Introduction To Economics: Topic 2

Outline
Demand and Supply.

2.1. The demand.
Introduction to Economics 2.2. Defining elasticity. Elasticities of demand.
2.3. The supply.
Topic 2
 Reference: Krugman and Wells (various chapters)
Demand and Supply
GADE, GDADE, GFICO, GDFICO

Academic Year 2017-2018. Introduction to Economics
GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018. 2
Supply and Demand Model Outline

Demand and Supply.
 The supply and demand model is a model of 2.1. The demand.
how a competitive market works.
A. Demand curve
 It has five key elements: B. The difference between movements along a curve
 Demand curve and shifts of a curve
 Supply curve
2.2. Defining elasticity. Elasticities of demand.
 Demand and supply curve shifts
 Market equilibrium 2.3. The supply.
 Changes in the market equilibrium
 Reference: Krugman and Wells (various chapters)
.
Introduction to Economics Introduction to Economics
GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018. 3 GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018. 4
Demand Schedule
Demand Curve Demand Schedule for Coffee Beans
 A demand schedule Price of coffee Quantity of coffee

 A demand schedule shows how much of a good or shows how much of a
beans ($ per
pound)
beans demanded
(billions of pounds)
service consumers want to buy at any given price. good or service
2.00 7.1
 A demand curve is the graphical representation of the consumers will want to
demand schedule. buy at different 1.75 7.5
prices. 1.50 8.1
 Law of Demand: A higher price for a good, other
things equal, leads people to demand smaller quantities 1.25 8.9
of that good. 1.00 10.0
0.75 11.5
0.50 14.2
GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018. 5 GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018.
Demand Curve
No se puede mostrar la imagen en este momento.
An Increase in Demand
Price of Quantity of
coffee beans
coffee
beans demanded
(billions of
Example
($ per
pound) pounds)
 An increase in the
Price of
coffee beans 2.00 7.1 population and other factors Demand Schedules for Coffee Beans
2.00
($ per gallon)
1.75 1.75 7.5
generate an increase in Quantity of coffee
demand – a rise in the Price of coffee beans demanded
(billions of pounds)
1.50 1.50 8.1
quantity demanded at any beans
($ per pound)
1.25 1.25 8.9 given price. in 2002 in 2012
1.00 1.00 10.0  The increase in demand is $2.00 7.1 8.5
0.75 As price rises, 0.75 11.5 represented by the two demand 1.75 7.5 9.0
the quantity Demand
curve, D schedules - one showing 1.50 8.1 9.7
demanded falls
0.50 0.50 14.2 demand in 2002 (before the rise 1.25 8.9 10.7
in population), the other
1.00 10.0 12.0
0 7 9 11 13 15 17
showing demand in 2012 (after
Quantity of coffee beans
(billions of pounds) the rise in population). 0.75 11.5 13.8
0.50 14.2 17.0
A shift of the demand curve Movement along the demand curve
= a change in the quantity demanded at any given = a change in the quantity demanded of a good, resulting from
price (represented by the change of the original demand a change in that good’s price.
curve to a new position, denoted by a new demand curve). A shift of the
demand curve…
$2.00
Price of
Price of coffee
coffee beans beans (per 1.75
(per gallon) gallon)
$2.00
A C … is not the same
1.50 thing as a movement
1.75 Demand curve along the demand
in 2012 curve
1.50 1.25
B
1.25 1.00
1.00
0.75
0.75
Demand curve 0.50 D D
0.50 1 2
in 2002 D D
1 2
0 7 8.1 9.7 10 13 15 17
0 7 9 11 13 15 17
Quantity of coffee
Quantity of coffee beans beans (billions of
(billions of pounds) pounds)
Shifts of the Demand What Causes a Demand Curve to Shift?

A “decrease in
Curve demand”, means a
leftward shift of the
demand curve: at
1. Changes in the Prices of Related Goods
Price
any given price,
consumers demand A. Substitutes: Two goods are substitutes if a fall in the
Increase in a smaller quantity price of one of the goods makes consumers less willing
demand than before. to buy the other good.
(D1D3)
Ex. Coke vs. Pepsi
An “increase in
demand” means a
Decrease in
rightward shift of B. Complements: Two goods are complements if a fall
demand
the demand curve: in the price of one good makes people more willing to
D D D
at any given price, buy the other good.
3 1 2 consumers demand
a larger quantity Ex. Printers and ink cartridges, DVD players and DVDs,…
Quantity
than before.
(D1D2)
What Causes a Demand Curve to Shift?
Outline
2. Changes in Income
Demand and Supply.
A. Normal Goods: When a rise in income increases the
demand for a good – that good is a normal good. 2.1. The demand.
Ex. Travelling, going to the cinema, buying clothes, etc.
B. Inferior Goods: When a rise in income decreases the

2.2. Defining elasticity. Elasticities of demand.
demand for a good, it is an inferior good. A. Price elasticity of demand
Ex. Public transport B. Cross-price elasticity of demand
3. Changes in Tastes C. Income elasticity of demand
Ex. New fashion styles
4. Changes in Expectations 2.3. The supply
Ex. Knowledge of an upcoming sale
5. Changes in number of consumers  Reference: Krugman and Wells (various chapters).

Defining and Measuring Elasticity The Price Elasticity of Demand

 The price elasticity of demand is the ratio of the percent
change in the quantity demanded to the percent change in
the price as we move along the demand curve
%∆Q
%∆P
 Drop the minus sign - price elasticity of demand is always negative

because of the inverse relationship between price and quantity
demanded - so drop the minus sign and use absolute value.

Demand for Vaccinations
Calculating the Price Elasticity of Demand
Price of vaccination 1)
When the price rises to $21

2)
B
per barrel, world demand
$21 falls to 9.9 million barrels
per day (point B).
A
20
3)
0 9.9 10.0
Quantity of vaccinations (millions)
Types of Elasticity
Interpreting Price Elasticity of Demand Perfectly elastic demand: Demand is perfectly elastic when any
price increase will cause the quantity demanded to drop to zero.
 Demand is elastic if the price elasticity of demand is => demand curve is a horizontal line.
greater than 1
 Price Elasticity of Demand > 1 Price of pink tennis balls Perfectly Elastic Demand:
(per dozen) Price Elasticity of Demand = ∞
 Demand is inelastic if the price elasticity of demand is less
than 1 At any price above $5, At exactly $5,
consumers
 Price Elasticity of Demand < 1
quantity demanded is
zero will buy any
quantity
 Demand is unit-elastic if the price elasticity of demand is $5 D

2
exactly 1 At any price below
 Price Elasticity of Demand = 1 $5, quantity
demanded is infinite
0 Quantity of tennis balls (dozens per year)

Types of Elasticity Types of Elasticity
Demand is unit-elastic if the price elasticity of demand is exactly 1 Demand is inelastic if the price elasticity of demand is less than 1
Price of crossing
Price of crossing Inelastic Demand:
Unit-Elastic Demand: a bridge
a bridge Price Elasticity of Demand = 0.5
Price Elasticity of Demand = 1
B
B
A 20% increase $1.10
A 20% $1.10 A
A in the price . . .
increase in 0.90
0.90
the price . . .
D
1
D
2
0 900 1,100
Quantity of crossings 0 950 1,050 Quantity of crossings
(per day)
(per day)
. . . generates a 20% decrease in
. . . generates a 10% decrease in the
the quantity of crossings
quantity of crossings demanded.
Introduction to Economics demanded. Introduction to Economics
Types of Elasticity Why Does It Matter Whether Demand is

Demand is elastic if the price elasticity of demand is greater than 1
Unit-Elastic, Inelastic, or Elastic?
Price of crossing Elastic Demand:
a bridge
Price Elasticity of Demand = 2  Because this predicts how changes in the price of a good
will affect the total revenue earned by producers from the
B
$1.10
A
sale of that good.
A 20%
0.90
increase in
the price . . . D
3  The total revenue is defined as the total value of sales of a
good or service, i.e.
Total Revenue = Price × Quantity Sold
0 800 1,200
Quantity of crossings
(per day)
… generates a 40%
decrease in the quantity of
crossings demanded.
Total Revenue by Area Elasticity and Total Revenue
Price of crossing Total Revenue = Price × Quantity Sold  When a seller raises the price of a good, there are two
a bridge
effects in action (except in the rare case of a good with
perfectly elastic or perfectly inelastic demand):
 A price effect: After a price increase, each unit sold
$0.90 sells at a higher price, which tends to raise revenue.
 A quantity effect: After a price increase, fewer units
Total revenue = price x
quantity = $990 D are sold, which tends to lower revenue.
0 1,100 Quantity of crossings (per day)

Effect of a Price Increase on Total Elasticity and Total Revenue

Revenue  If demand for a good is elastic (i.e. price elasticity of
demand > 1), an increase in price reduces total revenue.
Price of crossing Price effect of price increase:  The quantity effect is stronger than the price effect.
a bridge higher price for each unit sold
Price TR
$1.10
Quantity effect of  If demand for a good is inelastic (i.e. price elasticity of
price increase:
C fewer units sold demand < 1), a higher price increases total revenue.
0.90
 The price effect is stronger than the quantity effect.
B A D Price TR
 If demand for a good is unit-elastic (i.e. price elasticity of

0 900 1,100
Quantity of crossings (per day)
demand = 1), an increase in price does not change total revenue.
 The quantity effect and price effect exactly offset each other.
Demand Schedule and Total Revenue
Price Elasticity of Demand and Total Price
$10 Elastic
Revenue 9
8
7
Unit-elastic
6 Inelastic
5 Demand Schedule and Total
4 Revenue for a Linear Demand Curve
3
2 Price Quantity Total
1 demanded Revenue
D $0 10 $0
0 1 2 3 4 5 6 7 8 9 10 1 9 9
Quantity 2 8 16
3 7 21
Total 4 6 24
revenue 5 5 25
$25 6 4 24
24 7 3 21
21 8 2 16
16 9 1 9
10 0 0
9
The price elasticity of demand
0
0 1 2 3 4 5 6 7 8 9 10
changes along the demand curve
Quantity
Demand is elastic: a Demand is inelastic: a

higher price reduces higher price increases
total revenue total revenue

What Factors Determine the Price Elasticity

of Demand? Cross-Price Elasticity
Price Elasticity of Demand is determined by: The cross-price elasticity of demand between two goods
measures the effect of the change in one good’s price on the
 Whether Close Substitutes Are Available quantity demanded of the other good.
price elasticity of demand is high if there are other goods that consumers regard
as similar (elasticity of demand is low if there are no close substitutes)
Equal to the percent change in the quantity demanded of one
 Whether the Good Is a Necessity or a Luxury good divided by the percent change in the other good’s price.
Elasticity of demand is low if the good is a necessity – high if a luxury
 Share of Income Spent on the Good The Cross-Price Elasticity of Demand between Goods A
Elasticity of demand is low if spending accounts for a small share of consumer’s
income.
and B
 Time
Elasticity of demand tends to increase as consumers have time to adjust to price
change. Long-run price elasticity of demand is often higher than short run.

Cross-Price Elasticity Income Elasticity of Demand
The income elasticity of demand is the percentage
 Goods are substitutes when the cross-price elasticity
change in the quantity of a good demanded when a
of demand is positive.
consumer’s income changes divided by the percent
Ex. butter and margarine, beef and pork change in the consumer’s income.
 Goods are complements when the cross-price

elasticity of demand is negative.
Ex. DVD players and DVD videos, hot dog buns and sausages

Normal Goods and Inferior Goods Outline

Demand and Supply.
 When the income elasticity of demand is positive, the
good is a normal good 2.1. The demand.
 that is, the quantity demanded at any given price 2.2. Defining elasticity. Elasticities of demand.
increases as income increases.
Ex. International travelling 2.3. The supply
A. Production function, factors and costs
 When the income elasticity of demand is negative, the
B. Supply curve
good is an inferior good
C. Shifts of the supply curve
 that is, the quantity demanded at any given price
D. Elasticity of supply
decreases as income increases.
Ex. Using the bus to go to work

35 36
GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018.
 Reference: Krugman and Wells.
GADE, GDADE, GFICO, GDFICO, Academic year 2017-2018.
The Production Function Inputs and Output
A production function is the relationship between the  The long run is the time period in which all inputs can be
quantity of inputs a firm uses and the quantity of output varied.
it produces.
 The short run is the time period in which at least one input
is fixed.
A fixed input is an input whose quantity is fixed for a
period of time and cannot be varied.  The total product curve shows how the quantity of output
depends on the quantity of the variable input, for a given
A variable input is an input whose quantity the firm quantity of the fixed input.
can vary at any time.

Production Function and Total Product Curve

Quantity of wheat
(bushels)
Marginal Product of Input
Adding a 7th worker
leads to an increase
in output of only 7
Quantity Quantity MP of labor
of labor L of wheat Q MPL= Q/L  The marginal product of an input is the additional
bushels (worker) (bushels) (bushels per worker)
100 Total product, TP 0 0 quantity of output that is produced by using one more
Adding a 2nd worker 19
leads to an increase
in output of only 17
1
2
19
36
17 unit of that input.
80
bushels 15
3 51
60 4 64
13
11
 Marginal Product of Labor: change in quantity of
5 75
40 6 84
9 output generated by adding one additional worker
7
7 91
20 5
8 96
0 1 2 3 4 5 6 7 8
Quantity of labor (workers)
 Although the total product curve in the figure slopes upward along its entire length,
the slope isn’t constant: as you move up the curve to the right, it flattens out due to
changing marginal product of labor.
Marginal Product of Labor Curve
Diminishing Returns to an Input
Marginal
product of labor
(bushels per
worker)
 There are diminishing returns to an input when an 19
There are
diminishing returns
increase in the quantity of that input, holding the levels of 17 to labor.
all other inputs fixed, leads to a decline in the marginal

15
13
product of that input. 11
9
 As we add more and more workers eventually we get 7
less and less output per additional worer. 5
Marginal product of labor, MPL
 An additional worker cannot add as much output as the

previous worker. 0 1 2 3 4 5 6 7 8
 Here, the first worker employed generates an increase in output of 19 bushels,

the second worker generates an increase of 17 bushels, and so on…

Total Product, Marginal Product, and the From the Production Function to Cost
Fixed Input
With more land, each worker can
This shift also implies that the
marginal product of each worker is
Curves
produce more wheat. So an increase higher when the farm is larger. As a
A fixed cost is a cost that does not depend on the
in the fixed input shifts the total result, an increase in acreage also
product curve up from TP10 to TP20. shifts the marginal product of labor
curve up from MPL10 to MPL20. quantity of output produced.
A variable cost is a cost that depends on the quantity of
Quantity of Marginal product of
wheat labor
(bushels) (bushels per
160
worker)
30
output produced.
140 TP
 The total cost is the sum of the fixed cost and the
20 25
120
100
80
TP
10
20
variable cost of producing that quantity of output.
15
60
10  TC = FC + VC
40 MPL
20 5
MPL
20
10  The total cost curve becomes steeper as more output is
0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8
produced due to diminishing returns.
(a) Total Product Curves (b) Marginal Product Curves

Total Cost Curve Two Key Concepts:
Cost
$2,000
Total cost, TC
I
Marginal Cost and Average Cost
1,800
H
1,600
1,400
F
G  The marginal cost of producing a good is the additional
1,200
1,000
E cost incurred by producing one more unit.
D
800
C
600
B
 i.e. the marginal cost is equal to the increase in total cost
400
200
A divided by the increase in the quantity of output.
0 19 36 51 64 75 84 91 96
Quantity of wheat (bushels)

Total Cost and Marginal Cost Curves for

Costs at Selena’s Gourmet Salsas Selena’s Gourmet Salsas
(a) Total Cost (b) Marginal Cost
Cost Cost of
case
8th case of salsa

$1,400 increases total TC $250 MC
cost by $180.
1,200
200
1,000 2nd case of
salsa
800 150
increases total
cost by $36.
600
100
400
50
200
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Quantity of salsa (cases) Quantity of salsa (cases)

Why is the Marginal Cost Curve Average Total Cost
Upward Sloping?
 Because there are diminishing returns to inputs.  Average total cost (ATC), often referred to simply as
As output increases, the marginal product of the variable average cost, is total cost divided by quantity of output
input declines. produced.
 This implies that more and more of the variable input must
be used to produce each additional unit of output as the ATC = TC/Q = (Total Cost) / (Quantity of Output)
amount of output already produced rises.
 And since each unit of the variable input must be paid for, A U-shaped average total cost curve falls at low levels of
the cost per additional unit of output also rises. output, then rises at higher levels.

Average Fixed and Variable Cost Average Total Cost Curve

 Increasing output has two opposing effects on average total
 Average fixed cost is the fixed cost per unit of output. cost — the “spreading effect” and the “diminishing
AFC = FC/Q = (Fixed Cost) / (Quantity of Output)
returns effect”:
 The spreading effect: the larger the output, the
greater the quantity of output over which fixed cost is
 Average variable cost is the variable cost per unit of spread, leading to lower average fixed cost.
output.  The diminishing returns effect: the larger the output,
AVC = VC/Q=(Variable Cost) / (Quantity of Output) the greater the amount of variable input required to
produce additional units leading to higher average
variable cost.

Average Costs for Selena’s Gourmet Salsas Average Total Cost Curve for Selena’s Gourmet
Salsas
Cost of
case
$140 Average total cost, ATC

Minimum
120 average
total cost
100
80 M
60
40
20
0 1 2 3 4 5 6 7 8 9 10
Quantity of salsa (cases)
Minimum-cost output

Marginal Cost and Average Cost Curves for

Putting the Four Cost Curves Together: Selena’s Gourmet Salsas
Notes Cost of case
The bottom of the
ATC curve is at the
1. Marginal cost is upward sloping due to diminishing $250
MC level of output at
returns.
which the marginal
cost curve crosses
200
the average total
2. Average variable cost is also upward sloping but is cost curve from
below.
flatter than the marginal cost curve.
150
ATC
AVC Is this an accident?
3. Average fixed cost is downward sloping because of 100

No!
M
the spreading effect. 50
4. The marginal cost curve intersects the average total AFC
cost curve from below, crossing it at its lowest point. 0 1 2 3 4 5 6 7 8 9 10
Quantity of salsa (cases)

Minimum-cost output
The Relationship Between the Average Total Cost
General Principles That Are Always True About a and the Marginal Cost Curves
Firm’s Marginal and Average Total Cost Curves Cost of unit
 The minimum-cost output is the quantity of output at MC

If marginal cost is
which average total cost is lowest - the bottom of the above average total
cost, average total MC ATC
U-shaped average total cost curve.
H
cost is rising.
 At the minimum-cost output, average total cost B

is equal to marginal cost. A
2
 When marginal
1
 At output less than the minimum-cost output, marginal A
2
M B
1
cost equals
average total
cost is less than average total cost and average total cost, we must be
at the bottom of
cost is falling. MC the U, because
If marginal cost is
L only at that point
 At output greater than the minimum-cost output, below average total
cost, average total average total cost
marginal cost is greater than average total cost and cost is falling. is neither falling
nor rising.
average total cost is rising.
Quantity

Does the Marginal Cost Curve Always Slope More Realistic Cost Curves
Upward? Cost of unit
 In practice, marginal cost curves often slope downward as 2. … but diminishing returns set
MC
ATC
a firm increases its production from zero up to some low in once the benefits from
specialization are exhausted
level, sloping upward only at higher levels of production. and marginal cost rises. AVC
 This initial downward slope occurs because a firm that

employs only a few workers often cannot reap the benefits
of specialization of labor. This specialization can lead to
increasing returns at first, and so to a downward-sloping
marginal cost curve.
 Oncethere are enough workers to permit specialization,
1. Increasing specialization
leads to lower marginal cost…
however, diminishing returns set in.
Quantity
Supply Curve Supply Schedule for Coffee
Supply Beans
Schedule Quantity of
 A supply curve is the graphical representation of Price of coffee beans
the supply schedule  A supply schedule
coffee beans supplied
(per pound) (billions of
 it shows how much of a good or service producers are shows how much of a pounds)
willing to sell at any given price. good or service would
$2.00 11.6
be supplied at
1.75 11.5
 Law of Supply: different prices.
A higher price for a good, other things equal, the greater 1.50 11.2
the quantities of that good is produced. 1.25 10.7
1.00 10.0
0.75 9.1
0.50 8.0
Supply Curve An Increase in Supply

Price of coffee Supply
Supply Schedule for Coffee Beans
beans (per pound) curve, S A supply curve  The entry of Vietnam into
$2.00
shows graphically the coffee bean business Price of Quantity of beans supplied
how much of a good
1.75 or service people are generated an increase in coffee beans (billions of pounds)
As price rises, the
quantity supplied rises.
willing to sell at any supply—a rise in the
1.50 given price. quantity supplied at any (per pound) Before entry After entry
1.25 given price. $2.00 11.6 13.9
1.00  This event is represented 1.75 11.5 13.8
0.75
by the two supply
schedules—one showing 1.50 11.2 13.4
0.50
supply before Vietnam’s 1.25 10.7 12.8
entry, the other showing
0 7 9 11 13 15 17
supply after Vietnam came 1.00 10.0 12.0
Quantity of coffee beans (billions of pounds)
in. 0.75 9.1 10.9
0.50 8.0 9.6
An Increase in Supply Movement Along the Supply Curve Versus Shift
S
1
S
2
of the Supply Curve
$2.00 S
S 2
Price of coffee A movement Price of $2.00 A movement 1
beans (per along the supply coffee beans along the supply
pound) 1.75
curve… (per pound) curve…
1.75
1.50
1.50 B
Vietnam enters 1.25
coffee bean 1.25
business  1.00 A
1.00 C
more coffee
producers 0.75 … is not the … is not the
same thing as a 0.75 same thing as
shift of the a shift of the
0.50 supply curve supply curve
0.50
0 7 9 11 13 15 17 0 7 10 11.2 12 15 17
Quantity of coffee beans Quantity of coffee beans
(billions of pounds) (billions of pounds)
 A shift of the supply curve is a change in the quantity supplied of  A movement along the supply curve is a change in the quantity
a good at any given price. supplied of a good that is the result of a change in that good’s price.
Shifts of the Supply Curve What Causes a Supply Curve to Shift?

 Any “decrease in 1. Changes in input prices
supply” means a
Price S S S leftward shift of the  An input is a good that is used to produce another good.
3 1 2
supply curve: at any
given price, there is a
Increase in decrease in the 2. Changes in the prices of related goods and services
supply
quantity supplied.
(S1 S3)
3. Changes in technology
 Any “increase in
supply” means a
Decrease in rightward shift of the 4. Changes in expectations
supply supply curve: at any
given price, there is an
increase in the 5. Changes in the number of producers
quantity supplied.
(S1 S2)
Quantity
Two Extreme Cases of Price Elasticity of Supply
Price Elasticity of Supply
Perfectly Inelastic Supply: Perfectly Elastic Supply: Price
Price Elasticity of Supply = 0 Elasticity of Supply = ∞
The price elasticity of supply is a measure of the
responsiveness of the quantity of a good supplied to Price of cell phone frequency Price of
pizza
the price of that good. S
1
It is the ratio of the percent change in the quantity supplied to At any price above
$12, quantity
At exactly $12,
producers will
the percent change in the price as we move along the supply An increase $3,000 supplied is infinite. produce any
quantity
in price…
curve. 2,000 $12 S
2
… leaves
the quantity At any price
supplied below $12,
unchanged quantity
supplied is
0 100 zero. 0
Quantity of cell Quantity of pizzas
phone frequencies

Measuring the Price Elasticity of Supply What Factors Determine Price Elasticity of
Supply?
 Supply is perfectly inelastic when the price elasticity of  The Availability of Inputs:
supply is zero. When changes in the price have no The price elasticity of supply tends to be large when
effect on the quantity supplied inputs are readily available and can be shifted into and
 Supply curve is a vertical line out of production at a relatively low cost. It tends to be
small when inputs are difficult to obtain.
 Supply is perfectly elastic when price elasticity of  Time:

supply is infinite. When any price change will lead to very The price elasticity of supply tends to grow larger as
large changes in the quantity supplied producers have more time to respond to a price
 Supply curve is a horizontal line change. This means that the long-run price elasticity of
supply is often higher than the short-run elasticity.

Elasticity overview Elasticity overview (continued)


Introduction To Economics: Topic 2

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Introduction To Economics: Topic 2

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Outline

Demand and Supply.

GADE, GDADE, GFICO, GDFICO

Supply and Demand Model Outline

 A demand schedule Price of coffee Quantity of coffee

Shifts of the Demand What Causes a Demand Curve to Shift?

B. Inferior Goods: When a rise in income decreases the

Introduction to Economics Introduction to Economics

Defining and Measuring Elasticity The Price Elasticity of Demand

 Drop the minus sign - price elasticity of demand is always negative

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When the price rises to $21

 Demand is unit-elastic if the price elasticity of demand is $5 D

0 Quantity of tennis balls (dozens per year)

Types of Elasticity Why Does It Matter Whether Demand is

0 1,100 Quantity of crossings (per day)

Effect of a Price Increase on Total Elasticity and Total Revenue

 If demand for a good is unit-elastic (i.e. price elasticity of

Demand is elastic: a Demand is inelastic: a

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What Factors Determine the Price Elasticity

Introduction to Economics Introduction to Economics

 Goods are complements when the cross-price

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Normal Goods and Inferior Goods Outline

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Introduction to Economics Introduction to Economics

Production Function and Total Product Curve

all other inputs fixed, leads to a decline in the marginal

 An additional worker cannot add as much output as the

 Here, the first worker employed generates an increase in output of 19 bushels,

Introduction to Economics Introduction to Economics

Introduction to Economics Introduction to Economics

Introduction to Economics Introduction to Economics

Total Cost and Marginal Cost Curves for

8th case of salsa

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Introduction to Economics Introduction to Economics

Average Fixed and Variable Cost Average Total Cost Curve

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$140 Average total cost, ATC

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Marginal Cost and Average Cost Curves for

3. Average fixed cost is downward sloping because of 100

the spreading effect. 50

4. The marginal cost curve intersects the average total AFC

cost curve from below, crossing it at its lowest point. 0 1 2 3 4 5 6 7 8 9 10

Quantity of salsa (cases)

 The minimum-cost output is the quantity of output at MC

 At the minimum-cost output, average total cost B

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 This initial downward slope occurs because a firm that

Supply Curve An Increase in Supply

Shifts of the Supply Curve What Causes a Supply Curve to Shift?

Introduction to Economics Introduction to Economics

 Supply is perfectly elastic when price elasticity of  Time:

Introduction to Economics Introduction to Economics

Introduction to Economics Introduction to Economics

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