Mam econ 3-4

Elasticity Concept

A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

Own Price Elasticity of Demand

-A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the

good.

Elastic Demand

The absolute value of the own price elasticity is greater than 1

Inelastic demand

The absolute value of the own price elasticity is less than 1.

Unitary Elastic Demand

the absolute value of the own price elasticity is equal to 1.

Perfect elastic demand

when the absolute value is infinite (OED = ∞). At higher prices, the quantity demanded decreases to zero.

Perfect inelastic demand

when the absolute value is zero(OED = 0) when price changes do not affect the quantity demanded.

Availability of close subtitute

When there are many close substitutes, demand is highly elastic, and when substitutes are limited, demand is highly inelastic.

Portion of income spent on the good

The larger the proportion of income spent on a good, the more highly elastic is an individual’s demand for that good

Time period since the time charge

The elasticity of demand tends to be greater in the long-run than in the short-run, as consumers can take time to adjust their consumption habits.

Necessities of the product

Necessities like bread, eggs, and milk are less price elastic than discretionary goods like restaurant meals and health supplements.

Point Elasticity

measures elasticity at a finite point of the demand curve.

Alfred Marshall

Introduce point elasticity

Point elasticity measured when

Change is infinitesimally small

Arc elasticity

measures elasticity at the central

point of an arc between a pair of

two points on the demand curve.

Hugh Dalton

Introduce Arc elasticity

Arc elasticity measured when

Change is finite (Discrete)

Cross elasticity on demand

an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. It's also referred to as cross price elasticity of demand.

Always positive

The cross elasticity of demand for substitute goods is _________ because the demand for one good increase when the price for the substitute good increases.

Always negative

The cross elasticity of demand for complementary goods _____________ . An item closely associated with that item and necessary for its consumption decreases as the price for one item increases because the demand for the main good has also dropped.

Cross price elasticity formula

Exy = % Change in Quantity Demanded of A /

% Change in Price of B

Income elasticity demand

measures the relationship between the consumer’s income and the demand for a certain good. It may be positive or negative, or even non-responsive for a certain product. The consumer’s income and a product’s demand are directly linked to each other, dissimilar to the price-demand equation.

Income of elasticity of demand formula

Income Elasticity of Demand = % Change in Demand Quantity / % Change in Income of Consumer

Type of income of elasticity demand

1. Positive income elasticity of demand

2. Negative income elasticity of demand

Positive income of demand elasticity

a commodity rises with a rise in consumer income and declines with a decline in consumer income. Commodities with ________ are normal goods.

Positive income of demand elasticity

The upward slope implies that the rise in income contributes to a rise in demand and vice versa.

3 forms of positive income of elasticity demand

1. Unitary

2. More than unitary

3. Less than unitary

Unitary

The proportionate change in the amount of a

product demanded equals the change in

consumer income in due proportion.

More than unitary

The proportionate change in the amount of a product demanded is higher than the change in consumer income in due proportion.

Less than unitary

The change in the amount of a product demanded in due proportion is less than the change in consumer income in due proportion.

Negative income of elasticity demand

It refers to a condition in which demand for a

commodity decreases with a rise in consumer

income and increases with a fall in consumer

income. Inferior goods are such commodities.

Negative income of elasticity demand

The downward slope implies that the increase in income contributes to a fall in demand, and a decrease in income causes a rise in demand.

Zero income of elasticity demand

It corresponds to the situation when there is no impact of rising household income on commodity production. Such goods are termed essential goods. For example, a high-income consumer and a low-income consumer will need salt in the same quantity.

Uses of income elasticity of demand

1. Forecasting demand

2. Investment demand

Forecasting demand

applies to the idea that the income elasticity of demand tends to predict demand for commodities in the future. If there is a substantial change in wages, the change in demand for products will also be significant. This is because when buyers become aware of a shift in income, they will change their preferences and expectations for such products

Investment demand

The idea of national income is very important to businesses as it helps them to decide which sectors they should invest their money in. In general, investors tend to invest in markets where they can predict that the demand for commodities is related to a growth in national income or where the income elasticity of demand is greater than negligible.

Cost Analysis

The bedrock on which many managerial decisions are groun

Reckoning cost

accurately is essential to determining a firm’s current level of profitability.

Profit maximizing

decisions depend on projections of costs at other (untried) levels of output.

Opportunity profit

focuses explicitly on a comparison of relative pros and cons. This is associated with choosing a particular decision is measured by the benefits forgone in the next-best alternative.

Economic profit

the difference between revenues and all economic costs (explicit and implicit), including opportunity costs.

economic profit

involves costs associated with capital and with managerial labor

Short run

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

Fixt factor of production

The inputs a

manager cannot adjust in

the short run

Variable factor of production

The inputs a

manager can adjust to

alter production.

Long run

defined as

the horizon over which

the manager can adjust all

factors of production.

Principle of Marginal Returns

As the usage of an input increases, marginal product initially increases (increasing marginal returns), then begins to decline (decreasing marginal returns), and eventually becomes negative (negative marginal returns

Law of diminishing marginal returns

theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output

Productive phase

At the starts, every units leads to the productive gains

Deminishing returns

Every additional inputs will give a slower gain in inputs

Negative returns

Every additional inputs will give u negative returns

Economies of scale

are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods

Effects of economies of scale production cost

1. It reduces the per unit fixed cost

2. It reduces the per unit variable cost

Types of economiss of scale

1. Internal economies of scale

2. External economies of scale

Internal economies of scale

This refers to economies that are unique to a firm. For instance, a firm may hold a patent over a mass production machine, which allows it to lower its average cost of production more than other firms in the

industry.

External economies of scale

These refer to economies of scale enjoyed by an entire industry.

Sources of economies of scale

1. Purchasing

2. Managerial

3. Technological

Purchasing

Firms might be able to lower average costs by buying the inputs required for the production process in bulk or from special wholesalers.

Managerial

Firms might be able to lower average costs by improving the management structure within the firm.

Technological

technological advancement might drastically change the production process

Type of Diseconomies scale

1. Technical Diseconomies scale

2. Organizational Diseconomies scale

3. External Diseconomies scale

Technical Diseconomies of scale

involve physical limits on handling and combining inputs and goods in process. These can include overcrowding and mismatches between the feasible scale or speed of different inputs and processes.

Organizational Diseconomies of scale

Organizational diseconomies of scale can happen for many reasons, but overall, they arise because of the difficulties of managing a larger workforce.

External Diseconomies of scale

External diseconomies of scale can result from constraints of economic resources or other constraints imposed on a firm or industry by the external environment within which it operates.