What happens when demand is elastic? (elasticity coefficient is > 1)
% change in quantity is greater than the % change in price. For a given price decline, there will be a greater than proportional increase in quantity
Elasticity of demand equation
% change in quantity demanded / % change in price
Elasticity of supply equation
% change in quantity supplied / % change in price
When is demand inelastic (elasticity coefficient is < 1)?
quantity % change is less than the % change in price
When is demand unitary ( elasticity coefficient = 1)?
quantity % change is the same as the % change in price
Utility Theory
measurement of satisfaction (or utility) derived from the acquisition of a good or service
Total Utility (TU)
- increases with quantity acquired
- total utility is maximized where the last dollar spent on every commodity acquired gives the same marginal utility (MU)
Marginal Utility (MU)
- utility acquired from the last derived unit
- decreases with quantity acquired (Law of Diminishing Marginal Utility)
What happens to marginal utility when total utility is maximized?
- the marginal utility of the last dollar spent on each and every item acquired must be the same
Short-run analysis
period during which at least one input to the production process can’t be varied
Long-run analysis
period during which all inputs to the production process can be varied
Average fixed cost (AFC)
- per unit fixed cost
- total fixed cost / units produced
Average variable cost (AVC)
- per unit variable cost
- total variable cost / units produced
Law of Diminishing Returns
- in a system with both fixed and variable cost inputs, adding more variable inputs will eventually result in less and less (diminishing) output per unit of input
- variable inputs overwhelm fixed factors
Average total cost (ATC)
Average fixed cost (AFC) + Average variable cost (AVC)
Marginal cost
- cost of last acquired unit of input
- computed as the change in successive variable costs or change in successive total costs
Market structure
economic environment within which a firm produces and distributes its good/service
What are the primary factors that distinguish different market structures?
- number of sellers and buyers in the market
- nature of the commodity in the market
- difficulty of entry into the market
What are the main four market structures?
- perfect competition
- perfect monopoly
- monopolistic competition
- oligopoly
What are the characteristics of a perfectly competitive market or industry?
- large # of independent buyers and sellers, each too small to affect price
- sell a homogeneous product
- market entry and exit are easy
- buyers & sellers have complete information
(virtually non-existent in modern society)
marginal revenue
revenue derived from the last unit sold
Where should a firm produce in a perfectly competitive market?
where marginal cost = marginal revenue
Will a firm always make a profit in the short-run in perfect competition?
no, it depends on the firm’s average total cost (ATC) / average variable cost (AVC) vs. market price
What happens in the long-run under perfect competition?
- no profit, breakeven
- MR = MC = long-run average cost (LAC)
