Ed = (Q2 - Q /Q /Q2+Q1) * (P2+P /P /P2-P1) 1 1 Ed = %∆ Q /%∆ /%∆ Price d |Ed| > 1 = elastic |Ed| < 1 = inelastic |Ed| = 1 = unitary Ex
P
Qd
TR
A
25
5
125
B
20
10
200
3
C
15
15
225
7/5
Law of Diminishing Marginal Utilities – Long-Run Cost Curve as more of a good is substituted the less satisfaction it 1st Period – [EoS] Economy of Scale provides in the trade off. - specialization - purchase supplies in bulk Consumer equilibrium – combination of two goods 2nd Period – Constant return to scale giving the greatest satisfaction. - stability 3rd Period – Diseconomy of Scale (MU/P) good x = (MU/P) good y = (MU/P) good z - labor cost increase - inefficiency Find MU/P that is equal for all goods
Perfect Competition 1) Many Sellers “price takers” 2) Homogenous (same product) 3) Easy to enter/exit market MR = MR = Marginal Revenue (additional revenue for producing one unit of output) MR > MC MR < MC MR = MC
Income Effects Real Income = Purchasing Power
|Ed|
D
10
20
200
5/7
E
5
25
125
1/3
Income Elasticity of Demand EI = Income of Ed EI = %∆ Qd / %∆ Income Normal Goods – Income increases, Qd increases Inferior Goods – Goods – Income increases, increases, Qd decreases Cross-Price Cross-Price Elasticity of Demand Exy = % Qd of Goods Y / % Price of Goods X Ex. Exy = 2 Price of X increases, Qd of Y increases Exy > 0 = substitute Ex. Exy = -2 Price of X increases, Qd of Y decreases Exy < 0 = complimentary Perfectly inelastic – vertical demand curve
Substitution Effects Increase Price level
→
→
decrease purchasing power
increase OPC
→
→
Net Profits = Total Revenue – Total Cost
Indifference Indifference Curve Shows the maximum combination of two goods that you can consume that gives the same satisfaction.
P = price Q = quantity FC = Fixed Costs VC = variable variable costs MC = marginal cost (additiona l cost from producing one unit of output) TC = Total costs AFC = avg FC AVC = avg VC ATC = avg TC
→
Demand = MR TR = Total Revenue MR = ∆TR / ∆Q
Increase price level decrease Qd
→
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