Economics notes

Quantity of Factors of production are fixed in the SR, except labour

DEMAND
Quantity demanded changed when there is a change in price!

PED has no sign

The symbol represents the price elasticity of demand. The symbol Q 0represents
the initial quantity demanded that exists when the price equals P 0. The symbol
Q1 represents the new quantity demanded that exists when the price changes to P 1.
In this formula, the price elasticity of demand will always be a negative number
because of the inverse relationship between price and quantity demanded. As price
went up, quantity demanded went down, or vice versa. When price goes down,
quantity demanded goes up. Price and quantity demanded always move in opposite
directions, hence the price elasticity of demand is always negative. Since always
negative, we can ignore the sign.
Income elasticity of demand has both positive and negative signs.. if its postitive,
it is a normal good/lixury good if its negative. It is an inferior good
For income elasticity that is < 1, it is income inelastic.
For income elasticity that is > 1 , it is income elastic
The definition of a normal good is a good for which demand rises when income rises and falls when
income falls. So when the elasticity is above 0, it Is a normal good!!! Below, it is an inferior
goods..normal good as in necessity or luxury(>1)
An inferior good is sort of the opposite, it is a good for which demand falls when income rises and
demand rises when income falls.
Both goods are elastic by definition. All goods have some degree of income elasticity. The key word is
degree and negativity or positivity of elasticity.
An inferior good will have a negative income elasticity, a normal good will have a positive income
elasticity.

If income elasticity is positive but less than 1, it is considered a "necessity good" if income elasticity is
positive and greater than 1 it is considered a "luxury" or "superior good".

Cross elasticity of demand is calculated as the percentage change in the quantity

demanded divided by the percentage change in the price of a substitute or
complement.. when the price of a substitute rises, the percentage change in the
quantity demanded increase, so the cross elasticity of demand is positive.
Cross elasticity for substitutes are positive
Cross elasticity for complements are negative
Elasticity is greater than 1 if there are close substitutes for a product
Always the quantity demanded divide by the price

For elasticity of supply, when they ask for the elsaticuty of supply when the
average is X, take the quantity and price of W and Y. the one before and after X
to calculate.
Different cost curves

MC goes down then goes up ( law of diminishing marginal returns)

AFC (average fixed cost) will decrease with the increased quantity of output
produced.
AVC will decrease initially but will increase after awhile, and get closer to ATC as
it goes up. But not touching the ATC.
ATC = AFC + AVC
At the point when ATC is left of MC, where MC is below average, the ATC will be
going down, but on the right of MC, where MC is above average, it pulls the ATC
up.
SO MC passes through the lowest point of ATC
And passes through the lowest point of AVC

The output at which avergage product is a maximum is the same output at which
avc is a minimum
*** total fixed cost changes does not affect marginal cost***
Total revenue= price X quantity
Total cost = cost X quantity
The Long Run Average Cost, LRAC, curve of a firm shows the minimum or lowest
average total cost at which a firm can produce any given level of output in the long
run http://www.whitenova.com/thinkEconomics/lrac.html
The smallest quantity of output at which LRAC is at a minimum is a firms MEs
IMPTTTT -- https://mindmap.nus.edu.sg/view.htm?
m=bcf75c555a9e40969cd9d6c56b729645

TR TC = economic profit which includes opp cost

To maximise profits, firms will produce at this point where marginal cost (MC) =
marginal revenue (MR)

To increase output in the short run, a firm must increase the quantity of a
variable factor of production
In the long run, to increase output, a firm can choose to change its plant as well
as the quantity of labour it hires
The output at which average product is manimum is the same output at
which AVC is a minimum (go google why)
The u shape of the average total cost curve arises because of spreading total
fixed cost over a larger output and eventually diminishing returns.

A firms minimum efficient scale is the smallest quantity of output at which long
run average cost reaches its lowest level

Marginal cost is the cost involved in producing an additional unit of output! So if

increase by 2 output is 16, the marginal cost have to divide by 2.. to get the
marginal of 1!!
Perfect competition
-

Lots of buyers and sellers

No barriers to entry
Perfect knowledge about price and all
Products are homogeneous
No advantage in production

Price taker

** changes in individual demand/supply has no effect/impact on market

demand/supply
Price is fixed
Total cost is the opportunity cost in production.
Any point producing below the AVC (average variable point) where mc=mr, the
firm will shut down, there will be too huge a loss economically for the firm to
continue, not able to operate. The lowest lowest point will be producing
whereby it is covering average variable cost, where daily expenses cost are
covered.

1.

1.

A sunk cost is money that has already been spent and cannot be
recovered. Sunk costs are also called retrospective costs. Logic dictates that
because sunk costs will not change -- no matter what actions are taken -- they
should not play a role in decision-making.
2. A sunk cost is money that has already been spent and cannot be
recovered. Sunk costs are also called retrospective costs. Logic dictates that
because sunk costs will not change -- no matter what actions are taken -they should not play a role in decision-making.

A sunk cost is money that has already been spent and cannot be
recovered. Sunk costs are also called retrospective costs. Logic dictates that
because sunk costs will not change -- no matter what actions are taken -- they
should not play a role in decision-making.
1.
A sunk cost is money that has already been spent and cannot be
recovered. Sunk costs are also called retrospective costs. Logic dictates that
because sunk costs will not change -- no matter what actions are taken -- they
should not play a role in decision-making.

Total fixed cost includes normal profits google!

Constant returns to scale!

so marginal revenue = price in perfecect com

perfect com arises if the MES of a single producer is amall relative to the demand
for t good or services
MARGINAL REVENUE = PRICEE

 The demand curve for an individual firm is different from a market demand curve. The
market demand curve slopes downward, while the firm's demand curve is a horizontal
line.

The firm's horizontal demand curve indicates a price elasticity of demand that is
perfectly elastic.

Its the firm that is horizontal! Not the market demand hat is hotrizontal.

WHY IS SHORT RUN MARKET SS CURVE IS HORIZJONTAL AT THE SHUTDWON PRICE?

REMEMBER THAT MARGINAL REEVENUE IS THE PRICE PF AN EXTRA REVENUE! ONE!!!!!.

SO FOR PERFECT COMPETIOTION, THE MARGINAL REVENUE IS EWUAL TO THE PRICE!!!!!!

A FIRMS SUPPLY CURVE IS THE SAME AS THE MARGINAL COST CURVE AT ALL POINTS
ABOVE MINIMUM AVERAGE VARIABLE COST

Effocoemcy

Pure free market no government intervention

Consumer surplus the area below dd curve, and above the price ( the extrat hey
saved)s

-Value is the maximum price that a person is willing to pay

-Willingness to pay determines Demand

When efficient quantity is produced, buyers and sellers acting in their self interest
PROMOTE SOCIAL INTEREST

Sources of inefficiency:
-

Price and quantity regulations

Monopoly

Public goods and common resources

High transaction costs

Externalities

Taxes and Subsidies

The competitive market pushes the quantity produced to its efficient

level

Monopoly

Total revenue is maximise when MR=0. At the point when demand is unit elastic.
This is the point where the rise in revenue from the greater quantity sold equals
the fall in revenue from the lower price per unit, and MR= 0. (zero marginal
revenue)

IN monopoly, the demand is always elastic, they never produces an output at which
demand is inelastic.

Monopoly sets its price at the highest level at which it can sell the profit-maximising
quantitiy whereby MC= MR.