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Unformatted text preview: ARE130 Test Outline I. Demand for Agricultural Products A. Logical Basis of Demand Theory i. The problem is to choose the specific goods and services that best satisfy these wants within the limits imposed by income. ii. Economics define best in terms of the consumers attempt to maximize utility (well being). iii. The utility theory concludes that a consumer tends to prefer more to less of a good but that he or she will buy more only at a lower price. iv. There is an inverse relationship between quantity demanded and price B. Consumer and Market Demand i. Consumer Demand is defined as the various quantities of a particular good that an individual consumer is willing and able to buy as the price of that good varies, with all other factors that affect demand held constant. ii. Demand schedule : table of prices and quantities iii. Demand Curve : graph or algebraic function of prices and quantities. iv. The demand relationship defines the relationship between price and quantity demanded per unit of time. v. Price and quantity vary inversely; demand curve has a negative slope. Sometimes called the law of demand. vi. The higher the indifference curve, the greater the consumers utility. vii. The indifference curves are continuous and have a negative slope. C. Price Elasticity i. Own-Price elasticity of demand is a ratio that expresses the percentage change in quantity demanded associated with a given percentage change in price. ii. Price elasticity is defined for a point on the demand curve, and for most demand functions the magnitude of the elasticity coefficient varies along the function. iii. Eii= (dQi / Qi) / (dPi / Pi) a. Where dQi / dPi is defined as the first derivative of the demand function Qi = Di (Pi) b. Or E = (Q0-Q1) / (Q0+Q1) * (P0 +P1) / (P0-P1) Interpretation i. The own-price elasticity of demand coefficient for any product can be interpreted as the percentage change in quantity demanded given a very small percentage change in the price of that product, other factors being held constant. ii. Price-elasticity coefficient is from 0 to minus infinity a. If the absolute value of the coefficient is larger than 1, demand is said to be elastic. b. If the absolute value of the coefficient is less than 1, demand is inelastic . c. A coefficient of exactly -1 represents the case of unitary elasticity. iii. Demand is elastic (or inelastic) only within some range of prices Price Elasticity and Total Revenue i. Total revenue equals price multiplied by quantity and consequently has two components, price and quantity, ii. Whether a given percentage increases in price will increase or decrease total revenue depends on the magnitude of the corresponding percentage change in quantity, or the price elasticity-of-demand coefficient....
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- Fall '08