Costs of Production
All firms incur costs and those costs help determine how much a
firm will produce as well as how high the price of the good or service
will be. The area of economics which deals with production and
pricing decisions firms make as well
Consumer Choice and Budget Restraints
Rational Behaviorderive the greatest satisfaction
on marginal utility
Restraintsmoney income is limited
scarcity, consumer must compromise
Utility-Maximizing RuleConsumer Equili
The non-price determinants of supply are:
Changes in resource prices-most important and most typical reason for
change. The price of ingredients and other capital goods, rent or labor could
rise of all. New technology could make productions more or les
is a measure of how much buyers and sellers respond to
changes in market conditions.
allows us to analyze supply and demand with
Price elasticity of demand
is the responsiveness of consumers to a change in the price of a
Non-price determinants of demand are:
Change in Income-having more or less to spend affects individual demand
schedules. For normal goods, an increase in income leads to a rightward shift in the
demand curve. For inferior goods, an increase in income l
Not all markets are allowed to function freely. Supply and
Demand may result in prices that are unfair to buyers or to sellers.
Government may set a price and it may differ from the equilibrium
price that the market sets.
Changes in Quantity demanded: Movement along the same
demand curve caused by a change in Price!
As the price changes, the quantity demanded
assume that among the horizontal axis changes.
PRICE is the 4
A movement from $5 to $4 causes
Interpretation of E
see graphs on page 21
Inelastic Supply Quantity supplied does not respond strongly to price
changes. E is less than one.
Elastic Supply Quantity supplied responds strongly to
price. E is more than one.
A minimum legal price above equilibrium price
Supported by authority like government
Creates surplus since
the amount supplied is
greater than the amount
Examples: minimum wage, price supp
Total Revenue Test for Elasticity
Total Revenue is the amount the seller receives from the buyer
from the sale of a product; P x Q = TR
Elasticity and total revenue are related; observe the effect on total
revenue when product price changes
In 1992 people