Quantitative Demand Analysis and Production Costs

Elasticity Formula

%ΔG/%ΔS. Greater than 1 is highly responsive, smaller than is slightly 1 responsive.

Own Price Elasticity of Demand

Epx= %ΔQx/%ΔPx.

elasticity = 1

unitary

elasticity < 1

inelastic (not responsive)

Elasticity > 1

price is elastic

Cross Price Elasticity of Demand

Exy=%ΔQx/%ΔPy.

Income Elasticity of Demand

Em=%ΔQx/%ΔM.

Total Revenue (TR)

P×Q.

Advertising Elasticity

Ea= %ΔQx/%ΔAx.

Cross-Advertising Elasticity

Eaxy= %ΔQx/%ΔAy.

Production Function

Q=F(K,L).

Average Product of Labor (APL)

Q/L.

Average Product of Capital (APK)

Q/K.

Marginal Product of Labor (MPL)

ΔQ/ΔL or dQ/dL.

How to solve marginal product and capital questions

you just take the derivative in respect to k (capital) or L labor)

Marginal Product of Capital (MPK)

ΔQ/ΔK or dq/dK, respect to capital

Value of Marginal Product (VMPL)

MPL×P.

Marginal Rate of Technical Substitution (MRTS)

MPL/MPK.

Isocost Line

C=wL+rK or K= c/r - w/rL.

Cost-Minimizing Input Rule

mpl/mpk = w/r. Slope of iq= slope of ic best output.

Total Cost (TC)

FC+VC(Q).

Marginal Cost (MC)

ΔTC/ΔQ.

Average Fixed Cost (AFC)

FC/Q.

Average Variable Cost (AVC)

VC/Q.

Average Total Cost (ATC)

TC/Q.

Cost Function

Mathematical relationship that relates cost to the cost minimizing output associated with an isoquant.

For graph problems: - What is your total cost

o Atc=Tc/Q then plug in what you

For graph problems: What is your average fixed costs:

Atc = AFC+AVC plug in what you know

For graph problems. What is total fixed cost:

afc=tfc/q then plug in what you know

If wage goes up what will happen to the the isocost line

shift(rotate) inwards

Suppose capital, K, is on the vertical axis and labor, L, is on the horizontal axis in a graph. Which of the following would be true if the price of labor, w, increased?

The isocost line rotates clockwise