630. Microeconomics Flashcards
Price Elasticity of Demand Formula
%∆Q demanded / %∆P
If |e| is less than one, demand is said to be ___.
Inelastic
If |e| is greater than one, demand is said to be __.
Elastic
First Law of Demand
- consumers demand more (purchase more) as price falls, assuming other factors are held constant.
Consumers make consumption decisions using ___.
marginal analysis, consume more if marginal value > price
law of diminishing marginal utility
the marginal value of consuming each subsequent unit diminishes the more you consume
price must fall in order to ___
encourage consumers to purchase more units
Demand curves
depict the function that relates the price of a product to the quantity demanded by consumers
Demand curves describe
buyer behavior and tell you how much they will buy at a given price
If something other than price causes an increase in demand, we say that
“demand shifts” to the right or “demand increases” such that consumers purchase more at each possible price than they had previously
Pricing is
an extent decision
Profit=
Revenue - Cost
Demand curves turn pricing decisions into
quantity decisions:
“what price should I charge?” is equivalent to “how much should I sell?
Fundamental tradeoff:
Lower price to sell more, but earn less on each unit sold
Higher price to sell less, but earn more on each unit sold
Tradeoff created by
downward sloping demand curve
Marginal analysis finds the profit increasing solution to the pricing tradeoff.
It tells you
which direction to go (to raise or lower price), but not how far to go.
marginal revenue (MR) is
change in total revenue from selling another unit.
If MR>0, then
total revenue will increase if you sell one more.
If MR>MC,
then total profit will increase if you sell one more.
Profit is maximized when
MR = MC
Price elasticity (e)=
= %∆Qd / %∆P
= (ΔQ/Qaverage) ÷ (ΔP/Paverage)
MR =
ΔTR/ΔQ
When demand is elastic
If P↑ then Revenue↓
If P↓ then Revenue↑
When demand is inelastic
If P↓ then Rev ↓
If P↑ then Rev ↑
To estimate MR from a given price change using elasticity
MR = Paverage [(1 + e)÷e]
Note that in this formula you should not take the absolute value of e.
What is price elasticity of demand?
it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus)
|e| shows the ??% ∆ in Q for every
1%∆ in Price
marginal revenue
is the additional revenue that will be generated by increasing product sales by one unit.
also called unit revenue
