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MARKET DEMAND Microeconomics Made Easy by William Yacovissi Mansfield University ©William Yacovissi All Rights Reserved Profits Profit is the difference between money earned from selling a good, and money paid to produce the good. Money earned from selling a good is called Revenue, or Total Revenue. Profits Money used to pay for inputs to produce a good are called Costs, or Total Costs Profits = Total Revenue - Total Costs or (PR = TR - TC) A company is assumed to want to behave in such a way as to maximize profits. Revenue Total Revenue = Price * Quantity or (TR = P * Q). 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 Average Revenue = Total Revenue/ Quantity or AR = TR/Q. 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 Revenue is complicated by the fact that often the price of a good and the quantity sold are related. This relationship is called Demand. Revenue The relationship between Price and Quantity is assumed to be inverse. That is, as the Price increases, the Quantity sold decreases. Conversely, as the Price decreases, the Quantity increases. WAYS OF SHOWING DEMAND The relationship between price and quantity sold, which is called demand, can be shown as a table, a graph, or an equation Each way shows the same information in a different form. MARKET DEMAND FOR VIDEO RENTALS FOR EXAMPLE Price Quantity Revenue $1.00 500 a Day $500 $2.00 400 a Day $800 $3.00 300 a Day $900 $4.00 200 a Day $800 $5.00 100 a Day $500 DEMAND AS A GRAPH De mand For Vide o Re ntals $5.00 P ric e $4.00 $3.00 $2.00 $1.00 100 200 300 400 Rentals Per Day 500 DEMAND SHOWN AS AN EQUATION The equation: Quantity Demanded = 600 - 100(Price) fits the data for the demand for video rentals shown in the table and graph. Do you see why the table, graph, and equation are all equivalent ways to show demand.