unit2notes

Page 1: Revenue and Cost Dynamics

• Revenue:

  • Revenue per unit = Price

  • Total revenue = Revenue per unit x Quantity sold

  • Analyze profit/loss by comparing total revenue to total cost.

• Points of Diminishing Returns:

  • Occurs when the marginal cost is at its lowest.

  • Producers aim to maximize profits, at point MC = MR.

  • Can change point of diminishing returns by altering additional production factors (e.g., workers, facilities).

Page 2: Understanding Cost/Revenue

• Cost: The expenditure necessary to produce a good/service.

• Revenue: The income generated from production.

• Cost Types:

  • Fixed Costs: Do not vary with output (e.g., rent, insurance).

  • Variable Costs: Change with output (e.g., labor, materials).

• Total Cost = Fixed Costs + Variable Costs.

• Marginal Cost: The cost of producing one additional unit.

• Law of Diminishing Returns: As factors of production increase, output increases at a decreasing rate.

Page 3: Elasticity

• Elasticity: Measures responsiveness of quantity to price changes.

  • Elastic Demand: Significant changes in quantity with price changes.

  • Inelastic Demand: Minimal changes in quantity with price changes.

• Curve Orientation:

  • More horizontal = more elastic.

  • More vertical = more inelastic.

• Elasticity Formula:

  • Elasticity = % Change in Quantity / % Change in Price

Page 4: Elasticity Examples

• Elastic Product Example: Bottled water - many substitutes available, leading to sensitivity to price changes.

• Inelastic Product Example: Cigarettes - demand remains stable despite price changes due to addiction.

• Law of Diminishing Returns: As more of a factor is added, the additional output produced falls.

Page 5: Understanding Elasticity Further

• Visual Analogy:

  • Elasticity: A rubber band that stretches with price changes (responsive).

  • Inelasticity: A metal rod that does not alter with price changes (unresponsive).

Page 6: Market Equilibrium

• Equilibrium: Price where quantity supplied equals quantity demanded.

  • Surplus: Supply exceeds demand, leading to price decreases.

  • Shortage: Demand exceeds supply, leading to price increases.

• Price Ceiling: Maximum selling price set by government, can lead to shortages.

  • Example: NYC apartments.

• Price Floor: Minimum selling price set by government, can lead to surpluses.

  • Example: Minimum wage.

Page 7: Shifts in Supply and Demand

• Supply shifts right with increased supply, left with decreased supply.

• Determinants of Demand: 1) Price of substitutes 2) Number of consumers 3) Consumer income 4) Price of complements 5) Consumer preference 6) Expected future prices.

• Determinants of Supply: 1) Changes in resource prices 2) Number of suppliers 3) Technology improvements 4) Political factors.

Page 8: Supply and Demand Principles

• Law of Demand: Inverse relationship between price and quantity demanded.

• Law of Supply: Direct relationship between price and quantity supplied.

  • As price rises, quantity supplied increases and vice versa.

• Ceteris Paribus: Assumes all other factors remain constant when examining effect of price on supply/demand.

Page 9: Diminished Utility

• Utility measures personal value derived from goods.

• Law of Diminishing Marginal Utility: Each additional unit consumed provides less satisfaction.

Page 10: Demand Measurement

• Demand and Price Relationship:

  • Price increases lead to reduced quantity demanded

  • Price decreases lead to increased quantity demanded.

• Example Demand Schedule:

  • .50 -> 28 units, 1.00 -> 26 units, 1.50 -> 16 units, etc.