HOW DO WE EXPRESS ECONOMIC RELATIONSHIP

EXPRESSING ECONOMIC RELATIONSHIP

 Applications and Examples

REVENUE, PRICE AND DEMAND

REVENUE- the analysis of revenue rests on the most basic empirical relationship in economics: the
law of demand; this law states
 All other factors held constant, the higher the unit price of a good, the fewer the number of units
demanded by consumers and consequently, sold by firms.

ANALYSIS

THE LAW OF DEMAND operates at several levels. Consider the microchip industry as whole, consisting of
the manufacture in question and a half- dozen major competitors. Suppose the leading firms raise their
chip prices due to the increased cost of silicon. According to the law of demand, the industry’s total sales
of chips will fall. Of course, the law applies equally to a single chip manufacture. An individual firm
competes directly or indirectly with the other leading suppliers selling similar chip.
ANALYSIS

 As quantity increase and price increases, revenue increase

 As quantity decrease and price decrease, revenue decreases
 In short, the law of demand means that there is a fundamental trade-off between P and Q in
generating revenue. An increase in Q requires a cut in P, the former effect raising revenue but the
latter lowering it. Operating at either extreme-selling a small quantity at high prices or a large quantity
at every low price will raise little revenue.
 Quantity and price directly affect revenue.

PROFIT

 From the preceding analysis of revenue and cost, we now have enough information to compute
profit for any given output the firm might choose to produce and sell.
  Profit is the difference between the firm’s total revenue and total cost. A table and graph of a profit
analysis show the amount of profit the firm will earn for different quantities that it produces and
sells.

DEFINITIONS OF PROFIT

 Business Profit: total revenue minus the explicit or accounting costs of production
 Economic profit: total revenue minus the explicit and implicit cost of production
 Opportunity cost: implicit value of a resource in its best alternative use.

FUNCTION OF PROFIT

 Profit is a signal that guides the allocation of society’s resources

 High profits in an industry are signal that buyers want more of what the industry produces.
 Low (or negative) profits in an industry are a signal that buyers want less of what the industry
produces.