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ECON 2306:Exam Two
elasticity
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measure of responsiveness of one variable to a change in another variable
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price elasticity of demand
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measures the response of the quantity demanded of a good/service to a change in the price of that good/service
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ED formula
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%ΔQD / %ΔP
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[ED] > 1 then...
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product is elastic
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[ED] < 1 then...
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product is inelastic
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[ED] = 1 then...
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product is unit elastic
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total revenue=
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price × quantity
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as price ↑, if product is inelastic...
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total revenue ↑
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as price ↑, if product is elastic...
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total revenue ↓
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as price ↑, if product is unit elastic...
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total revenue stays the same
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if ED=0
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perfectly inelastic demand.
consumers will demand the same quantity no matter what the price.
curve is a straight vertical line
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if ED<1...
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inelastic demand curve.
very little response to shifts in price.
curve is a sloped more vertical
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if ED=∞...
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perfectly elastic curve.
consumers will want infinite amount.
curve is straight horizontal line
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if ED>1...
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elastic demand curve.
has a lot of response in shift in price.
more of a horizontal slope
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determinants of price elasticity
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1. availability of substitutes.
2. time/urgency of purchase.
3. importance to budget.
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the more substitutes a product has...
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the more elastic the curve
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short-term has a...
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more inelastic curve
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long term has a more
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elastic curve
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having a bigger share of budget means
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curve is more elastic
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elasticity of supply
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responsiveness of producers to a price/cost change
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ES= formula
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%ΔQS ÷ %ΔP
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ES=0
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perfectly inelastic supply.
no matter the price paid this is the only max/only amount i can pay to put on the market.
supply slope is straight vertical
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ES=∞
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perfectly elastic curve.
will supply as much you want but only at one price.
curve is straight horizontal.
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ES=1
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unit elastic supply.
shift to the left=more elastic
shift to the right=more inelastic
supply curve is 45º
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determinants of supply
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length of adjustment time
short term= more inelastic
responsive of marginal cost to increase in output
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income elasticity of demand
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responsiveness in the change of demand for a good/service with the change in the income of the demander
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EI=
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%ΔQD÷%Δincome
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cross price elasticity
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measures the responsiveness of the demand for agood to a change in the price of another good
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EXY=
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%ΔQDX÷%ΔPy
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if EI is negative
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good is inferior
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if EI is positive
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good is normal
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if EI is greater than 1
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good is luxury
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If Exy is negative
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product is a complement
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if Exy is positive
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products are substitutes
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the more elastic the demand
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the more the producer has to pay
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the more elastic the supply
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the less the producer has to pay
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utility
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satisfaction or happiness
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total utility
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total satisfaction from consuming a product
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marginal utility
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extra satisfaction from consuming one more unit; change in utility resulting from a one unit change is consumption
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util
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measure of satisfaction; measures individually not as a group because everyone's satisfaction is different
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utility maximizing rule
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the consumer should allocate income so that the last dollar spent on each product yields the same amount of extra marginal utility
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law of diminishing marginal utility
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the more of a good a person consumes per period, the smaller the increase in total utility from consuming on more unit
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explicit costs
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what you pay for a good of service
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implicit costs
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opportunity costs
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accounting profit=
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total revenue-explicit costs
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economic profit=
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total revenue- explicit and implicit costs
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normal profit/ zero economic profits
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covering both explicit and implicit costs
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short run
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time period during at least one input is fixed
companies operate in the short run
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long run
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all inputs are variables
companies use this for future planing
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production function
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shows relation ship between inputs and outputs
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total product=
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total output produced
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marginal product=
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Δtotal product÷ Δoutput
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marginal product-
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change in total product resulting from the use of one more unit of the variable input
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law of diminishing marginal returns
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the more of a variable resource is combined with a fixed amount of another resource, marginal product eventually declines. only get this effect in the short-run
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Average product=
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total product÷ input
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fixed costs
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cost of production that is independent of the output produced.
this always deals with short run
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variable costs
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cost of production that changes with the rate of output
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total cost=
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fixed costs + variable cost
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marginal cost-
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change in total cost resulting from a one-unit change in output
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Average fixed cost
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total fixed cost ÷ output
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average variable cost
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total variable cost ÷ output
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average total cost
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total cost ÷ output
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reasons why long run curve has "u" shape
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economies of scale.
diseconomies of scale
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economies of scale
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produce more output and average cost decreases
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diseconomies of scale
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produce more output and average cost increases
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reasons why short run curve has "U" shape
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diminishing return
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long run curve is for
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planning
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