ECO 105 1nd Edition Lecture 9Outline of Last Lecture I. SubsidyII. TaxIII. Price Elasticity of DemandOutline of Current Lecture I. Degrees of ElasticityII. Theory of FirmCurrent LectureI. Degrees of Elasticitya. Price Elasticity of Demandi. eQ,P = (∆Q/Q)/(∆P/P)1. eQ,P < -1, elastic2. eQ,P = -1, unitary elastic3. -1 < eQ,P < 0, inelastica. Generally inelastic = slight curve4. eQ,P = 0, perfectly inelastica.5. eQ,P = -∞, perfectly elasticThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a.b. (∆Q/Q)/(∆P/P) = (-)/0 = -∞b. Elasticity and Revenuei.1. R1 = P1Q1 (the area)ii. There are two effects on revenue when P changes1.a. Quantity changesb. Price changes2. Has revenue decreased?a. It depends on elasticity. And elasticity varies along a linear demand curvei. Why??ii. eQ,P = (∆Q/∆P) * (P/Q)1. ∆Q/∆P < 02. P/Q > 0b.i. If A > B, then revenue has decreasedii. If demand is elastic, then A > B (revenue decreases)iii. If demand is inelastic, then A < B (R increases)iv. If demand is unitary elastic, then A = B (revenue is constant/unchanged)iii. Expenditure is the same as revenue (based on consumer)II. Theory of Firma. Theory of Production (short-run)i. Production function (supply side)1. Q = f(L,K)a. Q is output, quantityb. L = labor (factor of production)c. K = capital (factor of production)ii. Short-run production theory1. K is fixed/constant2. L is variableiii. EXAMPLEL Q ∆Q/∆L0 0 ---1 5 (5-0)/(1-0)= 52 15 (15-5)/(2-1) = 103 30 (30-15)/(3-2) = 154 55 (55-30)/(4-3) = 255 85 306 10015diminishing marginalreturns tolabor7 110108 11 559