Understanding Market Equilibrium and Elasticity

This assignment delves into the fundamental principles of economics, focusing on market equilibrating processes, movements along and shifts in supply and demand curves. It examines the significance of price elasticity and its impact on revenue and profit. The concepts of accounting and economic profit are discussed, alongside factor productivity and variable costs. The assignment concludes by analyzing how marginal revenue differs in various market structures.

Running head: ECONOMIC PRINCIPLE 1
Economic Principle
Name
Institution

ECONOMIC PRINCIPLE 2
Market equilibrating process
The law of demand states that more will be demanded when share price in market
reduces and when their prices increase, less will be demanded, when other factors remain
constant. Law of supply indicates that at high prices, more is supplied and at low price, less is
supplied. When the buyers’ income increases, more shares will be demanded hence increasing
its price, similarly the supply of shares will increase and if the disposable income of the buyer
reduces, the shares becomes unaffordable, the supply reduces, price increases hence less of the
shares will be demanded.
Movements along vs Shift in curves
Movement along a supply curve is caused by alterations in price, for instance if the value
increases from A0 to A1 the quantity to be supplied should increase from S0 to S1. And when
price reduces from A1 to A0 the supply will reduce from S1 to S0. Shift in supply is caused by
factors such as decline in the cost of production. If the cost production reduces the supply curve
shifts to the right meaning that there is an increase in quantity supplied and if the cost production
increases, the supply curve moves to the left meaning that there is a reduction in the quantity of
goods to be supplied. Therefore movement in the demand curve and change in supply curve
brings about a state of equilibrium where the supply and demand curves meet hence setting
market price.
Importance of elasticity
Price elasticity is the responsiveness to change in demand due to change in price. Price
elasticity can as considered as a % change in amount needed divided by % change in price. For

ECONOMIC PRINCIPLE 3
example if when quantity demanded rises by 15% due to decrease in price by 10%, the elasticity
would be 1.5. The elasticity is important as it enable businesses to forecast pricing on a product.
Elasticity and Revenue
It would be prudent for owner of the restaurant not to heed to the advice of the chef.
Because if price is moderately flexible, a price reducing brings an increase in the total proceeds.
In this case, when the price is flexible, falling in price brings an increase in the buyers’ spending
thereby increasing the total revenue. The elasticity of demand in change of price from $ 7 to $ 5
gives a percentage change in price of 28 giving a negative elasticity.
Discussing Profit
Profit in the sense of accounting, is the amount by which the total revenue exceeds the
total cost and the economic profit is simply the amount that is adequate to settle the total cost of
production that is return on capital for safe investment. In economic view, profit simply should
cover the owner’s costs and nothing excess while in accounting there must be an excess over the
total costs. For example in a competitive, lowering the price so as to increase the demand to
extent that losses are not made but costs are covered. Product differentiation would also be a
great deal so as to secure market.
Factor productivity and Variable
Factor productivity and variable costs both increase as the total production volume
increases. If the variable cost declines, the variable cost curve slopes negatively meaning that the
marginal cost is less than the average variable cost similarly, when average variable cost rises,
the average variable curve positively slopes implying that marginal cost is more than the variable

ECONOMIC PRINCIPLE 4
cost. It can be assumed that there is profit maximization on production in the short-run. The
average curves and the marginal productivity show the cost of product the firm incurs.
The revenue got from sale of every unit of output is calculated by dividing revenue
collected by the output quantity. In determination of profit, average revenue is subtracted from
the average cost, therefore average revenue is equal to price.in a perfect competition market,
marginal revenue is equal to average revenue but not price and in other market structures like
oligopoly, marginal revenue is higher than the marginal cost hence price is not always equal to
marginal revenue .