Elastic = flexible increase price decrease demand inelastic = inflexible increase price same demand Ed = (Q2 - Q1/Q2+Q1) * (P2+P1/P2-P1)

1) Ed = % Qd/% Price |Ed| > 1 = elastic |Ed| < 1 = inelastic |Ed| = 1 = unitary Ex A B C D E P 25 20 15 10 5 Qd 5 10 15 20 25 TR 125 200 225 200 125 3 7/5 5/7 1/3 |Ed| -

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 Income Effects Real Income = Purchasing Power Increase price level decrease purchasing power decrease Qd Substitution Effects Increase Price level increase OPC decrease Qd Net Profits = Total Revenue Total Cost P = price Q = quantity FC = Fixed Costs VC = variable costs MC = marginal cost (additional cost from producing one unit of output) TC = Total costs AFC = avg FC AVC = avg VC ATC = avg TC NP = (P x Q) (FC VC) Costs Account Explicit Economics Implicit (OPC) MC = TC / Q

Perfect Competition 1) Many Sellers price takers 2) Homogenous (same product) 3) Easy to enter/exit market MR = Marginal Revenue (additional revenue for producing one unit of output) MR > MC increase output MR < MC decrease output MR = MC maximum output Demand = MR TR = Total Revenue MR = TR / Q Price > ATC == Profit > 0 Price = ATC == Profit = 0; break even Price < AVC == Shutdown ATC > Price > AVC == Profit < 0

Income Elasticity of Demand EI = Income of Ed EI = % Qd / % Income Normal Goods Income increases, Qd increases Inferior Goods Income increases, Qd decreases 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 Perfectly elastic horizontal demand curve Consumer Choice Theory Increase Price decrease Qd Decrease Price increase Qd utilities satisfaction, happiness MU = Marginal Utilities Pizza 1 2 3 4 MU 8 4 2 1 TU 8 12 14 15

Indifference Curve Shows the maximum combination of two goods that you can consume that gives the same satisfaction.

Slope of indifference curves = MRS = marginal rate of substitution. Furthest curve from origin is most ideal Production Function Qoutput = f(K, L) (capital, labor) Law of Diminishing Return Labor 0 1 2 3 4 5 Quantity 0 15 40 90 92 93 Marginal Prod. 15 25 50 2 1