Unit 1 - Supply & Demand

Elasticity of Demand

• the measure of how consumers react to a change in price
• Inelastic Demand
• demand will not Δ or will Δ very little regardless of price
• "needs"
• few to no substitutes
• ex: water, milk, soap, insulin, gas
• E < 1
• Elastic Demand
• demand will Δ greatly if there is a Δ in price
• "wants"
• there are substitutes
• ex: soda, steak, fur coat
• E > 1
• Unitary Elastic
• E = 1
• "perfect economy"

Calculating Demand

• Step 1: Quantity
• (new − old) / old
• Step 2: Price
• (new − old) / old
• Step 3: PED (price elasticity of demand)
• (% Δ in quantity) / (% Δ in price)

Supply

• Total revenue - P x Q
• Fixed Cost - cost that doesn't change no matter how much of a good is being produced
• ex: insurance, salary
• Variable Cost - a cost that rises or falls depending upon how much is produced
• ex: electricity
• Marginal Cost - the cost of producing one more unit of good
• Revenue - income
• Cost - spendings

Equations

• Q - Quantity
• TFC - Total Fixed Cost
• TVC - Total Variable Cost
• TC - Total Cost
• MC - Marginal Cost
• AFC - Average Fixed Cost
• AVC - Average Variable Cost
• ATC - Average Total Cost

• AFC x Q = TFC
• AVC x Q = TVC
• ATC x Q = TC
• TFC + TVC = TC
• AFC + AVC = ATC
• TFC / Q = AFC
• TVC / Q = AVC
• TC / Q = ATC
• new TC - old TC = MC
• (Δ TC) / (Δ Q) = MC

Supply & Demand

• Price Ceiling - the legal maximum price meant to help buyers
• ex: rent control
• consequences when price ceilings are set too low:
• lower prices for some consumers
• shortages
• long lines for some buyers
• illegal sales above the equilibrium price

• Price Floor - the legal minimum price meant to help sellers
• to keep the product price from falling
• ex: minimum wage
• consequences:
• higher product prices
• surplus
• higher taxes
• waste