- Own price
- Income
- Price of related goods
Sensitivity of Qd to changes in own price
1. Perfectly inelastic demand
2. Perfectly elastic demand
Consumer is extremely insensitive to ∆ in own px: Qd doesn't ∆ regardless of ∆s in own px
- Number of substitutes
- Time horizon
- Portion of budget spent on good
- Discretionary vs nondiscretionary good i.e. necessary vs luxury good
if demand for a good is elastic, then a 1% decrease in Px is associated with a proportionately larger increase in total expenditure --> i.e. total expenditure increases
Sensitivity of Qd to changes in income
- normal good
- inferior good
- indicates normal good
- why: an increase in income --> increase in Q
- indicates inferior good
- why: increase in income --> decrease in Q
Sensitivity of Qd to changes in price of related goods
- complement
- substitute
- Represents substitute
- When Px of substitute increases, Qd of own good increases
- Represents complementary good
- When Px of complement increases, Qd of own good falls
1. substitution effect
2. income effect
When own Px falls, Qd for good increases regardless of whether good is normal / inferior
When own Px falls, Qd may increase / decrease depending on whether good is normal / inferior
- Qd for good increases
- Why: Its relatively cheaper than substitutes
Qd for good increases because there's an increase in buying power --> increase in real income --> increase in consumption
Q falls and consumer switches to relatively better good
- Extreme case of an inferior good
- This is relevant to consumers with very low incomes
- This is a status good e.g. LV bag worth $50k is better regarded than LV bag worth $1k
- positive demand slope
TC = wL + rK
Amount of additional output from using one more unit of input i.e. ∆TP/∆L or TP1 - TP0
Increase in Q from additional unit of L / K
Average output p/unit of input
implicit opportunity costs
Total Revenue - Total economic costs OR
Accounting profit - Total implicit opportunity costs
- MR is downward slopping
- Intersects x-axis when TR is maximized
1. FC
2. VC
MR = MC
1. ATC includes AVC
2. AVC increases more quickly than AFC decreases
It's zero b/c positive economic profit attracts new entrants --> greater competition --> decline in economic profit
Normal profit
Normal profit
Operate
Shutdown
Exit the industry
We can think of the long-run total cost curve as a ...
Combination of SR ATC
Falls
Decrease in LR ATC as output increases
- Output level at which LRATC is the lowest and output is optimal
- The point where returns to scale is constant
1. Increasing returns to scale
2. Division of labor / management
3. Technologically / economically better equipment
4. Effective decision-making
5. Better quality control --> lower waste and lower costs
6. Bulk purchases --> lower prices
1. Decreasing returns to scale
2. Higher resource costs
3. Improper management due to size
4. Duplication of product lines
5. Higher labor costs
Increase in output is relatively larger than the increase in input
Increase in output is relatively less than increase in input
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