Price Elasticity of demand (different per point on curve) Total Revenue: P * Q Total Surplus = Producer + Consumer Σ = | %ΔQ D / %ΔP | (ΔQ D / Q D ) and (ΔP / P) Use midpoint in formula (denominator) Steeper = less elastic Σ < 1 →demand is inelastic (weak) Σ = 1 →demand is unit elastic Σ > 1 →demand is elastic (strong) Flatter = more elastic Σ < 1 P↑ ►Q D ↓►TR↑ Σ = 1 P↑►Q D ↓►TR→ Σ > 1 P↑►Q D ↓►TR↓ Σ = ∞ then “perfectly elastic” Elasticity Influences: 1. more substitutes = higher elasticity, more time that passes after P change Σ↑ Luxury goods more elastic 2. Fraction of income spent on the good/service Fraction↑ ► Σ↑ Σ INC = (%∆QD) / (%∆INC) Normal: (+) Inferior: (─) D curve for monopolist same as market D curve Marginal Rate of Sub. Indifference curve steep (flat), marginal rate of sub is high (low) Production function f(L,K) = Q Effect of a change in the price on the quantity of a good consumed is called the price effect. Eco Profit = Tot Rev – Opp. Costs Effect of a change in income on consumption is called the income effect. MR = MC is profit maximizing
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