Shifts in Demand
Consumer preferences
Number of coneumers
Consumer income
Price of related goods
Consumer expectations
Shifts in Supply
Input Costs
Technology
Taxes/Subsidies
Price expectations
Number of Sellers
Price Elasticity
The responsiveness or sensitivity of consumers or producers to a change in price.
If there is high responsiveness to change then….
the product is very elastic
if there is no responsiveness….
then the product is inelastic
Elastic
Price impacts quantity demand greatly; Total Revenue increases, Prices decrease and vice versa
Inelastic
Price minimally affects quantity demanded; Total revenue increases, Prices increase and vice versa
Perfectly inelastic
When price does not change a consumer’s response (very rare). ED will be equal to zero.
Perfectly elastic
When the smallest change in price completely affects consumers
Determinants of Price Elasticity of Demand
Substitutability, Proportion of Income, Luxuries vs. Necessities, Time
Substitutability
The more substitutes, the higher elasticity
Luxuries vs Necessities
The more luxury of a good, the more elastic it is
Time
Demand is more elastic over time
Elasticity Formula
% Change in Q / % Change in P
If the number is greater than 1 it is…
Elastic
If the number is less than 1 it is…
Inelastic
If the number is 0 it is…
Perfectly inelastic
If the number is infinity it is…
Perfectly elastic
Total Revenue
The total amount the seller receives from the sale of a product in a particular time period. Using this we can find the elasticity of quantity demanded
Total Revenue Formula
Price x Quantity
Explicit Opportunity Costs
Ones that require you to spend money
Implicit Opportunity Costs
Ones that people/businesses need to give in order to use a resource
Total benefits
The amount of satisfaction people receive from the goods and services they use.
Total costs
The time, effort required to obtain the goods and services
Total net benefits
Are the difference between total benefits and costs
Marginal Benefit Formula
Change in total benefits / Change in output
Marginal Cost formula
Change in total cost / Change in output
Benefit Maximizing rule formula
MB > MC Increase output
MB = MC Optimal level of output
MB < MC Reduce output
Consumer choice theory
Consumers are rational
Consumers are never 100% satisfied
Consumer satisfaction decreases with each unit of consumption (diminishing marginal utility)
Marginal utility
refers to the additional amount of usefulness that someone gets from one extra unit of good/service
Total Benefit =
Marginal Benefit
Total Cost
Marginal cost
When optimal quantity exists, it is when
MB = MC
Sunk Costs
Past spendings on that good or service
Utility Maximization Formula
MU of product A / price of A = MU of product B / Price of product B
Cross elasticity of Demand Formula
Percentage change in quantity demanded of product / percentage change in price of product Y
Cross elasticity of demand deals with…
substitutes and complementary goods
If cross elasticity value is positive, then…
X and Y are substitute goods
If cross elasticity value is negative, then…
X and Y are complementary goods
Independent goods
not affected by cross elasticity
Income Elasticity of Demand Formula
Percentage change in quantity demanded / percentage change in income