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Elasticity
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measure of sensitivity
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Price elasticity of demand
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measure of sensitivity of the Qd to a change in price
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Elasticity of Demand Equation
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% change in QD / % change in price
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Total Revenue =
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P x Q
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2 ways to measure elasticity
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point elasticity & ARC
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Elastic graph
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flat
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Eastic
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E > 1
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Inelastic graph
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steep
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inelastic
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E < 1
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Unit elastic
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E = 1
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Elastic region
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P & TR move in opposite direction
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Inelastic region
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P & TR move in same direction
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Profit =
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Total revenue - total cost
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ArcElasticity
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between 2 points
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number of substitutes
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factors affecting elasticity of demand
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increase substitutes leads to
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incr. elasticity (more choices)
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factors affecting elasticity of demand
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% of budget spent on good x
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incr. elasticity
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increase % of budget spend on good x
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luxury v. necessity
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factors affecting elasticity of demand
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time
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factors affecting elasticity of demand
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increase in time
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incr. in elasticity (more time to respond)
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Decrease TR
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elastic region incr. in price leads to a
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increase TR
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elastic region decr. price leads to a
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increase TR
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inelastic region incr. price leads to a
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decrease TR
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inelastic region decr. price leads to a
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luxury
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more sensitive to change in price, more elastic
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cross price elasticity
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substitutes and compliments
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cross price elasticity
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P1 change first, then Q2 either + or -
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if coke P1 coke incr.
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Q2 pepsi incr.
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if P gas incr.
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Q tires decr.
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income elasticity
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% change consumption / % change income
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normal good example
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incr. demand steak / incr. Income
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inferior good example
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decr. demand ramen / incr. income
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income elasticity
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change in income leads to a change in consumption
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price elasticity of supply
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% change Qs / % change in P
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time
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factor affecting supply
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elasticity =
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% change in Q / % change in P
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change Q > change P
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flat curve (elastic)
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change Q < change P
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steep curve (inelastic)
not responsive to price changes
not responsive to price changes
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excise tax
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fixed tax per unit sold
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excise tax result on supply
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supply shifts in b/c they collect tax from supplies
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excise tax =
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P consumers - P suppliers
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more inelastic group
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group that pays more of the tax (don't care as much about price increase)
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inelastic demand who pays more?
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consumers
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2 constraints for firms
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costs, competition
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Total Cost =
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wage of labor + interest rate w/ capital
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firms
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get scarce resources together, sell goods and services
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production cost
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how much it costs to produce a certain quantity
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Total Cost includes
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opportunity cost
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2 kinds of production cost
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short run and long run
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short run
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time period short enough so that the level of 1 input can't change (input is fixed)
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long run
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long enough so that the levels of all inputs can be changed (not fixed)
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short run
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K is fixed, L is variable
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long run
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K & L are variable
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labor
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always variable (hire/ fire at will)
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capital (K)
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building/ equipment
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rK
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interest rate, opp. cost
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Total Cost =
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total fixed (explicit & implicit) cost + total variable (explicit only) cost
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explicit
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out of pocket ($$ changes hands)
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implicit
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opportunity costs of doing something else
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marginal
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change in total from one additional unit
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marginal unit
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one additional unit
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marginal affects
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the average
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marginal < average
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avg. decline
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marginal > average
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avg. increase
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Average Cost
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tells you cost per unit @ a certain quantity
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Average variable Cost
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labor only
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AC =
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AFC + AVC
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TC =
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TFC + TVC
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adding labor
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incr. efficiency then decr. efficiency as there becomes too many workers
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marginal cost
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change in TC from making 1 additional unit of output
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MC graph
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nike checkmark
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MR > MC
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make and sell it
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MR < MC
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don't make and sell it
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marginal cost pulls
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AVC and AC b/c all 3 are related to labor
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MC crosses
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AVC, AC at their lowest point
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MC > AVC
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incr. AVC
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MC < AVC
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decr. AVC
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MC > AC
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incr. AC
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MC < AC
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decr. AC
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what dictates the shape of curves?
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division of labor
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MPL
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marginal productivity of labor
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marginal productivity of labor?
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if you add 1 person (L) to the taco truck how many more tacos will be produced?
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law of diminishing returns
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beyond some point, successive additions. of a variable input (L) to a fixed input (K) will incr. output by increasingly smaller amounts
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short run MC =
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Wage / MPL
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Long run AC
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What factory size is best for my operation?
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short run AC
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what is the cost per unit of each worker?
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Envelope curve
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a LRAC curve, contains all possible SRAC
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SRAC graph
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U-shaped due to law of diminishing returns
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LRAC graph
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U-shaped due economies of scale
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economies of scale
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bigger is better, incr. efficiency
incr. plan size -> decr. LRAC
incr. plan size -> decr. LRAC
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diseconomies of scale
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bigger is not better, decr. efficiency
incr. plant size -> incr. LRAC
incr. plant size -> incr. LRAC
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factors of economies of scale
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specialization, mass production techniques
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factors of diseconomies of scale
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too big to manage, government
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profit =
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TR - TC
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goals of the firm
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max. profit
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economic profit
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explicit (#s) and implicit (opp. cost)
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accounting profit
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explicit (#s only)
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TR =
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P x Q
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TC =
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AC x Q
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profit =
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total revenue - total cost
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Profit =
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(PxQ) - (ACxQ)
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profit sends signals
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to entrepreneurs
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resources should gravitate towards
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industries with the highest profits
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Econ profit = 0
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ok if your profit is equal to opp. cost (both valued equally)
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Free Enterprise
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3 points about entrepreneurship
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problem with business- potential for fraud
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3 points about entrepreneurship
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Business v. others
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3 points about entrepreneurship
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sunk cost
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previously incurred cost that is irreversible
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profit is maxed where
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MR=MC
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Bryant's law
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institutions (like trees) rot from the inside, by the time you realize it's too late
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