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Elasticity
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a concept used to quantify the response in one variable when another variable changes
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Price elasticity of demand
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% change in quantity demanded / % change in price
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perfectly inelastic demand
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demand in which Qd does not respond at all to a change in price
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inelastic demand
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demand that responds somewhat, but not a great deal to changes in price
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Unitary elasticity
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% change in price results equal % change in quantity demanded or supplied.
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Perfectly inelastic demand numerical value
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0
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inelastic demand numerical value
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IEI < 1
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Unitary elasticity numerical value
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1
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Elastic demand
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% change in Qd is larger than % change in Price (absolute value)
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Elastic demand numerical value
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IEI > 1
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Perfectly elastic demand
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quantity drops to 0 at the slightest increase in price
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inelastic demand graph
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% change in Qd = (Q2-Q1/(Q1+Q2)/2)x100
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elastic demand graph
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% change in P = (P2-P1/(P1+P2)/2)x100
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Midpoint formula for Qd
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Price x Quantity
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Midpoint formula for Price
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Declines, Increases
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Point Elasticity changes along a demand curve
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Increases, Decreases, Increases
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What is Total Revenue equation
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Increases, Decreases, Decreases
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When price ________________, Qd _________________.
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If inelastic - TR follows Price
If elastic - TR follows Qd
If elastic - TR follows Qd
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Effects of a price increase on a inelastic demand: Price ___________, Qd ___________, TR _____________.
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Decreases, Increases, Decreases
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Effects of a price increase on an elastic demand: price _____________. Qd _____________, TR _____________
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Decreases, Increases, Increases
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Hint for whether TR goes up or down with price change
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more substitutes, more elastic demand
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Effects of Price cut on inelastic demand: Price ____________, Qd ______________, TR ________________
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When an item represents a relatively small part of our total budget, we tend to pay little attention to its price.
- Small share implies inelastic
- Small share implies inelastic
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Effects of Price cut on an Elastic Demand: Price _____________, Qd ___________________, TR ______________
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if you have more time to make adjustments, more elastic
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Availability of Substitutes
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how much Qd changes in response to an increase in income
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The importance of being unimportant
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% change in Qd / % change in income
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The time dimension
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E > 0 (positive)
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Income Elasticity of Demand
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E > 1
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Income elasticity of demand equation
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Negative
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Normal good elasticity
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% change in Qd for good 1 / % change in price of good 2
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Superior good elasticity
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the response of the Q of one good to a change in P of another
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Inferior good elasticity
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the 2 products are substitutes
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Cross-Price elasticity of demand equation
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the 2 products are complements
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Cross-Price elasticity of demand
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response of Q of a good supplies to a change in P of that good
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If CP elasticity is > 0
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% change in Qs / % change in price
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If CP Elasticity is < 0
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response of labor supplied to a change in the price of labor (wages)
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Elasticity of supply
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% change in quantity of labor supplied / % change in wage rate
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Elasticity of supply equation
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where there are many firms, each small, producing virtually identical products, and in which no firm is larger enough to have control over prices
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Elasticity of labor supply
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undifferentiated outputs, identical to or indistinguishable from one another
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Elasticity of labor supply equation
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the assumption that households possess a knowledge of the qualities and prices of everything available
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perfect competition
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1. How much of each product, or output, to demand
2. How much labor to supply
3. How much to spend today and how much to save for the future
2. How much labor to supply
3. How much to spend today and how much to save for the future
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Homogeneous products
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- price of the product
- income available
- amount of accumulated wealth
- prices of other products
- tastes and preferences
- expectations about future income, wealth, and prices
- income available
- amount of accumulated wealth
- prices of other products
- tastes and preferences
- expectations about future income, wealth, and prices
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Perfectly knowledge
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the limits imposed on HH choices by income and product prices
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Every household must make three basic decisions:
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the set of options that is defined and limited by a budget constraint
-What you can afford to purchase
-What you can afford to purchase
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Determinants of household demand
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the set of opportunities to purchase goods and services available to a household as determined by prices and money income
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Budget constraint
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PxX + PyY = Income
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Choice/Opportunity set
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the satisfaction a product yields
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real income
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decrease in satisfaction or usefulness from having one more unit of the same product
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Equation of budget constraint
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the total amount of satisfaction obtained from consumption of a good or service
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Utility
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the additional satisfaction gained by the consumption/use of one more unit of something
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Diminishing marginal utility
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marginal utility per dollar or "bang per buck"
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total utility
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MUx / Px = MUy/Py or MUx/MUy = Px/Py
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Marginal utility (MU)
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Price increases = worse off = Real income decrease
Price Decrease = Better off = Real income increase
Price Decrease = Better off = Real income increase
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MU/P
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maximum amount a person is willing to pay - current market price
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The utility-maximizing rule
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wage rate, as you give up working
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the income effect
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total revenue - total cost
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consumer surplus
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total fixed costs plus total variable costs
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Price of leisure
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A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
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profit
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- firms work under a fixed scale of production
- firms can neither enter nor exit an industry
- firms can neither enter nor exit an industry
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Total Cost (TC)
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- no fixed factors
- firms can increase or decrease the scale of operation
- new firms can enter or existing firms can exit the industry
- firms can increase or decrease the scale of operation
- new firms can enter or existing firms can exit the industry
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Normal Rate of return
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the quantitative relationship between inputs and outputs
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Short-run
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relies heavily on human labor instead of capital
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Long-run
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relies heavily on capital instead of human labor
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Production technology
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a numerical relationship between inputs and outputs
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Labor-intensive technology
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The additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
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Capital-intensive technology
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the average amount produced by each unit of a variable factor of production
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Production function/total product function
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total product/total units
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marginal product
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When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
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Average product
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Increase
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Average product equation
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decrease
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law of diminishing returns
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Not change
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MP > AP then AP will __________
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complementary
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MP < AP then AP will ___________
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any cost not dependent on the firms level of output
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MP = AP then AP will __________
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costs that depend on the level of production chosen
-cost of inputs
-cost of inputs
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Total average and marginal product graph
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the total of all costs that do not change with output, even if 0
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Capital and labor are ______________ inputs
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costs that have already been incurred and cannot be recovered
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fixed cost
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total fixed cost divided by the number of units of output
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variable cost
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TFC / q (output)
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Total fixed costs or overhead
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he process of dividing TFC by more units of output. AFC decline as quantity rises
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sunk costs
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the total of all costs that vary with output in the short-run
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average fixed cost (AFC)
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the increase in total cost that results from producing one more unit of output
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AFC =
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variable costs
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Spreading overhead
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undefined
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Total Variable Cost (TVC)
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undefined
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Marginal cost (MC)
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undefined
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MC also reflects changes in ____________
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undefined
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