AREC 323 Lecture 1 - Economic Concepts Review

AREC 323 Lecture 1 - Review of Economic Concepts

• The lecture covered supply and demand, cost, revenue, profit, and elasticity concepts.
• Supply: The quantity of a good or service producers are willing and able to offer at various prices during a specific period.
• Law of Supply: There's a positive relationship between price and quantity supplied. As price increases, quantity supplied increases.
• Demand: The quantity of a good or service consumers are willing and able to purchase at various prices during a specific period.
• Law of Demand: There's an inverse relationship between price and quantity demanded. As price decreases, quantity demanded increases.
• Elasticity: Measures how much the quantity demanded or supplied responds to a change in price.
• Own-price elasticity of demand (PED): Measures how quantity demanded changes in response to price changes.
• Own-price elasticity of supply (PES): Measures how quantity supplied changes in response to price changes.
• Cross-price elasticity: Measures how the quantity demanded of one good changes in response to a change in the price of a related good.
• Total Cost (TC) is the sum of fixed costs (FC) and variable costs (VC).
• Fixed costs (FC) do not change with the level of output.
• Variable costs (VC) change directly with the level of output.
• Average cost (AC) = TC/Q
• Marginal cost (MC) = dTC/dQ (the change in total cost divided by the change in output)
• Revenue: Total Revenue (TR) = Price (P) x Quantity (Q); Marginal Revenue (MR) = dTR/dQ
• Profit: Profit = Total Revenue - Total Cost (TR -TC)
• Profit maximization occurs at the output level where marginal revenue equals marginal cost (MR=MC).
• Explicit Costs: Direct monetary payments for resources.
• Implicit Costs: Opportunity costs of using resources owned by the firm.
• Economic Profit = Total Revenue – Economic Cost
• Accounting Profit: Total Revenue – Explicit Costs

Formulas

• Own-price elasticity formula: η= ΔQ/Q ÷ ΔP/P.
• Arc elasticity formula: η= (Q₂-Q₁)/(Q₂+Q₁)*( (P₂-P₁)/(P₂+P₁))/2

Key Concepts

• Factors influencing elasticity include availability of substitutes, necessity vs. luxury, proportion of income spent, time horizon, degree of commodity aggregation, and relationship with complementary/substitute goods.
• Factors affecting profit include revenue, costs (fixed and variable), market conditions and profit maximization.