Essential Mathematics for Economics and Business, 4 th Edition

CHAPTER 2: THE STRAIGHT LINE AND

APPLICATIONS.

John Wiley and Sons 2013

www.wiley.com/college/Bradley John Wiley and Sons 2013
 Calculate and plot a demand schedule (slide show)Worked
Example 2.6, Figure 2.19: Slides 2 11
Plot a demand function from the points of intersection with the
axis Worked Example 2.6, Figure 2.19: Slides 12, 13, 14, 15
Calculate and plot a supply schedule Worked Example 2.7,
Figure 2.22: Slide 16, 17
Fixed Cost, Variable Cost and Total Cost:
Calculate and plot a TC function (slide show), Worked Example
2.9, Figure 2.25: Slides 18, 19, 20, 21
Calculate and Plot a Total Revenue function (TR) Worked
Example 2.10, Figure 2.26: Slide 22
Linear Profit function. Worked Example 2.10b. Figure 2.26:
Slides 23, 24, 25, 26

www.wiley.com/college/Bradley John Wiley and Sons 2013

 Demand Function P =100 - 0.5Q

Label the horizontal and vertical axis

Calculate the demand schedule from the
equation given above, for positive values of P
and Q
Plot the points
Draw the graph
Label the graph
Demand Function P =100 - 0.5Q :
Calculate the demand schedule (Method A)
Table 2.3 Demand schedule
Q P = 100 - 0.5Q
0 P = 100 -0.5(0) = 100

P on the vertical (y) axis

40 P = 100 -0.5(40) = 80
80 P = 100 -0.5(80) = 60
120 P = 100 -0.5(120) = 40
160 P = 100 -0.5(160) = 20
200 P = 100 -0.5(200) = 0
Intercept (vertical) = 100:
Slope = - 0.5:
Horizontal intercept = 200
Q on the horizontal (x) axis
 Demand Function P =100 - 0.5Q :
Plot the demand schedule

Table 2.3 Demand schedule P =100 - 0.5Q

Quantity (x) Price (y)
P Price
0 100 120

40 80 100

80 60 80

120 40 60

160 20 40

200 0 20

Intercept (vertical) = 100 0 Q Quantity

Slope = - 0.5:
0

40

80

120

160

200
Horizontal intercept = 200
 Demand Function P =100 - 0.5Q :
Plot the demand schedule
Table 2.3 Demand schedule
Quantity (x) Price (y)
0 100 P =100 - 0.5Q
P Price
40 80 120

80 60
100
120 40
80
160 20
200 0 60

Intercept (vertical) = 100 40

Slope = - 0.5: 20

Horizontal intercept = 200 0 Q Quantity

40

80

120

160

200
 Demand Function P =100 - 0.5Q :
Plot the demand schedule

Table 2.3 Demand schedule

Quantity (x) Price (y) P =100 - 0.5Q
P Price
0 100
120

40 80
100

80 60
80

120 40
60
160 20
40

200 0
20
Intercept (vertical) = 100
0 Q Quantity
Slope = - 0.5:

80
40

200
120

160
Horizontal intercept = 200
 Demand Function P =100 - 0.5Q :
Plot the demand schedule

Table 2.3 Demand schedule

Quantity (x) Price (y) P =100 - 0.5Q
P Price
0 100
120

40 80
100
80 60
80

120 40
60
160 20
40

200 0
20
Intercept (vertical) = 100
0 Q Quantity
Slope = - 0.5:
0

80
40

120

160

200
Horizontal intercept = 200
 Demand Function P =100 - 0.5Q :
Plot the demand schedule

Table 2.3 Demand schedule

Quantity (x) Price (y) P =100 - 0.5Q
P Price
0 100
120

40 80
100

80 60
80

120 40
60
160 20
40

200 0
20
Intercept (vertical) = 100
0 Q Quantity
Slope = - 0.5:

40

80

120

160

200
Horizontal intercept = 200
Demand Function P =100 - 0.5Q :
Plot the demand schedule

Table 2.3 Demand schedule

Quantity (x) Price (y)
P =100 - 0.5Q
0 100 P Price
40 80 120

80 60 100

120 40 80

160 20
60
200 0
40
Intercept (vertical) = 100
Slope = - 0.5: 20

Horizontal intercept = 200 0

Q Quantity

40

80

120

160

200

240
 Demand Function P =100 - 0.5Q :
Plot the demand schedule

Table 2.3 Demand schedule

Quantity (x) Price (y) P =100 - 0.5Q
P Price
0 100
120

40 80
100

80 60
80

120 40
60
160 20
40

200 0
20
Intercept (vertical) = 100
0 Q Quantity
Slope = - 0.5:

80
40

200
120

160

240
Horizontal intercept = 200
 Demand Function P =100 - 0.5Q :
Join the points and label the graph

Table 2.3 Demand schedule

Quantity (x) Price (y) P =100 - 0.5Q
P Price
0 100
120

40 80
100

80 60
80
P = 100 - 0.5Q
120 40
60
160 20
40
D : Demand
200 0
20
Intercept (vertical) = 100
0 Q Quantity
Slope = - 0.5:

80
40

200
120

160

240
Horizontal intercept = 200
Figure 2.17
Demand Function P =100 - 0.5Q :
Alternatively, plot the vertical intercept(Method B)
Table 2.3 Demand schedule
Quantity (x) Price (y) P Price
0 100 120

40 80 100 Vertical intercept = 100

80 60 80

120 40
60
160 20
40
200 0
Intercept (vertical) = 100 20

Slope = - 0.5: 0 Q Quantity

40

80

120

160

200

240
Horizontal intercept = 200
Demand Function P =100 - 0.5Q :
and plot the horizontal intercept
Table 2.3 Demand schedule
Quantity (x) Price (y)
0 100 120

40 80 100 Vertical intercept = 100

80 60 80

120 40
60
160 20 Horizontal intercept = 200
40
200 0
Intercept (vertical) = 100 20

Slope = - 0.5: 0 Q Quantity

120

160

200
40

80
Horizontal intercept = 200
Demand Function P =100 - 0.5Q :
Join the horizontal and vertical intercepts
Table 2.3 Demand schedule
Join the horizontal and vertical intercepts
Quantity (x) Price (y)
P Price
0 100 120

40 80 100

80 60 80

120 40 60
D : Demand
160 20 40

200 0
20
Intercept (vertical) = 100
0 Q Quantity
Slope = - 0.5:

200
0

40

80

120

160

240
Horizontal intercept = 200
Figure 2.19
The General Linear Demand function
P = a - bQ such as P =100 - 0.5Q
P

120

a = 100 100 Slope = - 0.5

80

P = 100 - 0.5
60

40

20

0 Q
0

200
40

80

120

160

240
a
200
b

Figure 2.19 Demand function, P = 100 - 0.5Q

Supply Function P = 10 + 0.5Q
Calculate and plot the supply schedule P = 10 + 0.5Q
Table 2.4 Supply schedule
Q: Quantity P: (P = 10 +0.5Q)
0 10: (P =10 +0.5(0)) P = 10 + 0.5Q
20 20: (P = P
10+0.5(20))
70
40 30 S
60
60 40
50
80 50 P = 10 + 0.5Q
40
100 60
30
Intercept (vertical) = 10 Slope = 0.5
20
Slope = 0.5 c = 10
10
Horizontal intercept = - 20 Q
0
Figure 2.22 -20 0 20 40 60 80 100
 Supply Function P = 10 + 0.5Q
Calculate and plot the supply schedule P = 10 + 0.5Q

Table 2.4 Supply schedule

Q: Quantity 0 20 40 60 80
P = 10 + 0.5Q
100
P: Price per unit 10 20 30 40 50 P

60 70

60

Intercept (vertical) = 10 50

Slope = 0.5 40 P = 10 + 0.5Q

Horizontal intercept = - 20 30
Slope = 0.5
20
c = 10
The supply function may be plotted 10
Q
(i) from the table of points 0
-20 0 20 40 60 80 100

(ii) Or by simply joining the intercepts Figure 2.22

Total Cost Function:Derive the equation :

Example: Given the following: TC = 10 + 2Q

Fixed Costs (FC) = 10

C on the vertical axis

Variable Costs, VC = 2 for one unit
Variable costs, VC = 2Q for Q units
Hence, Total Cost for Q units is

TC = FC + VC
TC = 10 + 2Q.
Plot
Costs on the vertical axis Q on the horizontal axis
Q on the horizontal axis
Total Cost Function: TC = 10 + 2Q
Plot the horizontal line: FC = 10
Plot Fixed Costs

This is a horizontal line, Cost 24

which cuts the vertical axis at C 22

20
Costs = 10 18

16

14
FC = 10
12

10

0 Q Quantity
0 1 2 3 4 5 6
Total Cost Function: TC = 10 + 2Q
Plot the points
Table 2.5: TC = FC +VC
TC = 10 + 2Q
Cost 24
Calculate and plot the total cost schedule
C 22
Points
20
Q VC = 2Q TC = 10 +2Q (Q, TC) 18
0 0 TC = 10 + 0 = 10 (0, 10) 16
FC = 10
1 2(1) = 2 TC = 10 + 2 = 12 (1, 12) 14

12
2 2(2) = 4 TC = 10 + 4 = 14 (2, 14)
10
3 2(3) = 6 TC = 10 + 6 = 16 (3, 16)
8
4 2(4) = 8 TC = 10 + 8 = 18 (4, 18) 6
5 2(5) = 10 TC = 10 + 10 = 20 (5, 20) 4

6 2(6) = 12 TC = 10 + 12 = 22 (6, 22) 2

0 Q Quantity
0 1 2 3 4 5 6
 Total Cost Function: TC = 10 + 2Q
Join the points: Label the graph
Table 2.5: TC = FC +VC
TC = 10 + 2Q
Total Cost
Calculate and plot the total cost schedule TC 24
22

20 TC = 10 + 2Q
Q VC = 2Q TC = FC +VC (Q, TC)
18
0 0 TC = 10 + 0 = 10 (0, 10) 16
1 2(1) = 2 TC = 10 + 2 = 12 (1, 12) 14
FC = 10
2 2(2) = 4 TC = 10 + 4 = 14 (2, 14) 12

10
3 2(3) = 6 TC = 10 + 6 = 16 (3, 16)
8
4 2(4) = 8 TC = 10 + 8 = 18 (4, 18)
6
5 2(5) = 10 TC = 10 + 10 = 20 (5, 20) 4
6 2(6) = 12 TC = 10 + 12 = 22 (6, 22) 2

0 Q Quantity
0 1 2 3 4 5 6

Figure 2.24
Total Revenue: TR = 3.5Q:
Calculate and plot the TR

TR = 3.5Q
Table 2.6 Total revenue
Total revenue,
Price is fixed at P = 3.5 TR
28

Q TR = PQ =3.5 Q
21
(Q, TR) TR = 3.5Q
0 TR = 3.5 (0) = 0 (0, 0) 14

2 TR = 3.5 (2) = 7 (2, 7)

4 TR = 3.5 (4) = 14 (4, 14) 7

6 TR = 3.5 (6) = 21 (6, 21) 0 Q Quantity,

0 2 4 6

Figure 2.25: Linear total revenue function

Profit from chicken snack boxes
Price = 3.5 per box : FC = 800, Cost = 1.5 per box.
Total Revenue from the sale of Q boxes
TR = Price per box number of boxes TR = 3.5Q
= Price Quantity = 3.5Q
Total cost of producing Q boxes
TC = Fixed Cost + Cost per box number of boxes
TC = FC + VC
TC = 800+1.5Q
TC = 800 + 1.5Q
Profit = Total Revenue Total Cost
= TR TC Profit = 2Q-800
= (3.5Q) - (800 + 1.5Q)
= 3.5Q- 800 -1.5Q = 2Q - 800
Profit from chicken snack boxes
TR = 3.5Q: FC = 800, VC = 1.5 per unit.
TR = PQ =3.5 Q 3000
TR

2500 TC

TC = 800 + 1.5Q 2000

Profit

1500

Profit = 2Q - 800 1000

500

0
0 100 200 300 400 500 600 700 800

-500

-1000

Figure 2.26: Linear profit function and TR, TC

Break-even quantity of chicken snack boxes
TR = 3.5Q: FC = 800, VC = 1.5 per unit.
TR = 3.5 Q 3000
TR

TC = 800 + 1.5Q 2500 TC

Profit
Break-even when 2000
TR = TC 1500

3.5Q = 800 + 1.5Q 1000

2Q = 800 500

Q = 400 0
0 100 200 300 400 500 600 700 800

At the break-even Q -500

TR = TC = 1400 -1000
Figure 2.26: Linear profit function and TR, TC
Profit from chicken snack boxes
TR = 3.5Q: FC = 800, VC = 1.5 per unit.
TR = 3.5 Q 3000
TR
TC = 800 + 1.5Q
2500 TC

Profit
Profit = TR TC 2000

= 2Q - 800 1500

1000

When profit = 0
500
2Q 800 = 0
0
Q = 400 0 100 200 300 400 500 600 700 800

But break-even Q = 400 -500

Hence TR = TC = 1400 -1000
when Profit = 0 Figure 2.26: Linear profit function and TR, TC