Unit 1 Basic Economic Concepts

What is Elasticity of Demand:

• A measure of how consumers react to change in price
• Elastic Demand: demand that is very sensitive to a change in price
  • E > 1
  • ex.) soda, steaks, coffee

Inelastic Demand: demand that is not very sensitive to a change in price

• E < 1
• ex.) gas, milk, sugar, salt, insulin

Unit Elastic or Unitary Elastic Demand:

• E = 1

Equations:

Total Revenue: it is the total amount of money a firm receives from selling goods and services
Fixed Costs: cost that does not change no matter how much is produced (salaries, mortgage, car note)
Variable Cost cost that rises or falls depending upon how much is produced (electricity, water, etc.)
Marginal Costs: is the cost of producing one additional unit of a good
Marginal Revenue: it is the additional income from selling one more unit of a good

• PED (Price Elasticity of Demand) = percentage change in quantity demand / percentage change in price
• TR = PxQ
• AFC = TFC/Q
• AVC = TVC/Q
• ATC = TC/Q or AFC+AVC
• MC = new TC-old TC
• TVC = TC-TFC