Economic and Legal Environment of Business Module

1. Economic and Legal Environment of Business Module Instructor: Prof. SaadKiryakos Contact details: Tel: + 971 55 9802102 Email: Skiryakos@synergydubai.ae

2. Markets and Prices Basics of Demand and Supply

3. MARKETDEMAND The demand for a good or service is defined as: Quantities of a good or service that people are ready to buy at various prices, within some given time period, other factors besides price remain constant.

4. Price and quantity demanded are inversely related. That is, as the price of a good rises , all other factors remain constant, the quantity demanded of the good falls. The Law of Demand

5. Price Market Demand Curve The demand curve express the relationship between the quantity demanded of a good and its price, Keeping all other variable constant. As the price of X decreases the quantity demanded increases. A B C D Quantity 0

6. Nonprice Determinants of Demand Consumers Income Prices of Related Goods Advertising Tastes and Preferences Population “Number of buyers” Consumer Future Expectations

7. Demand Shifters

8. The Demand Function A demand Function expresses the functional relationship between the demand for a good and its various determining factors. Where: Q : The quantity demanded of good X : The Price of good X : The price of a good y M : Income E : The consumer’s expectations A : Level of advertising Z : Population size

9. The value the consumer receives but does not have to pay for it. • Graphically, Consumer surplus is the area above the price paid for a good but below the demand curve. ConsumerSurplus

10. Price MarketSupply Supply . B Quantities of a good or service that producers are ready to sell at various prices within some given time period, other factors besides price held constant. . A Quantity 0

11. Determinantsof supply Input Prices Technology Number of Firms Substitutes in Production Taxes Producer Expectations

12. Supply Shifters 0

13. The Supply Function The supply function of a good express the quantity of the good produced at alternative prices of the good, alternative prices of inputs, and alternative values of other variables that affect supply. The supply function for good X may be written as: = F ( ,W,, F, E,T) Where Qs represent the quantity supplied of a good, the price of the good, W the price of an input, the price of technologically related goods, F number of firms, E Producer’s Expectations and T Taxes.

14. ProducerSurplus The amount of money producers receive in excess of the amount necessary to induce them to produce good. Geometrically, producer surplus is the area above the supply curve but below the market price of the good.

15. Mathematically, if and QS represent the quantity demanded and supplied, the equilibrium price,, is the price such that Market Equilibrium

16. Comparative Statics Changesin Demand Price S B P1 E pe d1 d0 0 Quantity QeQ1 Q

17. Price S1 S0 E1 P1 E0 P0 D 0 Q1 Q0 Quantity Changes in Supply

18. Simultaneous Shifts in Supply and Demand

19. Price Ceilings Is , the highest permissible price in the market, But it is below the initial equilibrium price

20. Price Floors In some case government legislate a minimum legal price floors. An example of price floor is the minimum wages legislations.

21. Quantitative Demande Analyses

22. The Elasticity Concept The elasticity is defined as a percentage relationship between two variables, that is, the percentage change in one variable relative to a percentage change in another. =

23. Own Price Elasticity of Demand The own price elasticity of demand, is defined as percentage change in quantity demanded caused by a one percent change in price. The own price elasticity of demand for good X, is defined as:

24. Relative Elasticity of Demand Demand is said to be elastic if the absolute value of the own price elasticity is greater than 1: A 1 percent change in price causes a change in quantity demanded greater than 1 percent.

25. The Demand is said to be inelastic if the absolute value of the own price elasticity is less than 1: Here the percentage change in price is greater than the corresponding change in quantity.

26. Unitary elasticity of demand Demand is said to be unit elastic if the absolute value of the own price elasticity is equal to 1: A 1 percent change in price results in a 1 percent change in quantity demanded in the opposite direction.

27. Perfect Elasticity = ∞ In this case, there is only one possible price, and at that price an unlimited quantity can be purchased. The demand curve is a horizontal line.

28. Perfect Inelasticity = 0 Under this condition, the quantity demanded remains the same regardless of price. Such a demand curve may exist for certain products within a particular price range.

29. Perfectly Elastic Demand

30. Perfectly Inelastic Demand Quantity

31. Measurement of Price Elasticity Arc Elasticity This method is the most commonly used to calculated the price elasticity. Where: EP = arc price elasticity Q1 = Original quantity demanded Q2 = New quantity demanded P1 = Original price P2 = New price

32. Point Elasticity

33. The Determinants of Elasticity Available Substitutes Time Expenditure Share

34. The Cross-Elasticity of Demand Is a measure of the percentage change in quantity demanded of product x resulting from a 1 percent change in the price of product y. The general equation can lie written as:

35. Income Elasticity of Demand Income elasticity of demand measure the percentage change in quantity demanded resulted from a one percent change in income. The general expression for this elasticity is : Ey = %∆ Q ÷ %∆M Where M represents income. The elasticity can be either positive or negative. For most products, normal goods, income elasticity is positive. Greater than zero but less than 1.

36. Elasticity of Supply Measures the percentage change in quantity supplied as a result of a one percent change in price.

37. The Production Processand Cost

38. The Production Function The production function is an engineering relation that defines the maximum quantity of output produced with a given sets of inputs. Mathematically, the production function is denoted as: Q = F(K, L) Q is the maximum amount of output that can be produced with K units of capital and L units of labor.

39. Measures of Productivity Total Product Total product (TP) is the maximum level of output that can be produced with a given quantity of inputs. Average Product The average product (AP) of an input is defined as total product divided by the quantity of the input. In particular, the average of product of labour (APL) is: APL = The average product of capital (APK) is: APK =

40. Marginal Product Marginal Product The marginal product (MP) of an input is the change in total output attributable to the last unit of an input. The marginal product of labour (MPL) is the change in total output divided by the change in labour: MPL= The marginal product of capital (MPK) therefore, is the change in total output divided by the change in capital: MPK=

41. Profit Maximizing Input Decision To maximize profits, a manager should continue to employ labour up to the point where VMPL= P MPL Where w is the wage rate, the cost of each unit of labour. VMPK= P  MPK

42. Isoquants An isoquant defines the combinations of inputs (K and L) that produce the same level of output; that is, any combination of capital and labour along an isoquant produced the same level of output.

43. Isocosts The combinations of inputs that cost the firm the same amount make up an isocost line. The relation for an isocost line is graphed in Figure 2. Suppose that the firm spends $ on inputs. Then the cost of labour plus the cost of capital equals $: C = wL + rK

44. K L 0 where w is the wage rate (the cost of labour) and r is the interest rate (the cost of capital).

45. Producing output at the lowest possible cost. The cost-minimizing input mix, MRTS = w/r Cost Minimization

46. Cost-Minimizing Input Rule To minimize the cost of producing a given level o output, the marginal product per dollar spent should be equal for all inputs: Equivalently, to minimize the cost of production, a firm should employ inputs such that the marginal rate o technical substitution is equal to the ratio of input prices:

47. Short-Run Cost Functions Fixed costs (FC). Fixed costs are costs that do not vary with output. Fixed costs include the costs of fixed inputs used in production. Variable costs VC(Q) . Variable costs, are costs that varies with the level of output . Variable costs include the costs of inputs that vary with output. The sum of fixed and variable costs is the firm’s short-run total cost function TC(Q) = FC + VC(Q)

49. Average and Marginal Costs Average fixed cost (AFC) is defined as fixed costs (FC) divided by the number of units of output: Average variable cost (AVC) is defined as variable cost (VC) divided by the number of units of output:

50. = Average total cost (ATC) is defined as total cost TC(Q), divided by the number of units of output. it provides a measure of total costs on a per-unit basis. Marginal cost (MC), is the cost of producing an additional unit of output, that is, the change in total cost attributable to the last unit of output: