Law of Demand

Change in Quantity Demanded

Change in Demand

Normal Good

Complements

Consumer Surplus

Market Supply Curve

Change in Quantity Supplied

Law of Supply

Supply Shifters

Producer Surplus

The Full Economic Power

Price Floor

Price Support

Elasticity

Elastic

Inelastic Demand

Unitary Demand

Total Revenue Test

The relationship between changes in price, elasticity and total revenue

-If demand is elastic then a increase in price will lead to a decrease in total revenue

Perfectly Elastic

Perfectly Inelastic

Changes in Demand

-Shifts to the right is an increase and Shifts to the left is a decrease.

Determinants of Demand

-Income: Normal or Inferior Good

-Prices of Related Goods: Substitutes and Compliments

-Advertising and Consumer Tastes: Anything that causes a shift in taste toward a good will increase demand for that good

-Population: As the population rises more individuals will purchase goods.

-Consumer expectations: Expection affect buyers

-Total consumer value: sum of the max amount a consumer is willing to pay at different quantities

-Total Expenditure: is the per unit market price times the number of units consumed

-Consumer Surplus: The extra value that consumers derive from a good but do not pay extra for

Linear Demand Function

-Input Prices

-Technology or government regulations

-Number of Firms

-Substitutes in production

-Taxes - Decrease the Supply: Excise tax (Tax collected on each unit of out put from the supplier), shifts the supply curve vertically up. Ad Valorem Tax: (A percentage tax, for example - sales tax), rotates the supply curve counter clockwise.

-Producer expectations

Linear Demand Function Continued

- Determined by the intersection of the market demand and market supply curve

-Equilibrium price that equates quantity demanded with quantity supplied

Consumer Surplus

-Increase in demand only: increase in equilibrium price and quantity

-Decrease in Demand Only: Decrease in equilibrium price and quantity

Supply Shifters

-Increase in Supply Only: Decrease in equilibrium price and increase in Equilibrium quantity

_Decrease in supply only: Increase in equilibrium price and decrease in equilibrium quantity.

Competitive Market Equilibrium

Changes in Demand

Changes in Supply

is the ration of the percentage change in the consumption of X to the percentage change in advertising spent on X

Simultaneous Shifts

Measure the percentage change in the consumption of X hat results from a 1 percent change in advertising directed towards Y

-The elasticity between two variables, G and S, is mathematically expressed as: See attached image

If elasticity is greater than 0 then S and G are directly related.

If elasticity is less than 0 then S and G are inversely related.

-Sign of the relationship: Positive or Negative

-Absolute Value of elasticity magnitude relative to unity: | Eg,s | greater than 1 G is highly responsive to changes in S

| Eg,s | less than 1 G is slightly responsive to changes in S

Own Adverting Elasticity

Measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price.

-Sign: negative by the law of demand

The magnitude of absolute value relative to unity:

An absolute value less than 1 is inelastic if it is greater than 1 it is elastic, if it is equal to 1 then it is unitary elastic

-When demand is elastic: a price increase (decrease) leads to a decrease (increase) in total revenue

-When demand in inelastic: A price increase (decrease) leads to an increase (decrease) in total revenue

-When demand is unitary elastic: Total revenue is maximized.

The Elasticity Concept

A function that defines the maximum amount of output that can be produced with a given set of inputs.

- Q = F(K,L)

Alternative way to measure the elasticity of a function G = f(s )

The inputs a manager cannot adjust in the short run.

Measurement Aspects of Elasticity

The inputs a manager can adjust to alter production.

*Usually inputs such as labor and materials.

Is the time frame in which there are fixed factors of production.

Total Revenue Test

Q = f(L) = f(K*,L)

- *K is the fixed level of capital.

Fixed Factors of Production

Short Run

Short Run Production Function Formula

Long Run