 Capital goods are items/physical assets that
are designed to produce other products
including: fixed assets, such as buildings,
machinery, equipment, vehicles, and tools.
 Cement mixers, Shopping malls,
 Business computers, Delivery trucks, and
 Office buildings.
Asset = Liabilities + Capital/Equity
Cash (15,000$) = 0 + 15,000$
Cash(13,000$)+2Motor(4,000$) = 2,000$ + 15,000$
Chapter 1: Page 9
Entrepreneurship
 Entrepreneurship features/has the risk-taking
and innovation of entrepreneurs.
Chapter 1: Page 10
Two types of Economics
 Microeconomics
 Macroeconomics
Chapter 1: Page 11
What is Microeconomics?
 Microeconomics is the branch/part of
economics that studies individual decision-
making units, such as a consumer, a worker, or
a business firm.
 The most important participants in the
microeconomics are households, business
firms, and the government.
Chapter 1: Page 12
What is Macroeconomics?
 Macroeconomics is the branch of economics
that deals with the economic performance.
 Macroeconomics focuses on economic
growth and economic stability in a nation.
Chapter 1: Page 13
Economic System
 Societies develop economic systems to
solve their economic problem.
Chapter 1: Page 14
The Command System
 In a command system ( socialism or
communism):
 Government owns most factors of
production;
 Economic decisions are made by a central
governing body.
Chapter 1: Page 15
The Market System
 In a market system (capitalism):
 Factors of production are privately owned;
 Participants act in their own self-interest

resulting in competition among independent
buyers and sellers of each product and
resource.
Chapter 1: Page 16
Why Study Economic?
Chapter 1: Page 17
Why Study Economic?
Chapter 1: Page 18
Chapter 2
Demand and Supply:

How Markets Work

 Define what is market
 Define what is demand
 Examine what determines the demand for a
goods
 Identify what is supply
 Examine what determines the supply of a
goods
 Explain what is equilibrium
Chapter 2: Page 20
MARKETS
 The terms supply and demand refer to the
behavior of people. . .
 A market is a group of buyers and sellers of a
particular goods or service.
• Buyers determine demand...
• Sellers determine supply…
Chapter 2: Page 21
DEMAND
 Quantity Demanded refers to the amount
(quantity) of a goods that buyers are willing
to purchase at alternative prices for a given
period.
Chapter 2: Page 22
Determinants of Demand
 Factors that affect to Market demand
 Product’s Own Price
 Consumer Income
 Prices of Related Goods
 Tastes and preferences
 Future expectations
 Number of Consumers/buyers
Chapter 2: Page 23
1) Price
 If the price of ice cream rose to $20 per
scoop, you would buy less ice cream. You
might buy frozen yogurt instead.
 If the price of ice cream fall to $0.20 per
scoop, you would buy more.
 Because the quantity demanded falls as
the price rises and rises as the price falls, we
say that the quantity demanded is
negatively related to the price.
Chapter 2: Page 24
1) Price
 Law of Demand
 The law of demand states that, other
things equal, the quantity demanded of
a goods falls when the price of the
goods rises.
Chapter 2: Page 25
2) Income
 What would happen to your demand for
ice cream if you lost your job one
summer? Most likely, it would fall.
 A lower income means that you have
less to spend in total, so you would have
to spend less on some—and probably
most—goods.
Chapter 2: Page 26
2) Income
 As people’s incomes rise, it is
reasonable to expect their demand for a
product to increase.
 As income increases the demand for a
normal goods will increase.
 As income increases the demand for an
inferior goods will decrease.
Chapter 2: Page 27
3) Prices of Related Goods
 Prices of Related Goods
 Suppose that the price of frozen yogurt
falls.
 The law of demand says that you will buy
more frozen yogurt. At the same time, you
will probably buy less ice cream. Because ice
cream and frozen yogurt are both cold,
sweet, creamy desserts, they satisfy similar
desires.
Chapter 2: Page 28
 A goods and services can be related to
another by being a substitute or by being a
complement.
 If the price of substitute product changes
we expect the demand for the goods under
consideration to change in the same
direction as the change in the substitute’s
price.
Chapter 2: Page 29
 When a fall in the price of one goods
reduces the demand for another goods,
the two goods are called substitutes.
 Examples
o Hot dogs and Hamburgers
o Sweaters and Sweatshirts
o Movie ticket and Video rentals
Chapter 2: Page 30
 Now suppose that the price of hot fudge
falls. According to the law of demand, you
will buy more hot fudge.
 Yet, in this case, you will buy more ice
cream as well, because ice cream and hot
fudge are often used together.
Chapter 2: Page 31
 When a fall in the price of one good
increases the demand for another good,
the two goods are called complements.
 Examples
o Gasoline and Automobiles
o Computers and Software
o Skis and Ski lift ticket
Chapter 2: Page 32
4) Others
 Tastes
 The most obvious determinant of your
demand is your tastes.
 If you like ice cream, you buy more of it.
Chapter 2: Page 33
4) Others
 Expectations
 Your expectations about the future may
affect your demand for a good or service
today.
 For example, if you expect to earn a higher
income next month, you may be more
willing to spend some of your current
savings buying ice cream.
Chapter 2: Page 34
4) Others
 Expectations
 As another example, if you expect the price
of ice cream to fall tomorrow, you may be
less willing to buy an ice-cream cone at
today’s price.
Chapter 2: Page 35
The Demand Schedule and the Demand
Curve
 The demand schedule is a table that shows
the relationship between the price of the
goods and the quantity demanded.
 The demand curve is a graph of the
relationship between the price of a goods
and the quantity demanded.
Chapter 2: Page 36
Table 4-1: Catherine’s Demand Schedule
Price of Ice-cream Quantity of cones
Cone ($) Demanded
0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0
Chapter 2: Page 37
FigurePrice
4-1: Catherine’s Demand Curve
of Ice-
Cream
Cone
$3.00
2.50
2.00
1.50
1.00
0.50
0 2 4 6 8 10 12 Quantity of
Ice-Cream
Cones
Chapter 2: Page 38
Market Demand Schedule
 Market demand is the sum of all individual
demands at each possible price.
 Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
 Assume the ice cream market has two
buyers as follows…
Chapter 2: Page 39
Table 4-2: Market demand as the Sum of Individual Demands
Price of Ice-cream
Catherine Nicholas Market
Cone ($)
0.00 12 + 7 = 19
0.50 10 6 16
1.00 8 5 13
1.50 6 4 10
2.00 4 3 7
2.50 2 2 4
3.00 0 1 1
Chapter 2: Page 40
Figure 4-3: Shifts in the Demand Curve
Price of Ice-
Cream
Cone
Increase
in demand
Decrease
in demand
D2
D1
D3
Quantity of
Ice-Cream
Cones
Chapter 2: Page 41
Table 4-3: The Determinants of Quantity Demanded
Chapter 2: Page 42
Shifts in the Demand Curve versus Movements Along the Demand Curve
Chapter 2: Page 43
Figure 4-4 a): A Shifts in the Demand Curve
Price of
Cigarettes,
per Pack.
A policy to discourage
smoking shifts the demand
curve to the left.
B A
$2.00
D1
D2
0 10 20 Number of Cigarettes
Smoked per Day
Chapter 2: Page 44
Figure 4-4 b): A Movement Along the Demand Curve
Price of
Cigarettes,
per Pack.
C A tax that raises the price

of cigarettes results in a
$4.00 movements along the
demand curve.
A
$2.00
D1
0 12 20 Number of Cigarettes
Smoked per Day
Chapter 2: Page 45
SUPPLY
 Quantity Supplied refers to the amount
(quantity) of a good that sellers are willing
to make available for sale at alternative
prices for a given period.
Chapter 2: Page 46
Determinants of Supply
 Factors affect to Supply Market
 Product’s Own Price
 Costs and technology
 Price of other goods and services offered
by the seller
 Future expectations
 Number of sellers
 Weather conditions
Chapter 2: Page 47
1) Price
 Law of Supply
 The law of supply states that, other
things equal, the quantity supplied of a
good rises when the price of the good
rises.
Chapter 2: Page 48
The Supply Schedule and the Supply Curve
 The supply schedule is a table that shows
the relationship between the price of the
good and the quantity supplied.
 The supply curve is a graph of the
relationship between the price of a good
and the quantity supplied.
Chapter 2: Page 49
Table 4-4: Ben’s Supply Schedule
Price of Ice-cream Quantity of cones
Cone ($) Supplied
0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
Chapter 2: Page 50
FigurePrice
4-5: Ben’s Supply Curve
of Ice-
Cream
Cone
$3.00
2.50
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 8 10 12 Quantity of
Ice-Cream
Cones
Chapter 2: Page 51
Market Supply Schedule
 Market supply is the sum of all individual supplies

at each possible price.
 Graphically, individual supply curves are summed
horizontally to obtain the market supply curve.
 Assume the ice cream market has two suppliers
as follows…
Chapter 2: Page 52
Table 4-5: Market supply as the Sum of Individual Supplies
Price of Ice-cream
Ben Nicholas Market
Cone ($)
0.00 0 + 0 = 0
0.50 0 0 0
1.00 1 0 1
1.50 2 2 4
2.00 3 4 7
2.50 4 6 10
3.00 5 8 13
Chapter 2: Page 53
Figure 4-7: Shifts in the Supply Curve
Price of Ice-
Cream
S3
Cone
S1 S2
Decrease
in supply
Increase
in supply
Quantity of
Ice-Cream
Cones
Chapter 2: Page 54
Table 4-6: The Determinants of Quantity Supplied
Chapter 2: Page 55
SUPPLY AND DEMAND
TOGETHER
 Equilibrium refers to a situation in which the price
has reached the level where quantity supplied
equals quantity demanded.
Chapter 2: Page 56
Equilibrium
 Equilibrium Price
The price that balances quantity supplied and quantity
demanded.
On a graph, it is the price at which the supply and
demand curves intersect.
 Equilibrium Quantity
The quantity supplied and the quantity demanded at
the equilibrium price.
On a graph it is the quantity at which the supply and
demand curves intersect.
Chapter 2: Page 57
Equilibrium
Demand Schedule Supply Schedule
At $2.00, the quantity demanded

is equal to the quantity supplied!
Chapter 2: Page 58
Figure 4-8: The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium price Equilibrium

$2.00
Demand
Equilibrium quantity
0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Cream Cones
Chapter 2: Page 59
Equilibrium
Surplus
When price > equilibrium price, then quantity supplied
> quantity demanded.
 There is excess supply or a surplus.
 Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Shortage
When price < equilibrium price, then quantity
demanded > the quantity supplied.
 There is excess demand or a shortage.
 Suppliers will raise the price due to too many buyers chasing
too few goods, thereby moving toward equilibrium.
Chapter 2: Page 60
Figure 4-9 a): Excess Supply
Price of
Ice-Cream
Cone
Surplus
Supply
$2.50
$2.00
Demand
0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Cream Cones
Quantity Quantity
Demanded Supplied
Chapter 2: Page 61
Figure 4-9 b): Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
$1.50
Shortage
Demand
0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Cream Cone
Quantity Quantity
Supplied Demanded
Chapter 2: Page 62
Figure 4-10: How an Increase Demand Affects the Equilibrium
Price of
Ice-Cream
Cone 1. Hot weather increases the
demand for ice cream…
Supply
$2.50 New equilibrium
$2.00
Initial D2
2. … equilibrium
resulting in
a higher
price …
D1
0 1 2 3 4 5 6 7 10 11 Quantity of Ice-
Cream Cone
3. … and a higher quantity
sold.
Chapter 2: Page 63
Figure 4-11: How a Decrease Demand Affects the Equilibrium
Price of S2
Ice-Cream
Cone
1. An earthquake reduces the
supply of ice cream…
S1
$2.50 New equilibrium
$2.00 Initial equilibrium
2. …
resulting in
a higher
price …
Demand
0 1 2 3 4 7 10 11 Quantity of Ice-
Cream Cones
3. … and a lower quantity
sold.
Chapter 2: Page 64
Figure 4-12 a): A Shift in Both Supply and Demand
Price of
Large increase
Ice-Cream in demand
Cone
New
S2
equilibrium S1
P2
Small
decrease in
supply
P1 Initial equilibrium D2
D1
0 Q1 Q2 Quantity of Ice-
Cream Cone
Chapter 2: Page 65
Figure 4-12 b): A Shift in Both Supply and Demand
Price of Small increase

Ice-Cream in demand
Cone New S2
equilibrium
S1
P2
Large
decrease in
supply
P1 Initial equilibrium
D2
D1
0 Q2 Q1 Quantity of Ice-
Cream Cone
Chapter 2: Page 66
Chapter 3
Elasticity &
Applications

 Learn the meaning of the elasticity of
demand.
 Examine what determines the elasticity of
demand.
 Learn the meaning of the elasticity of
supply.
 Examine what determines the elasticity of
supply.
Chapter 3: Page 68
Price Elasticity of Demand
 Price elasticity of demand is a measure of how much the
quantity demanded of a good responds to a change in the
price of that good.
 Price elasticity of demand is the percentage change in

quantity demanded given a percent change in the price.
Chapter 3: Page 69
Computing the Price Elasticity of Demand
 The price elasticity of demand is computed as the
percentage change in the quantity demanded divided by the
percentage change in price.
Percentage change in quantity demanded

Price elasticity of demand =
Percentage change in price
Chapter 3: Page 70
The Midpoint Method: A Better Way to
Calculate Percentage Changes and Elasticity
The midpoint formula is preferable when

calculating the price elasticity of demand
because it gives the same answer regardless
of the direction of the change.
• point Method: A Better Way to Calculate Percentage
(Q2 - Q1) / [(Q2 + Q1) / 2]
Changes and Elasticities
Price elasticity of demand =
(P2 - P1) / [(P2 + P1) / 2]
Chapter 3: Page 71
The Midpoint Method: A Better Way to Calculate Percentage Changes and
Elasticities
Point A: Price = $4 Quantity = 120

Point B: Price = $6 Quantity = 80
 From Point A to Point B: Price rise = 50% and Quantity fall = 33%
 From Point B to Point A: Price fall = 33% and Quantity rise = 50%
(80 - 120) / [(80 + 120)/ 2]

Price elasticity of demand = =1
(6 - 4) / [(6 + 4)/ 2]
Mid point method

Chapter 3: Page 72
A Variety of Demand
 Inelastic Demand Curves
 Quantity demanded does not respond
strongly to price changes.
 Price elasticity of demand is less than
one.
 Elastic Demand
 Quantity demanded responds strongly
to changes in price.
 Price elasticity of demand is greater
than one.
Chapter 3: Page 73
A Variety of Demand Curves
 Perfectly Inelastic
• Quantity demanded does not respond to price changes.
 Perfectly Elastic
• Quantity demanded changes infinitely with any change in
price.
 Unit Elastic
• Quantity demanded changes by the same percentage as
the price.
Chapter 3: Page 74
Figure 5-1 a): Perfectly Inelastic Demand
Demand
Price E=0
$5.00
$4.00
1. An increase
in price…
0 100 Quantity
2. …leaves the quantity demanded unchanged.
Chapter 3: Page 75
Figure 5-1 b): Inelastic Demand
E<1
Price
Demand
$5.00
$4.00
1. A 22%
increase in
price…
0 90 100 Quantity
2. … Leads to a 11% decrease in quantity demanded.
Chapter 3: Page 76
Figure 5-1 c): Unit Elastic Demand
E=1
Demand
Price
$5.00
$4.00
1. A 22%
increase in
price…
0 80 100
Quantity
2. … Leads to a 22% decrease in quantity demanded.
Chapter 3: Page 77
Figure 5-1 e): Perfectly Elastic Demand
Price
E=
1. At any price above $4, quantity

demanded is zero.
$4.00 Demand
2. At exactly $4, consumers will buy any quantity.
3. At any price below $4, quantity demanded is infinite.
0
Quantity
Chapter 3: Page 78
Total Revenue and the Price Elasticity of
Demand
 Total revenue is the amount paid by buyers
and received by sellers of a goods.
 Total revenue computed as the Price (P) of
the goods times the Quantity sold (Q).
Total Revenue (TR) = P x Q
Ex.លក់ផះ ្ទ បាន១០=466,000$
?=>TR
7x45000$=315,000$
2x48000$=96,000$
1x55000$=55,000$
Chapter 3: Page 79
Figure 5-2: Total Revenue
Price
$4.00
P x Q = $400
(revenue) Demand
0 100 Quantity
Chapter 3: Page 80
Figure 5-3: How Total Revenue Changes When Prices
Changes: Inelastic Demand
Price
$3.00
P x Q = $240
(revenue)
$1.00
P x Q = $100
Demand
(revenue)
0 80 100 Quantity
Chapter 3: Page 81
Other Demand Elasticity
 Income elasticity of demand measures how
much the quantity demanded of a good
responds to a change in consumers’ income.
 It is computed as the percentage change in
the quantity demanded divided by the
percentage change in income.
Chapter 3: Page 82
 Types of Goods
oNormal Goods
oInferior Goods
 Higher income raises the quantity demanded
for normal goods but lowers the quantity
demanded for inferior goods.
Chapter 3: Page 83
 Goods consumers regard as necessities tend
to be income inelastic
oExamples include food, fuel, clothing,
utilities, and medical services.
 Goods consumers regard as luxuries tend to
be income elastic.
oExamples include sports cars, furs, and
expensive foods.
Chapter 3: Page 84
Other Demand Elasticities
 Cross-Price elasticity of demand measures
how much the quantity demanded of a goods
responds to a change in the price of another
goods.
 It is computed as the percentage change in
the quantity demanded divided by the
percentage change in the price of the second
goods.
Percentage change
in quantity demanded
Cross elasticity of demand =
Percentage change
in the price of
goods Chapter 3: Page 85
PRICE ELASTICITY OF SUPPLY
 Price elasticity of supply is a measure of how
much the quantity supplied of a good responds
to a change in the price of that good.
 Price elasticity of supply is the percentage

change in quantity supplied given a percent
change in the price.
Chapter 3: Page 86
Computing the Price Elasticity of Supply
 The price elasticity of supply is computed as
the percentage change in the quantity supplied
divided by the percentage change in price.
Chapter 3: Page 87
Computing the Price Elasticity of Supply
 Suppose an increase in the price of milk from
$1.90 to $2.10 a litre raises the amount that
dairy farmers produce from 9000 to 11 000 L
per month…
… using the midpoint method, we calculate the
percent change in the price as (2.10 - 1.90) / 2.00 x
100 = 10%
 Similarly, we calculate the percent change in the
quantity supplied as (11 000 - 9000) / 10 000 x 100 =
20%
20%
Price elasticity of supply = = 2.0
10%
Chapter 3: Page 88
Figure 5-6 a): Perfectly Inelastic Supply
Price
Supply
E =0
$5.00
$4.00
1. An increase
in price…
0 100 Quantity
2. …leaves the quantity supplied unchanged.
Chapter 3: Page 89
Figure 5-6 b): Inelastic Supply
Price
Supply
E<0
$5.00
$4.00
1. A 22%
increase in
price…
0 100 110 Quantity
2. …leads to a 10% increase in quantity

supplied.
Chapter 3: Page 90
Figure 5-6 c): Unit Elastic Supply
Price
E= 1
Supply
$5.00
$4.00
1. A 22%
increase in
price…
0 100 125 Quantity

supplied.
Chapter 3: Page 91
Figure 5-6 d): Elastic Supply
Price
E>1
Supply
$5.00
$4.00
1. A 22%
increase in
price…
0 100 200 Quantity

supplied.
Chapter 3: Page 92
Figure 5-6 e): Perfectly Elastic Supply
Price
E=
1. At any price above $4, quantity

supplied is infinite.
$4.00 Supply
2. At exactly $4, producers will supply any quantity.
3. At any price below $4, quantity supplied is zero.
0
Quantity
Chapter 3: Page 93
Figure 5-7: How the price elasticity of supply
can vary
Price
$15
Elasticity is less
than 1
$12
Elasticity is
greater than 1
$4
$3
0 100 200 500

525 Quantity
Chapter 3: Page 94
Chapter 4
The Cost of
Production

• Examine what items are included in a firm’s costs of production.
• Analyze the link between a firm’s production process and its total
costs.
• Learn the meaning of average total cost and marginal cost and how
they are related.
• Examine the relationship between short-run and long run costs.
Chapter 4: Page 96
Total Revenue, Total Costs, and Profit
• Total Revenue
• The amount a firm receives for the sale of its output. TR = P x Q
• Total Cost
• The market value of the inputs a firm uses in production.
• Profit
• The firm’s total revenue minus its total cost.
Profit = Total revenue - Total cost
Chapter 4: Page 97
Table 13-1: A Production Function and Total Cost: Hungry Helen’s Cookie
Factory
Output Total cost of

(quantity of Marginal inputs (cost
Number of Cost of Cost of
cookies product of of factory +
workers factory worker
produced per labour cost of
hour) workers)
0 0 $30 $0 $30
50
1 50 30 10 40
40
2 90 30 20 50
30
3 120 30 30 60
20
4 140 30 40 70
10
5 150 30 50 80
Chapter 4: Page 98
PRODUCTION AND COSTS
• The Production Function
• The production function shows the relationship
between quantity of inputs used to make a good and
the quantity of output of that good.
• Marginal Product
• The marginal product of any input in the production
process is the increase in output that arises from an
additional unit of that input.
Chapter 4: Page 99
Figure 13-2: Hungry Helen’s Production Function
Quantity of 150
Output
(cookies per 140 Production
hour) 120 function
90
50
0 1 2 3 4 5 Number of Workers Hired
Chapter 4: Page 100

From the Production Function to the Total-
Cost Curve
• The relationship between the quantity a firm can
produce and its costs determines pricing decisions.
• See last three columns in Table 13-1.
• The total-cost curve shows this relationship
graphically.
Chapter 4: Page 101

Figure 13-3: Hungry Helen’s Total-Cost Curve
Total Cost
Total-cost curve
$80
70
60
50
40
30
0 50 90 140 120 150 Quantity of

Output
(cookies per
hour)
Chapter 4: Page 102
Table 13-1: A Production Function and Total Cost: Hungry Helen’s Cookie
Factory
Output Total cost of

(quantity of Marginal inputs (cost
Number of Cost of Cost of
cookies product of of factory +
workers factory worker
produced per labour cost of
hour) workers)
0 0 $30 $0 $30
50
1 50 30 10 40
40
2 90 30 20 50
30
3 120 30 30 60
20
4 140 30 40 70
10
5 150 30 50 80
Chapter 4: Page 103

THE VARIOUS MEASURES OF COST
• Costs of production may be divided into
fixed costs and variable costs.
• Fixed costs are those costs that do not vary
with the quantity of output produced.
• Variable costs are those costs that do vary
with the quantity of output produced.
Chapter 4: Page 104

• Total Costs
• Total Fixed Costs (TFC)
• Total Variable Costs (TVC)
• Total Costs (TC)
• TC = TFC + TVC
Chapter 4: Page 105

• Average Costs
• Average costs can be determined by
dividing the firm’s costs by the quantity of
output it produces.
• The average cost is the cost of each
typical unit of product.
Chapter 4: Page 106

• Average Costs
• Average Fixed Costs (AFC)
= TFC / Q
• Average Variable Costs (AVC)
= TVC / Q
• Average Total Costs (ATC)
= TC / Q
• ATC = AFC + AVC
Chapter 4: Page 107

• Marginal Cost
• Marginal cost (MC) measures the
increase in total cost that arises from an
extra unit of production.
• Marginal cost helps answer the following
question:
• How much does it cost to produce an
additional unit of output?
Chapter 4: Page 108

• Marginal Cost
• Marginal cost (MC) measures the increase in total cost
that arises from an extra unit of production.
• Marginal cost helps answer the following question:
• How much does it cost to produce an additional unit of
output?
Chapter 4: Page 109

Table 13-2: The Various Measures of Cost: Thirsty Thelma’s Lemonade Stand
Quantity
of
Average Average
lemonade
(Glasses per
Fixed Variable Fixed Variable Average Marginal
hour) Total Cost Cost Cost Cost Cost Total Cost Cost
0 $ 3.00 $ 3.00 $ 0.00 --------- --------- ---------

0.30
1 3.30 3.00 0.30 $ 3.00 $ 0.30 $ 3.30
0.50
2 3.80 3.00 0.80 1.50 0.40 1.90
0.70
3 4.50 3.00 1.50 1.00 0.50 1.50
0.90
4 5.40 3.00 2.40 0.75 0.60 1.35
1.10
5 6.50 3.00 3.50 0.60 0.70 1.30
1.30
6 7.80 3.00 4.80 0.50 0.80 1.30
1.50
7 9.30 3.00 6.30 0.43 0.90 1.33
1.70
8 11.00 3.00 8.00 0.38 1.00 1.38
1.90
9 12.90 3.00 9.90 0.33 1.10 1.43
2.10
10 15.00 3.00 12.00 0.30 1.20 1.50
Chapter 4: Page 110

Figure 13-4: Thirsty Thelma’s Total-Cost Curve
Total Cost
Total-cost curve
15.00
11.00
5.40
3.00
0 4 8 10
Quantity of Output (glasses
of lemonade per hour)
Chapter 4: Page 111
Table 13-3: The Various Measures of Cost: Big Bob’s Bagel Bin
Quantity Average Average

of lBagels Fixed Variable Fixed Variable Average Marginal
(per hour) Total Cost Cost Cost Cost Cost Total Cost Cost
0 $ 2.00 $ 2.00 $ 0.00 --------- --------- ---------

1.00
1 3.00 2.00 1.00 $ 2.00 $ 1.00 $ 3.00
0.80
2 3.80 2.00 1.80 1.00 0.90 1.90
0.60
3 4.40 2.00 2.40 0.67 0.80 1.47
0.40
4 5.20 2.00 2.80 0.50 0.70 1.20
0.40
5 5.80 2.00 3.20 0.40 0.64 1.04
0.60
6 6.60 2.00 3.80 0.33 0.63 0.96
0.80
7 7.60 2.00 4.60 0.29 0.66 0.95
1.00
8 8.80 2.00 5.60 0.25 0.70 0.98
1.20
9 10.20 2.00 6.80 0.22 0.76 1.02
1.40
10 11.80 2.00 8.20 0.20 0.82 1.07
Chapter 4: Page 112

Figure 13-6a): Big Bob’s Cost Curves
(a) Total-Cost Curve

Total
Cost
$18.00 TC
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0 2 4 6 8 10 12 14
Quantity of Output (bagels per hour)
Chapter 4: Page 113
Figure 13-6b): Big Bob’s Cost Curves
(b) Marginal- and Average-Cost Curves
Costs
$3.00
2.50
MC
2.00
1.50
ATC
AVC
1.00
0.50
AFC
0 2 4 6 8 10 12 14
Quantity of Output (bagels per hour)
Chapter 4: Page 114
Chapter 5
Market Models

In this chapter you will………
 Identify the characteristics of pure
competition
 Identify the characteristics of pure
monopoly
 Describe of characteristics of monopolistic
competition
 Describe of characteristics of oligopolistic
Chapter 5: Page 116

Characteristics of Pure Competition
 Very large numbers of independently acting
sellers who offer their products in large
markets.
 Standardized product: firms produce a
product that is identical or homogenous.
 Firms are “price takers”: the firm cannot
change the market price, but can only accept it
as “given” and adjust to it.
 Free entry and exit: no barriers to entry exist.
Chapter 5: Page 117

Market Strategy
=>Marketing Mix: 5Ps
• Product: Quality, Quantity
• Price :
• Place/Distribution:
• Promotion:
Advertising, Sale promotion, Personal Selling,
Public Relation
• People(Communication):
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 118
The Revenue of a Competitive Firm
Total Revenue (TR) for a firm is the selling price
times the quantity sold. TR = (P  Q)
 Average revenue tells us how much revenue a
firm receives for the typical unit sold.
 Average revenue is total revenue divided by the
quantity sold.
Chapter 5: Page 119

 In perfect competition, average revenue
equals the price of the good.
Chapter 5: Page 120

 Marginal revenue is the change in total
revenue from an additional unit sold.
 For competitive firms, marginal revenue
equals the price of the good.
MR =TR/ Q
Chapter 5: Page 121

PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM’S
SUPPLY CURVE
 The goal of a competitive firm is to
maximize profit, which equals Total Revenue
minus Total Cost.
 This means that the firm will want to
produce the quantity that maximizes the
difference between total revenue and total
cost.
Chapter 5: Page 122

Table 14-1: Total, Average, and Marginal Revenue
for a Competitive Firm
Quantity Total Average Marginal

(in litres) Price Revenue Revenue Revenue
(Q) (P) (TR = P x Q) (AR = TR/ Q) (MR = ∆TR/∆Q)
1 $6 $6 $6 $6
2 6 12 6 6
3 6 18 6 6
4 6 24 6 6
5 6 30 6 6
6 6 36 6 6
7 6 42 6 6
8 6 48 6
Chapter 5: Page 123
Characteristics of a
Pure Monopoly
 Single supplier: the firm is the sole producer of a specific
product.
 No close substitutes: this product is unique.
 Price maker: the firm has considerable control over price
because it controls the total quantity supplied.
 Blocked entry: there is no immediate competition because
there are barriers to entry.
 Those barriers may be economic (economies of scale create natural
monopolies), technological, legal, or of some other type.
Examples: local telephone company, local gas and electric company,

small town gas station.
Chapter 5: Page 124

Characteristics of
Monopolistic Competition
 Large number of sellers:
• Small market shares
Examples:
• No collusion
• Independent action • furniture
 Differentiated products: • jewelry
• Firms have some control over prices. • leather goods
• Products may differ in • grocery stores
• attributes • gas stations
• services • restaurants
• location
• clothing stores
• brand name and packaging
• medical care
 Easy entry and exit
Chapter 5: Page 125

Characteristics of
Oligopoly
A few large producers: Examples:
• Firms are price markers
• Firms engage in strategic behavior • tires
• Firms’ profits depend on the actions • beer
of other firms
• cigarettes
Homogeneous or differentiated • copper
products:
• greeting cards
• If products are differentiated, firms
engage in advertising • automobiles
Blocked entry
• breakfast
cereals
• airlines
Chapter 5: Page 126

Collusion
Collusion, through price control, may allow oligopolists to reduce
uncertainty, increase profits, and possibly block potential entry.
If oligopolistic firms produce an identical product and have identical
cost, demand, and marginal-revenue curves, then each firm can
maximize profit using the MR = MC Rule.
Firms will choose the price and quantity according to the MR = MC
Rule, because it is the most profitable price-output combination.
One form of collusion is the cartel.
A Cartel is a formal agreement among producers to set the price and the
individual firm’s output levels of a product. One example is OPEC.
Chapter 5: Page 127

Obstacles to Collusion
Anti-trust law prevents cartels from forming
Demand and costs may be different across firms
There may be too many firms to coordinate
There are strong incentives to cheat
• If rivals charge prices lower than Po, then the demand curve of the
firm charging Po will shift to the left as its customers turn to its rivals,
and its profits will fall.
• The firm can retaliate and cut its price, too. However, all firms’ profits
would eventually fall.
Recessions increase excess capacity and strengthen
incentives to cheat
High profits attract potential entry.
Chapter 5: Page 128

Oligopoly and Advertising
Oligopolists have sufficient financial resources to engage
in product differentiation through product development and
advertising.
Positive Effects of Advertising Negative Effects of Advertising
Enhances competition Alters consumers’ preferences in
favor of the advertiser’s product
Reduces consumers’ search
time, direct costs, and indirect Brand-loyalty promotes
costs monopoly power
Facilitates the introduction of
new products
Chapter 5: Page 129

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Chapter 1

© by Nelson, a division of Thomson Canada Limited

 Scarcity means that society has limited

 Participants act in their own self-interest

Demand and Supply:

© by Nelson, a division of Thomson Canada Limited

C A tax that raises the price

 Market supply is the sum of all individual supplies

At $2.00, the quantity demanded

Equilibrium price Equilibrium

$2.00 Initial equilibrium

Price of Small increase

© by Nelson, a division of Thomson Canada Limited

 Price elasticity of demand is the percentage change in

Percentage change in quantity demanded

The midpoint formula is preferable when

Point A: Price = $4 Quantity = 120

(80 - 120) / [(80 + 120)/ 2]

Mid point method

2. … Leads to a 11% decrease in quantity demanded.

1. At any price above $4, quantity

3. At any price below $4, quantity demanded is infinite.

 Price elasticity of supply is the percentage

0 100 110 Quantity

2. …leads to a 10% increase in quantity

0 100 125 Quantity

0 100 200 Quantity

1. At any price above $4, quantity

3. At any price below $4, quantity supplied is zero.

0 100 200 500

© by Nelson, a division of Thomson Canada Limited

Output Total cost of

0 1 2 3 4 5 Number of Workers Hired

Chapter 4: Page 100

Chapter 4: Page 101

0 50 90 140 120 150 Quantity of

Output Total cost of

Chapter 4: Page 103

Chapter 4: Page 104

Chapter 4: Page 105

Chapter 4: Page 106

Chapter 4: Page 107

Chapter 4: Page 108

Chapter 4: Page 109

0 $ 3.00 $ 3.00 $ 0.00 --------- --------- ---------

Chapter 4: Page 110

Quantity Average Average

0 $ 2.00 $ 2.00 $ 0.00 --------- --------- ---------

Chapter 4: Page 112

(a) Total-Cost Curve

(b) Marginal- and Average-Cost Curves

© by Nelson, a division of Thomson Canada Limited

Chapter 5: Page 116

Chapter 5: Page 117

Chapter 5: Page 119

Chapter 5: Page 120

Chapter 5: Page 121

Chapter 5: Page 122

Quantity Total Average Marginal

Examples: local telephone company, local gas and electric company,