Unit I (Elasticity of Demand)

Elastic Demand: measure of how consumer's react to a change in price 

• Demand that is very sensitive to a change in price
• E > 1
• Product is not necessity 
• Available substitutes

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

• E < 1
• Product is a necessity
• Few to no substitutes 
• People will buy no matter what 

Unitary Elastic/Unit: 

• E = 1

Price Elastic of Demand (PED):

• Step 1: Quantity 

new quality- old quantity/ old quantity 

• Step 2:   Price

         new price - old price/ old price

• Step 3:  PED

percent change in quantity demanded/ percent change in price 

-Always remember to take absolute value of PED

Revenue: total amount of $ from selling goods and services   

• Total Revenue: Price x Quantity = Total Revenue

Fixed Cost: cost that does not change no matter how much is produced Ex: rent, mortgage, and insurance

Variable Cost:  cost that rises or falls depending upon how much is produced 

• Ex: electricity

Marginal Cost: cost of production of producing one more unit of a good 

• new total cost- old total cost = Marginal Revenue

Formulas:

• Total Fixed Cost + Total Variable Cost = Total Cost
• Average Fixed Cost + Average Variable Cost = Average Total Cost
• Total Fixed Cost/ Quantity= Average Fixed Cost 
• Total Variables Cost/ Quantity = Average Variable Cost 
• Total Cost/ Quantity = Average Total Cost
• Total Fixed Cost = Average Fixed Cost x Quantity 
• Total Variable Cost = Average Variable Cost x Quantity