Monday, January 19, 2015

Price Elasticity of Demand, Equilibrium and Production Costs

By 

I. Price elasticity describes how drastically buyers will cut back or increase their demand for a product when the price rises or falls

  1. Elastic Demand - The demand will change greatly if there is a change in price.
    • E > 1, E will be greater than 1
    • Ex. Soda (there are alternatives like water or juice), steak (you could get fish or pork instead)
  2. Inelastic Demand - The demand for a product will not change regardless of price.
    • E < 1, E will be less than 1
    • Ex. Salt, water, gas (there are no alternatives for these items)
  3. Unit Elastic - E = 1
These are the steps for determining elasticity, along with some practice problems from a website that is no doubt of notorious repute among the faculty of your learning institution: 

  1. % Δ in quantity - (new quantity - old quantity)/(old quantity) 
  2. % Δ  in price - (new price - old price)/(old price)
  3. Price Elasticity of Demand (PED) - (Δ in quantity)/(Δ in price)


II. Picking up where the Demand and Supply notes left off, here's a little bit about Equilibrium:

  • Equilibrium is the point at which the supply curve and demand curve intersect
    • This is the point where resources are being used efficiently
  • Shortage occurs when QD > QS (Quantity Demanded is greater than Quantity Supplied)
  • Surplus occurs when QS > QD (Quantity Supplied is greater than Quantity Demanded)


  • Price Floor - A government-imposed price limit on how low a price can be changed for a product
    • Ex. Minimum wage
  • Price Ceiling - A government-imposed limit on how high a price can be changed for a product.
    • Ex. Rent

III. Production Costs

  • Fixed Cost - A cost that does not change no matter how much is produced
    • Ex. Mortgage, insurance, car note
  • Variable Cost - A cost that fluctuates or changes
    • Ex. Gas, electricity, cell phone bill
  • Marginal Cost - The cost of producing one more unit of a good
    • Formula: New Total Cost (TC) - Old TC
The sample chart below outlines Production Cost, but it is missing a column for Marginal Cost (MC). Keep this in mind when using this chart as a reference. 












Formulas:
  • Total Cost (TC) - TFC + TVC
  • Average Fixed Cost (AFC) - TFC / Q
  • Average Variable Cost (AVC) - TVC / Q
  • Average Total Cost (ATC) - AFC + AVC or TC / Q

3 comments:

  1. Hanh N.January 19, 2015 at 3:04 PM

    I like how you used pictures for representation. Some of the pictures further explains the price ceiling and price floor which I did not have on my blog. You also inserted an example of the Supply Problem which helps especially with the acronyms and formulas.

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  2. Kimberly A.January 20, 2015 at 12:01 PM

    When looking through you notes, I have found many things that were really helpful with me. When I looked at your notes for Price Elasticity of Demand, Equilibrium, and Production Cost I found it very useful on how you incorporated various pictures onto your notes because I was able to understand it more. I was also able to understand the use of price ceiling and price floor more when looking at the graph you posted that I was not able to do on my blog.

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  3. Lori N.January 21, 2015 at 8:36 PM

    I like how everything was easy to understand. I did not know what price floor and price ceiling was before i looked at your blog. I was confused about it so i couldn't add it to me blog. Now that i look at your blog, i think i am set for the test. The pictures that you have in your blog are extremely helpful and i think that i will add more pictures and videos to my blog to help others understand my blog as much as yours.

    ReplyDelete