Calculating Elasticity

If price drops from $30 to $29, Quantiy increases from 20 to 22


Ed = %▲QTY / %▲Price = Q2-Q1

(Q2+Q1)/2

P2-P1

(P2+P1)/2

Sensitive to price changes

  • your demand is inelastic when you do not haggle over price

Elasticity and Total Revenue (TR)

(TR = P*Q)

  • elasticity on curve starts at -♾, and ends at 0

Total Revenue Test

  • For Elastic goods —> decrease in price —> Increase in TR

  • For Inelastic goods —> Increase in price —> Increase in TR

own price elasticity of demand Ed = %▲QTY / %▲Price

Fixed Cost (FC)

Variable Cost (VC) = Labor cost x #of workers (L)

Total Cost (TC) = VC+FC

Marginal Cost (MC) = change in TC/Change in Quantity

Average variable cost (AVC) = VC/Q

Average Total Cost (ATC) = TC/Q

Profit Max —> MR=MC

TR = P*Q

TC = ATC*Q

VC = AVC*Q

Perfect Competition

  • Many small firms

  • identical products (corn, wheat, oil)

  • Easy entry/exit

  • price taker

Monopolistic Competition

  • few firms

  • similar products but differentiated

    • fast food

    • cell phones

    • gas stations

  • Easy Entry/Exit

  • Price maker

Monopoly

  • one firm

  • unique product

  • barriers to entry

  • price maker