Economic Equations

Opportunity cost

Amount given up ÷ amount gained

Opportunity cost of one phone if a country can make 100 shirts or 50 phones

100 ÷ 50 = 2 shirts per phone

Comparative advantage rule

Goes to whoever has the LOWER opportunity cost, not the one who produces more

Absolute advantage vs. comparative advantage

Absolute = produce more with the same resources. Comparative = lower opportunity cost. Specialization should follow comparative advantage

Price elasticity of demand (PED) formula

% change in quantity demanded ÷ % change in price

Cost price elasticity of demand (CED) formula

% change in quantity demanded of good A ÷ % change in price of good B

Midpoint method for % change

(New − Old) ÷ average of New and Old, applied to both price and quantity

PED > 1 means

Demand is elastic (quantity responds more than price)

PED < 1 means

Demand is inelastic (quantity responds less than price)

PED = 1 means

Demand is unit elastic

Total revenue formula

TR = P × Q

Demand is elastic and price rises: effect on total revenue

Total revenue falls

Demand is inelastic and price rises: effect on total revenue

Total revenue rises

Unit elastic demand and a price change: effect on total revenue

Total revenue stays the same

Marginal utility (MU) formula

Change in total utility ÷ change in quantity (the added satisfaction from one more unit)

Consumer surplus formula

Price they were willing to pay − actual price paid

Marginal utility per dollar

MU ÷ P

Rational spending rule

Utility is maximized when MU(A) ÷ P(A) = MU(B) ÷ P(B)

If MU(A)/P(A) > MU(B)/P(B), the consumer should

Buy more of A and less of B

Total cost formula

TC = FC + VC

Marginal cost formula

MC = change in total cost ÷ change in quantity

Average fixed cost formula

AFC = FC ÷ Q

Average variable cost formula

AVC = VC ÷ Q

Average total cost formula

ATC = TC ÷ Q = AFC + AVC

If MC is below ATC, ATC is

Falling

If MC is above ATC, ATC is

Rising

Where the MC curve crosses the ATC curve

At the minimum point of ATC

Marginal revenue for a price-taking firm

MR = P

Profit-maximizing output rule for a perfectly competitive firm

Produce where P = MC

Profit formula for a competitive firm

Profit = (P − ATC) × Q, which equals TR − TC

Short-run shutdown rule

Shut down if P < AVC (keep producing if P ≥ AVC, even with a loss)

Break-even price

The minimum point of ATC (P = ATC, profit = 0)

Competitive firm's short-run supply curve

The MC curve above the minimum of AV

What curve is TIPEN used for?

Demand

What curve is TINER used for?

Supply

What does TIPEN stand for?

Tastes, income, price of related goods, expectations of future prices, number of buyers, price of related goods

What does TINER stand for?

Technology, inputs, number of sellers, expectations,

Formula for percent change in quantity demanded

[(Q1-Q2)/Q1] x 100

Formula for percent change in price

[(P1-P2)/Q1] x 100

What makes demand more elastic? SLAMB

Substitutes, luxury good, adjustment period, market, budget

Why is the ATC curve U-shaped?

Spreading effect and diminishing returns