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Elasticity of demand
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a measure of how consumers respond to price changes
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Different kinds of Elasticity
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-Price Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Price
-Cross Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Price of a different product
Negative Sign- means the products are compliments, a degrease in the price of a good, leads to a decrease in the demand of a complimentary good.
Positive Sign+ Means the products are substitutes, an increase in the price of one leads to an increase in the demand of the substitute good.
-Income Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Income
Positive Sign+ means it's a Normal Good
Negative Sign- means it is an Inferior Good
Percent Change in Quantity Demanded / Percentage Change in Price
-Cross Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Price of a different product
Negative Sign- means the products are compliments, a degrease in the price of a good, leads to a decrease in the demand of a complimentary good.
Positive Sign+ Means the products are substitutes, an increase in the price of one leads to an increase in the demand of the substitute good.
-Income Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Income
Positive Sign+ means it's a Normal Good
Negative Sign- means it is an Inferior Good
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Price Elasticity Categories
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Inelastic - Elasticity less than 1
Elastic - Elasticity greater than 1
Unitary Elastic - Elasticity of 1
Elastic - Elasticity greater than 1
Unitary Elastic - Elasticity of 1
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Price Elasticity of Supply
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Percentage change in quantity supplied / Percentage change in price
This can vary, if a collector's iteam from a specific year has a price increase, there is not much way the supply could follow.
But if something like bikes had an increase in price, over time supply could catch up. So the price Elasticity of supply would be high.
This can vary, if a collector's iteam from a specific year has a price increase, there is not much way the supply could follow.
But if something like bikes had an increase in price, over time supply could catch up. So the price Elasticity of supply would be high.
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Cross Elasticity of Demand
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-Cross Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Price of a different product
Compliment goods-- Negative Cross Elasticity
Substitute goods-- Positive Cross Elasticity
Percent Change in Quantity Demanded / Percentage Change in Price of a different product
Compliment goods-- Negative Cross Elasticity
Substitute goods-- Positive Cross Elasticity
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Income Elasticity of Demand
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-Income Elasticity of Demand is calculated by:
Percent Change in Quantity Demanded / Percentage Change in Income
Positive Sign+ means it's a Normal Good
Negative Sign- means it is an Inferior Good
Percent Change in Quantity Demanded / Percentage Change in Income
Positive Sign+ means it's a Normal Good
Negative Sign- means it is an Inferior Good
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Utility
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A hypothetical measure of the satisfaction one receives from consuming a good or service.
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Utility Maximization Rule
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Marginal Utility per dollar of the last unit of every good consumed is equal.
If you consume 2 goods, one may have a higher rate of utility per dollar. But as you adjust the quantities consumed of each good, the marginal utility will adjust, until you find the right combination where the margin of utility for each is equal. When that occurs, you have maximized utility.
If you consume 2 goods, one may have a higher rate of utility per dollar. But as you adjust the quantities consumed of each good, the marginal utility will adjust, until you find the right combination where the margin of utility for each is equal. When that occurs, you have maximized utility.
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Budget Line
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A line that shows the different combinations of two products a consumer can purchase with a specific budget(Income), given the products' prices.
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Marginal utility is the:
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Additional satisfaction from consuming an additional unit of a product.
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Consumers maximize total utility when:
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The marginal utility per dollar is equal for all goods.
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budget constraint
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the limited amount of income available to consumers to spend on goods and services
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Diminishing Marginal Utility
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As a consumer consumes more of one good, the Marginal Utility for each additional unit is less.
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Marginal Utility Per Dollar
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Marginal Utility of a Unit / Price
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Profit:
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Total Revenue - Total Cost
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Explicit Costs
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Accounting Costs, direct expenses paid to some other economic entity
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Implicit Costs
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Opportunity Costs,
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Accounting Profit
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Total Revenue - Total Explicit Cost
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Economic Profit
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Total Revenue - Total Cost, which includes explicit and implicit costs.
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Zero Economics Profit
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A business can stay in business as long as it accounts for all of its costs, including opportunity cost.
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Fixed Costs
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Costs that do not vary with the quantity of output produced
For example, a lease payment
For example, a lease payment
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Sunk Costs
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costs that have already been incurred and cannot be recovered
For example, printing custom menus for a restaurant. They have no value to anyone else.
For example, printing custom menus for a restaurant. They have no value to anyone else.
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Variable Costs
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costs that vary directly with the level of production
For example, raw materials, utilities, and labor wages
For example, raw materials, utilities, and labor wages
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Total Cost
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Fixed costs + Variable costs
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Marginal Cost
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The additional cost of producing one more unit of a good
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Average Costs
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Can be calculated for Fixed, Variable, and Total Costs.
It is just cost divided by output.
For example, Total Costs / Output
It is just cost divided by output.
For example, Total Costs / Output
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Profit Maximization Rule
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Firms maximize profit at a point when:
Marginal Cost = Marginal Revenue
Because if the additional cost of producing one more unit is more than the additional revenue of one more unit, profits will fall as you expand your business. But if they are equal, you have an equal profit growth rate as you grow your business.
Marginal Cost = Marginal Revenue
Because if the additional cost of producing one more unit is more than the additional revenue of one more unit, profits will fall as you expand your business. But if they are equal, you have an equal profit growth rate as you grow your business.
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Economic Profit Occurs when:
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Price > Average Cost
as long as the price of a good on the market exceeds the cost it takes a firm to make it, they can make profit.
"Price" includes all costs.
as long as the price of a good on the market exceeds the cost it takes a firm to make it, they can make profit.
"Price" includes all costs.
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average variable cost
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variable cost divided by the quantity of output
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Efficient scale of production
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the quantity of output that minimizes average total cost
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Economies of Scale
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factors that cause a producer's average cost per unit to fall as output rises
If you double the size of your output, chances are not every cost would double. Therefore, you can lower your average cost per unit by increasing the scale of your business.
If you double the size of your output, chances are not every cost would double. Therefore, you can lower your average cost per unit by increasing the scale of your business.
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Market Period
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A period of time so short that the output and the number of firms are fixed.
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The Steeper the Demand Curve
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The less elastic the demand is to price changes.
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Percentage Change In Price
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Percentage change in price = [(Pnew − Pold)/Pold] × 100 = ($1/$2) x 100 = 50%
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If grapefruits have a price elasticity of 4, that means that for every 1% decrease in price, the quantity demanded will:
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Increase by 4%
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Learn Taxes levied
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There are graphs that represent taxes collected and deadweight loss.
Depending on how elastic the demand is, taxes are pushed onto the consumer?
Depending on how elastic the demand is, taxes are pushed onto the consumer?
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Framing Bias
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is any technique used to steer individuals into selecting one option over another.
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Learn Psychological factors to consumption
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like: overvaluing the present relative to the future.
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Average Product
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output per worker
Total Output / number of workers
Total Output / number of workers
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diseconomies of scale
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the situation in which a firm's long-run average costs rise as the firm increases output
Diseconomies of scale can result from a firm becoming so big that management cannot efficiently control its operations.
Diseconomies of scale can result from a firm becoming so big that management cannot efficiently control its operations.
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Sole Proprietorship
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A business owned by one person
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Unit Elastic
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when the percentage change in price and quantity demanded are the same
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Elasticity calculations?
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1) a plastic container company, raises the price of its signature Lunchbox container from $3.00 to $4.00. As a result, the quantity sold drops from 20,000 to 15,000.
Price elasticity = [15000-20000/(15000+20000/2) / [4-3/(4+3/2) = [-5000/17500]/[1/3.5] = -0.2857/0.2857 =-1
so the price elasticity is unitary elastic
2) Economists working for the United States have determined that the elasticity of demand for gasoline is 0.5
As the price elasticity is less than 1 so it is inelastic.
3) Capital Metro decides to increase bus fare rates from $2.00 to $2.21. Consequently, the number of passengers who decide to take the bus in Austin drops from an average of 70,000 riders a day to an average of 61,000 riders a day.
Price elasticity = [61000-70000/(61000+70000/2)]/[2.21-2/(2.21+2/2)] = [-9000/65500] / [0.21/2.105] = -0.1374/0.099 = -1.38
Price elasticity = [15000-20000/(15000+20000/2) / [4-3/(4+3/2) = [-5000/17500]/[1/3.5] = -0.2857/0.2857 =-1
so the price elasticity is unitary elastic
2) Economists working for the United States have determined that the elasticity of demand for gasoline is 0.5
As the price elasticity is less than 1 so it is inelastic.
3) Capital Metro decides to increase bus fare rates from $2.00 to $2.21. Consequently, the number of passengers who decide to take the bus in Austin drops from an average of 70,000 riders a day to an average of 61,000 riders a day.
Price elasticity = [61000-70000/(61000+70000/2)]/[2.21-2/(2.21+2/2)] = [-9000/65500] / [0.21/2.105] = -0.1374/0.099 = -1.38
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Incident of Tax
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The amount of tax paid by the producer or consumer
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Learn:
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Inferior, normal, luxry goods based on elasticity
Equations
the negative and plus signs
Equations
the negative and plus signs
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Economies of scope
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savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology
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Unitary Elastic
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describes demand whose elasticity is exactly equal to 1
The price change results in a direct and equal change in demand
The price change results in a direct and equal change in demand
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Perfectly Inelastic
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quantity does not respond at all to changes in price (E=0)
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