Elasticity Demand- measure of how consumers react to a change in demand

Elastic Demand- demand that is very sensitive to a change in price, it is always greater than

1. the product is not a necessity

2. there are available substitutes

Inelastic Demand- demand that is not very sensitive to a change in price,  always less than 1

1. the product is a necessity
2. few or no substitutes
3. people will buy no matter what

Unitary Demand- always equal to one

Ex. elastic=soda, candy, steaks, and fur coats

Ex. inelastic= gas, salt,milk,insulin/medicine, toothpaste

Price Elasticity of Demand(PED)- 3 step process at counting amounts

1. Quantity=(New Quantity-Old Quantity)/Old Quantity
2. Price=(New  Price-Old Price)/Old Price
3. PED=% change in quantity demanded/% change in price

Ex. 1. Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and decides taht she can charge more. SHe raises the price to $6 a dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the elasticity of demand is constant, how many would she sell if the price were $10 a box?

1. 40-50=-10/40=-0.2
2. 6-4=2/4=½
3. |-0.2|/|½|= 0.4

Inelastic

LOOK AT THE NUMBER TO MAKE SURE DON'T GO GUESSING FROM FOOD

Total Revenue- the total amount of money a firm receives from selling goods and services

Price*Quantity=Total Revenue (P*Q=TR)

Fixed Cost- A cost that does not change no matter how much is produced

ex. rent, mortgage, insurance, and salaries

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

ex. Electricity

Marginal Cost- The cost of producing one more unit of a good

TC=TFC+TVC

ATC=AFC+AVC

AFC=TFC/Q

AVC=TVC/Q

ATC=TC/Q

TFC=AFC*Q

TVC=AVC*Q