Ryacanal / 1 SOCIAL SCIENCE 4 (ECONOMICS) QUARTER 2 PERIO REVIEWER ELASTICITY Measures responsiveness of quantity demand / supply to changes in a certain factor elasticity!= slope a line only has one slope, but different elasticities.
Ryacanal / 1 SOCIAL SCIENCE 4 (ECONOMICS) QUARTER 2 PERIO REVIEWER ELASTICITY Measures responsiveness of quantity demand / supply to changes in a certain factor elasticity!= slope a line only has one slope, but different elasticities.
Ryacanal / 1 SOCIAL SCIENCE 4 (ECONOMICS) QUARTER 2 PERIO REVIEWER ELASTICITY Measures responsiveness of quantity demand / supply to changes in a certain factor elasticity!= slope a line only has one slope, but different elasticities.
ELASTICITY Measures responsiveness of quantity demand/supply to changes in a certain factor elasticity != slope a line only has one slope, but different elasticities
Measures of elasticity elastic very responsive to change Elasticity > 1 inelastic not very responsive Elasticity < 1 unit elastic responsive Elasticity = 1 perfectly elastic slope perfectly inelastic 0 slope Price Elasticity of Demand ONLY ELASTICITY WITH ABSOLUTE VALUE Why? Because demand is downward sloping, so it will ALWAYS be negative % Qd x
%P x
Qd x x P x
P x Qd x
Income Elasticity % D x
%I x
D x x I x
I x D x
ryacanal/2 Price Elasticity of Supply % Qs x
%P x
Qs x x P x
P x Qs x
Cross Product Elasticity % D x
%P y
D x x P y
P y D x
If good are complement goods Cross Price Elasticity < 0 substitute goods Cross Price Elasticity > 0 independent goods Cross Price Elasticity = 0 Determinants of Elasticity presence of substitute goods necessity versus luxury time frame % of your income if the good has a (unique) value to you Tax Incidence inelastic good consumer has more tax burden elastic good producer has more tax burden government tax revenue relatively elastic demand - less government tax revenue relatively inelastic demand - more government tax revenue surplus producer equilibrium price - price producer is willing to sell for consumer price consumers are willing to pay - price actually paid ryacanal/3
CONSUMER THEORY Utility Family Utility satisfaction from a good/ service measured in utils Marginal Utility extra utility (because of consumption of more units) MU x = TU xn - TU xn-1
MU x = TU x
Q x
Total Utility MU x
Can TU go down? Yes. When? When MU is negative. TUx n =/= n(MU x ) Why? Because of LDMU Why does LDMU happen? Ceteris Paribus If its not ceteris paribus, LDMU does not happen Consumer Equilibrium MU x = MU y
P x P y
Assumptions Given Market Baskets A,B both containing goods x & y Consumers can determine preference A>B or B>A (preference) A = B (indifference) Consumer preference is transitive ryacanal/4 if A>B and B>C, then A>C if A=B and B=C, then A=C Consumers prefer more to less Consumers are rational Indifference Curve TU A = TU B
Characteristics IC is negatively sloped TU remains constant when its negatively sloped higher IC, higher TU IC s cannot intersect Because it would imply all the points on both curves are equal ICs are convex to the origin Because of LDMU Budget Line Combinations of goods X & Y where income is constant Equilibrium point Point of tangency between the Budget Line and Indifference Curve m ic = m bl
m ic = marginal rate of substitution of goods x & y equation for m ic = MU y
MU x
m bl = P ratio of x & y equation for m bl = P y
P x
but since m ic = m bl , we can combine it to get MU x = MU y
P x P y
PRODUCER THEORY Producer Family Total Product MP L
Marginal Product MP Ln = TP L(n)
- TP L(n-1)
MP L = TP L
ryacanal/5 Q Average Product TP Ln
L n
TP Ln =/= n(MPL 1 ) Because of LDMR Which is caused by ceteris paribus Returns to Scale Effect of proportional change in all inputs to total product Decreasing RtS 1% Increase in Input < 1% Increase in Total Product Constant RtS 1% Increase in Input 1% Increase in Total Product Increasing RtS 1% Increase in Input > 1% Increase in Total Product Time Frame based on what inputs you can change Momentary Run - change none Short Run - change some Long Run - change all Producer Equilibrium MP k = MP l
P k P l
Isoquant Equal quantity Parallel concept to Indifference Curve Isocost Equal cost Parallel concept to Budget Line Cost Minimization m iq = m ic
m iq = Marginal Rate of Technical Substitution equation for m iq = MP k
MP l
m ic = Price ratio equation for m ic = P k
P l
combine the two to get MP k = MP l
P k P l
ryacanal/6
Cost Family Total cost least amount of cost paid by producer to produce a certain number of output Fixed cost cost even without output Example: taxi Realistic fixed cost graph
Why? Because you reach capacity sooner or later.
Variable cost cost with output Marginal cost additional cost for every extra good produced MC x(n) = TC x(n) - TC x(n-1)
MC x = TC x
Q x
Why is the graph of Marginal Cost shaped like that? Because of LDMR - after LDMR strikes, it will cost more to produce the same amount Average Cost Total Cost/ quantity Why does the graph of AC and MC meet at the lowest point of the AC graph? ryacanal/7 Because if MC was lower than AC, it would pull it down, and if MC was higher than AC, it would pull it up Think of it in terms of GWA - if your tentative GWA is 1.50 (AC), and you get a 1.25 (MC), it will pull your average. But if you get a 2.00, it will pull your average down. So, MC is the one that pulls, AC is the one that gets pulled Average Variable Cost Variable Cost/ quantity Average Fixed Cost Fixed Cost/ quantity
//Firm Equilibrium not part of the perio //pictures not mine