ryacanal/1

SOCIAL SCIENCE 4 (ECONOMICS) QUARTER 2

PERIO REVIEWER

ELASTICITY
Measures responsiveness of quantity demand/supply to changes in a certain factor
elasticity != slope
a line only has one slope, but different elasticities

Measures of elasticity
elastic
very responsive to change
Elasticity > 1
inelastic
not very responsive
Elasticity < 1
unit elastic
responsive
Elasticity = 1
perfectly elastic
slope
perfectly inelastic
0 slope
Price Elasticity of Demand
ONLY ELASTICITY WITH ABSOLUTE VALUE
Why? Because demand is downward sloping, so it will ALWAYS be
negative
% Qd
x

%P
x

Qd
x
x P
x

P
x
Qd
x

Income Elasticity
% D
x

%I
x

D
x
x I
x

I
x
D
x

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Price Elasticity of Supply
% Qs
x

%P
x

Qs
x
x P
x

P
x
Qs
x

Cross Product Elasticity
% D
x

%P
y

D
x
x P
y

P
y
D
x

If good are
complement goods
Cross Price Elasticity < 0
substitute goods
Cross Price Elasticity > 0
independent goods
Cross Price Elasticity = 0
Determinants of Elasticity
presence of substitute goods
necessity versus luxury
time frame
% of your income
if the good has a (unique) value to you
Tax Incidence
inelastic good
consumer has more tax burden
elastic good
producer has more tax burden
government tax revenue
relatively elastic demand - less government tax revenue
relatively inelastic demand - more government tax revenue
surplus
producer
equilibrium price - price producer is willing to sell for
consumer
price consumers are willing to pay - price actually paid
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CONSUMER THEORY
Utility Family
Utility
satisfaction from a good/ service
measured in utils
Marginal Utility
extra utility (because of consumption of more units)
MU
x
= TU
xn
- TU
xn-1

MU
x
= TU
x

Q
x

Total Utility
MU
x

Can TU go down?
Yes. When? When MU is negative.
TUx
n
=/= n(MU
x
)
Why? Because of LDMU
Why does LDMU happen? Ceteris Paribus
If its not ceteris paribus, LDMU does not happen
Consumer Equilibrium
MU
x
= MU
y

P
x
P
y

Assumptions
Given Market Baskets A,B both containing goods x & y
Consumers can determine preference
A>B or B>A (preference)
A = B (indifference)
Consumer preference is transitive
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if A>B and B>C, then A>C
if A=B and B=C, then A=C
Consumers prefer more to less
Consumers are rational
Indifference Curve
TU
A
= TU
B

Characteristics
IC is negatively sloped
TU remains constant when its negatively sloped
higher IC, higher TU
IC
s
cannot intersect
Because it would imply all the points on both curves are equal
ICs are convex to the origin
Because of LDMU
Budget Line
Combinations of goods X & Y where income is constant
Equilibrium point
Point of tangency between the Budget Line and Indifference Curve
m
ic
= m
bl

m
ic
= marginal rate of substitution of goods x & y
equation for m
ic
= MU
y

MU
x

m
bl
= P ratio of x & y
equation for m
bl
= P
y

P
x

but since m
ic
= m
bl
, we can combine it to get
MU
x
= MU
y

P
x
P
y


PRODUCER THEORY
Producer Family
Total Product
MP
L

Marginal Product
MP
Ln
= TP
L(n)

- TP
L(n-1)

MP
L
= TP
L

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Q
Average Product
TP
Ln

L
n

TP
Ln
=/= n(MPL
1
)
Because of LDMR
Which is caused by ceteris paribus
Returns to Scale
Effect of proportional change in all inputs to total product
Decreasing RtS
1% Increase in Input < 1% Increase in Total Product
Constant RtS
1% Increase in Input 1% Increase in Total Product
Increasing RtS
1% Increase in Input > 1% Increase in Total Product
Time Frame
based on what inputs you can change
Momentary Run - change none
Short Run - change some
Long Run - change all
Producer Equilibrium
MP
k
= MP
l

P
k
P
l

Isoquant
Equal quantity
Parallel concept to Indifference Curve
Isocost
Equal cost
Parallel concept to Budget Line
Cost Minimization
m
iq
= m
ic

m
iq
= Marginal Rate of Technical Substitution
equation for m
iq
= MP
k

MP
l

m
ic
= Price ratio
equation for m
ic
= P
k

P
l

combine the two to get
MP
k
= MP
l

P
k
P
l


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Cost Family
Total cost
least amount of cost paid by producer to produce a certain number of output
Fixed cost
cost even without output
Example: taxi
Realistic fixed cost graph

Why? Because you reach capacity sooner or later.

Variable cost
cost with output
Marginal cost
additional cost for every extra good produced
MC
x(n)
= TC
x(n)
- TC
x(n-1)

MC
x
= TC
x

Q
x

Why is the graph of Marginal Cost shaped like that?
Because of LDMR - after LDMR strikes, it will cost more to produce the
same amount
Average Cost
Total Cost/ quantity
Why does the graph of AC and MC meet at the lowest point of the AC graph?
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Because if MC was lower than AC, it would pull it down, and if MC was
higher than AC, it would pull it up
Think of it in terms of GWA - if your tentative GWA is 1.50 (AC), and you
get a 1.25 (MC), it will pull your average. But if you get a 2.00, it will pull
your average down.
So, MC is the one that pulls, AC is the one that gets pulled
Average Variable Cost
Variable Cost/ quantity
Average Fixed Cost
Fixed Cost/ quantity




//Firm Equilibrium not part of the perio
//pictures not mine