1. Normal Profit or Zero Profit TR = TC.

This is a return which is just necessary to cover all its cost of production. Normal profits exist when TR = TC therefore it can be called zero profit.

  1. Super normal Profit

These are profits which are above the normal profit. They exist when TR is more than TC, therefore it can as be called Abnormal profit.

THEORY OF DEMAND

  • Demand refers to quantity of the goods and services consumers are able and willing to purchase at the prevailing price in a given period of time.
  • According to Bober “By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices or at various incomes, or at various prices related goods.
  • From the point of view of the seller, the demand price is the average revenue (revenue per unit) or income he expects to earn from the sale of unit of a commodity. Thus, demand price is identical with average revenue (AR). That is why; the demand curve is also drawn as AR curve.

The law of demand states that “The higher the price the lower the demand, the lower the price the higher the demand, other factors remaining constant.

Assumptions of the law of demand

The law of demand operates when all factors affecting demand apart from the price of the commodity are kept constant, therefore the following are the assumptions of the law of demand;-

  1. No change in the level of distribution of income
  2. The consumer’s level of income remains the same
  3. Population size remains unchanged
  4. The prices of other related goods remains the same
  5. There is no change in taste and preferences
  6. The level of advertisement remains the same
  7. The level of income tax remains unchanged.

The Demand Schedule

This is the table that shows different price levels and the corresponding quantities demanded of the commodity

Price of milk per ltr in Tshs. 100 200 300 400
Quantity demanded of milk in ltrs 8 6 4 1

Types of Demand Schedule

  1. Individual demand schedule -This is the type of table which shows different quantities demanded of the commodity by an individual
  2. Market demand schedule– This is the table which shows different total quantities demanded of the commodity at different prices in the whole market.

NOTE. In order to get a market demand schedule we add up individual demand schedules.

Price of milk per ltr Qty demanded milk by John in ltr Qty demanded of milk by Jane ltrs Market demand
100 8 6 14
200 6 4 10
300 4 2 6
400 1 1 2

 

Assuming there are two buyers in the market for milk, John and Jane, the market demand schedule will be derived as above

The Demand Curve

This is a graphical presentation of the demand schedule showing the relationship between price of the commodity and its demand.

A demand curve has a negative slope and its slopes downwards from left to right showing that as the price decrease the quantity demanded increases, other factors remaining constant.

The demand curve

The demand curve of Jane

The market demand curve

FACTORS AFFECTING DEMAND

Demand of a good or service will be high or low depending on the following factors;-

  1. The price of the commodity.

When the price of the commodity is high the demand will be low, and when the price of low demand will be high, other things being constant.

  1. Population size

The demand on an area with high population will be high while the demand of the area with low population will be low.

  1. Consumer’s level of income

When the consumer’s level of income is high, the demand will be high as the consumer’s ability will be high. However the consumer’s level of income is low, the demand will also be low as the consumer’s ability will be low.

  1. Level of advertisement

The commodity which is extensively advertised will be highly demanded, while the commodity which is not advertised the demand will be low.

  1. Tastes and Preference.

If the commodity is favored, people’s taste and preference, the demand will be high while the commodity which is not favored by people’s tastes and preference the demand will be low.

E.g. the demand of Hi-jab in Saudi Arabia is higher compared to the demand in USA.

  1. The level of Taxation.

When the income tax charged is high, demand will be low and when the income tax is low, demand will be high, in which the disposable personal income will be high.

  1. The price of the substitute goods

If the price of the substitute increases demand of the good will decrease and when the price of the substitute decreases the demand of good in qn will increase.

Substitutes are goods for which one can be used instead of the other e.g. pepsicola and Coca-Cola

  1. Price of the complement

Complement goods which are jointly demanded. These are goods which the demand of one result into demand of the other e.g. Car & petrol.

If the price of the complement is high the demand of the good in question will be low and when the price of the complement is low the demand f the good in question will be high. (e.g. When the price of a car is high, demand for petrol will be low and when the price of the car is low, demand for petrol will be high)

 

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Normal Profit or Zero Profit TR = TC. This is a return which is just necessary to cover all its cost of production. Normal profits exist when TR = TC therefore it can be called zero profit. Super normal Profit These are profits which are above the normal profit. They...