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    Economics All CH Notes

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    Nishtha Garg
    This document provides an economics cheat sheet covering key concepts related to demand, supply, elasticity, costs of production, and firm behavior. It defines key terms like: - Price elasticity of demand and its relationship to whether demand is elastic, inelastic, or unitary elastic. - Short run vs. long run elasticity of supply and how capacity constraints impact elasticity. - Marginal cost, average cost, and their relationship for determining profit maximization. - Long run equilibrium in perfect competition where price equals minimum average total cost and firms earn zero economic profit.

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    Economics All CH Notes

    Uploaded by

    Nishtha Garg
    77 views6 pages
    This document provides an economics cheat sheet covering key concepts related to demand, supply, elasticity, costs of production, and firm behavior. It defines key terms like: - Price elasticity of demand and its relationship to whether demand is elastic, inelastic, or unitary elastic. - Short run vs. long run elasticity of supply and how capacity constraints impact elasticity. - Marginal cost, average cost, and their relationship for determining profit maximization. - Long run equilibrium in perfect competition where price equals minimum average total cost and firms earn zero economic profit.

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    economics all ch notes

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    This document provides an economics cheat sheet covering key concepts related to demand, supply, elasticity, costs of production, and firm behavior. It defines key terms like: - Price elasticity of demand and its relationship to whether demand is elastic, inelastic, or unitary elastic. - Short run vs. long run elasticity of supply and how capacity constraints impact elasticity. - Marginal cost, average cost, and their relationship for determining profit maximization. - Long run equilibrium in perfect competition where price equals minimum average total cost and firms earn zero economic profit.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    77 views6 pages

    Economics All CH Notes

    Uploaded by

    Nishtha Garg
    This document provides an economics cheat sheet covering key concepts related to demand, supply, elasticity, costs of production, and firm behavior. It defines key terms like: - Price elasticity of demand and its relationship to whether demand is elastic, inelastic, or unitary elastic. - Short run vs. long run elasticity of supply and how capacity constraints impact elasticity. - Marginal cost, average cost, and their relationship for determining profit maximization. - Long run equilibrium in perfect competition where price equals minimum average total cost and firms earn zero economic profit.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6

    Economics cheat sheet

    DEMAND SUPPLY http://kimoon.co.kr/mi/pindyck-8/im/Ch02.pdf


     % change in demand / % change in price = MODULUS |ed |
     Delta QD/Q / DELTA P/ P
     DELTA QD*P / DELTA P * QD

    If, |𝑒𝑃 |<1 ⟹ percentage change in demand is less than the percentage change in price. Demand is
    inelastic.

    If, |𝑒𝑃 | >1 ⟹ percentage change in demand is more than the percentage change in price. Demand is
    elastic.

    If, |𝑒𝑃 | =1 ⟹ percentage change in demand is equal to the percentage change in price. Demand is
    unitary elastic. Or p*q remains the same ( I will buy 500$ chocolates even if price inc) (ravi will always
    buy 100$ worth petrol no matter if price change)

    Perfect elastic demand= horizontal line and ed= infinity (price never changes and qty can be anything)

    Perfect inelastic demand = vertical line and ed= 0 (qty never changes and price can be anything)

    For normal goods, income elasticity >0 +ve for inferior goods it is < 0 i.e -ve, for neutral goods it never changes
    with change income
     WHY SUPPLY IN LONG RUN MORE ELSASTIC THAN SHORT RUN
    The price elasticity of supply is the percentage change in the quantity supplied divided by the percentage
    change in price. In the short run, an increase in price induces firms to produce more by using their
    facilities more hours per week, paying workers to work overtime and hiring new workers. Nevertheless,
    there is a limit to how much firms can produce because they face capacity constraints in the short run. In
    the long run, however, firms can expand capacity by building new plants and hiring new permanent
    workers. Also, new firms can enter the market and add their output to total supply. Hence a greater
    change in quantity supplied is possible in the long run, and thus the price elasticity of supply is larger in
    the long run than in the short run.
     DURABLE GOODS MORE ELASTIC IN SHORT RUN THAN IN LONG RUN, AND VICE VERSA WITH NON-DURABLE
     SLOPE OF DEMAND = CHANGE IN QD/ CHANGE IN PRICE
     CROSS PRICE ELASTICITY= -VE FOR COMPLEMENT, +VE FOR SUBSTITUTE
     CROSS PRICE ELASTICITY= percentage change in Quantity demanded of X / percentage change in
    Price of Y.. (DELTA Qx/ delta Py) * ( Py/Qx)

    Q  a  bP this is the equation of demand. First find the slope which delta q / delta p. slope is -b,
    after that find a. The equation for demand is of the form Q  a  bP. First find the slope, which is -6/3 = -2
    You can figure this out by noticing that every time price increases by 3, quantity demanded falls by 6 million
    pounds. Demand is now Q  a  2P. To find a, plug in any of the price and quantity demanded points from
    the table. For example: Q  34  a  2(3) so that a  40 and demand is therefore Q  40  2P.

    The equation for supply is of the form Q  c  dP. D is slope of supply.

     Arc elasticity= (delta Q/delta P) * (average price/average qty)


    Consumer behaviour http://kimoon.co.kr/mi/pindyck-8/im/Ch03.pdf

    Slope of budget line= slope of IC = - Px/Py


    Utility is maximised when MRS = MUx/MUy = (Price ratio) Pf/Pc

    MUx/MUy= units of Y/Units of X

    PRODUCTION FUCNTION http://www.kimoon.co.kr/mi/pindyck-8/im/Ch06.pdf


    •When AP is rising, MP is greater than AP

    •When AP is falling, MP is less than AP

    •When AP reaches it maximum, AP = MP


    TP AP MP
    0 0
    1 20 20.0 20
    2 55 27.5 35
    3 95 31.7 40
    4 130 32.5 35
    5 150 30.0 20
    6 160 26.7 10
    7 160 22.9 0
    8 150 18.8 -10

    Suppose the company borrows money and expands its factory. Its fixed cost rises by $50,000, but its variable cost
    falls to $45,000 per 1000 units. The cost of interest (i) also enters into the equation. Each 1-point increase in the
    interest rate raises costs by $3000. Write the new cost equation
    The firm will earn negative profit when P  MC  AC

    Marginal rate of substitution Amount by which the quantity of one input can be reduced when one extra
    unit of another input is used, so that output remains constant
    MRTS = − Change in capital input/change in labor input
    = − ΔK/ΔL(for a fixed level of q)

    𝑀𝑅𝑇𝑆𝐿𝐾= −𝑀𝑃𝐿 / 𝑀𝑃𝐾

    Cost function http://www.kimoon.co.kr/mi/pindyck-8/im/Ch07.pdf

    Explicit cost= accounting


    Implicit = opportunity
    Economic cost = implicit + explicit
    Sunk cost: Expenditure that has been made and cannot be recovered.
    Assume that the marginal cost of production is increasing. Can you determine whether the average
    variable cost is increasing or decreasing?
    No. When marginal cost is increasing, average variable cost can be either increasing or decreasing as shown in the
    diagram below. Marginal cost begins increasing at output level q1, but AVC is decreasing. This happens because MC
    is below AVC and is therefore pulling AVC down. AVC is decreasing for all output levels between q1 and q2. At q2,
    MC cuts through the minimum point of AVC, and AVC begins to rise because MC is above it. Thus for output levels
    greater than q2, AVC is increasing

    units mc tc vc fc atc avc afc


    0 50 50 0 50
    1 40 90 40 50 90.0 40.0 50.0
    2 30 120 70 50 60.0 35.0 25.0
    3 20 140 90 50 46.7 30.0 16.7
    4 25 165 115 50 41.3 28.8 12.5
    5 40 205 155 50 41.0 31.0 10.0
    6 50 255 205 50 42.5 34.2 8.3
    7 60 315 265 50 45.0 37.9 7.1
    8 70 385 335 50 48.1 41.9 6.3
    9 80 465 415 50 51.7 46.1 5.6
    10 90 555 505 50 55.5 50.5 5.0

    mc and mp has inverse relation


    Minimum average cost occurs
    at the quantity where MC is
    equal to AC
    Long-run equilibrium: The process of entry or exit is complete— remaining firms earn
    zero economic profit. • Zero economic profit occurs when P = ATC. • Since firms produce
    where P = MR = MC, the zero-profit condition is P = MC = ATC.

    short run equilibrium:


    price= mr= mc

    The demand for a product produced in a perfectly competitive market permanently


    increases. In the short run the price a. does not change as new firms enter the industry b.
    rises and each firm produces more output. c. does not change because each firm
    produces more output. d. rises and each firm produces less output.

    When MC < ATC, ATC is falling.


    When MC > ATC, ATC is rising.
    The MC curve crosses the ATC curve at the ATC curve’s minimum.

    Long run
    𝑳𝑻𝑪=𝒘𝑳+𝒓𝑲, Where w & r are prices of labor & capital, respectively, & (L*, is the input combination
    on the expansion path that minimizes the total cost of producing that output

    •LMC is U-shaped

    •LMC lies below LAC when LAC is falling

    •LMC lies above LAC when LAC is rising

    •LMC = LAC at the minimum value of LAC

    fc mc tc vc n atc
    500 1000 500 1 1000
    500 200 1200 700 2 600

    500 1010 510 1 1010


    500 210 1220 720 2 610
    510 1010 500 1 1010
    510 200 1210 700 2 605

    ISOCOST
    Show various combinations of inputs that may be purchased for given level of expenditure
    (C) at given input prices (𝑤,𝑟) WHERE w=price of labour, r=price of capital
    𝐶=𝑤𝐿+𝑟𝐾

    Equilibrium condition

    •Two slopes are equal in equilibrium

    •Implies marginal product per rupee spent on last unit of each input is the same.

    𝑀𝑃(𝐿)/𝑀𝑃(𝐾) = 𝑤 / 𝑟 𝑜𝑟 𝑀𝑃 (𝐿 )/ 𝑤 = 𝑀𝑃 (𝐾) / 𝑟

    𝑀𝑅𝑇𝑆 (𝐿,𝐾) = 𝑤/𝑟

    Along expansion path, input price ratio is constant & equal to the marginal rate of technical substitution

    Theory of firm http://kimoon.co.kr/mi/pindyck-8/im/Ch08.pdf


    TR = P*Q AR = TR/Q = P MR= DELTA TR/DELTA Q
    In perfect competition P=MR=AR= TR/Q

    What Q maximizes the firm’s profit?

    If Q increases by one unit, revenue rises by MR, cost rises by MC.


    •If MR> MC, then increase Q to raise profit.
    •If MR< MC, then reduce Q to raise profit.
    Derivation of Profit maximizing conditions
    MR should be equal to MC
    Therefore, in perfect comp, MR=MC=P= AR
    A firm will operate till it is able to cover its variable cost by total revenue or avc by average
    rev.
    So, mr=mc >= avc for the firm to operate. Shut down if P=AR=MR=MC < AVC
    AVC- whether to produce, MC- how much to produce, TC- how much profit loss if produce

    LONG RUN

    Long-run equilibrium:
    The process of entry or exit is complete—remaining firms earn zero economic profit.
    •Zero economic profit occurs when P = ATC.
    •Since firms produce where P= MR= MC, the zero-profit condition is P= MC= ATC.
    •Recall that MC intersects ATC at minimum ATC.
    •Hence, in the long run, P= minimum ATC.

    What is the difference between economic profit and producer surplus?


    Economic profit is the difference between total revenue and total cost. Producer surplus is the difference
    between total revenue and total variable cost. So fixed cost is subtracted to find profit but not producer
    surplus, and thus profit equals producer surplus minus fixed cost (or producer surplus equals profit plus
    fixed cost).
    Why do firms enter an industry when they know that in the long run economic profit will be zero?
    Firms enter an industry when they expect to earn economic profit, even if the profit will be short-lived.
    These short-run economic profits are enough to encourage entry because there is no cost to entering the
    industry, and some economic profit is better than none. Zero economic profit in the long run implies
    normal returns to the factors of production, including the labour and capital of the owner of the firm. So
    even when economic profit falls to zero, the firm will be doing as well as it could in any other industry, and
    then the owner will be indifferent to staying in the industry or exiting.

    AN INCREASING-COST INDUSTRY, AND IT WILL HAVE AN UPWARD-SLOPING LONG-RUN


    SUPPLY CURVE.

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