AREC 323 Lecture 1 Economic Concepts Review

AREC 323 Lecture 1: Review of Economic Concepts

• Course name: AREC 323
• Lecture: 1
• Topic: Review of economic concepts, including supply and demand, cost, revenue, profit, elasticity, and derivative rules

Outline

• Supply and Demand
  • Definition and elasticity
  • Product characteristics (substitutes and complements)
• Cost
  • Total cost (TC), fixed cost (FC), variable cost (VC)
  • Average cost (AC), average fixed cost (AFC), average variable cost (AVC), marginal cost (MC)
  • Formula for calculating various costs
• Revenue
  • Total revenue (TR)
  • Average revenue (AR)
  • Marginal revenue (MR)
• Profit
  • Economic profit and accounting profit
• Elasticity
  • Own-price elasticity of demand (PED)
    • Definition and calculation
    • Relationship between price and quantity demanded (inverse)
  • Own-price elasticity of supply (PES)
    • Definition and calculation
    • Relationship between price and quantity supplied (direct)
  • Cross-price elasticity of demand (PED_xy)
    • Definition and calculation
    • Relationship between price of one good and quantity demanded of another (substitutes, complements)
• Derivative rule
  • Constant and power rules for calculating derivatives

Supply and Demand

• Supply:
  • Definition: The quantity of a good or service producers are willing and able to offer at various prices during a specific period.
  • Law of Supply: Positive relationship between price and the quantity supplied (as price rises, quantity supplied rises).
• Demand:
  • Definition: The quantity of a good or service consumers are willing and able to purchase at various prices during a specific period.
  • Law of Demand: Inverse relationship between price and quantity demanded (as price falls, quantity demanded rises).

Elasticity

• Own-price elasticity of demand (PED): Measures the responsiveness of quantity demanded to changes in price. Calculated as the percentage change in quantity demanded divided by the percentage change in price.
• Own-price elasticity of supply (PES): Measures the responsiveness of quantity supplied to changes in price. Calculated as the percentage change in quantity supplied divided by the percentage change in price.
• Cross-price elasticity of demand (PED_xy): Measures the responsiveness of quantity demanded of good Y to a change in the price of good X.

Cost

• Total Cost (TC): The sum of fixed costs (FC) and variable costs (VC).
• Fixed Costs (FC): Costs that do not vary with the level of production (e.g., rent, insurance).
• Variable Costs (VC): Costs that vary directly with the level of production (e.g., raw materials, labor).
• Average Cost (AC): TC divided by quantity (Q).
• Average Fixed Cost (AFC): FC divided by Q.
• Average Variable Cost (AVC): VC divided by Q.
• Marginal Cost (MC): The additional cost of producing one more unit of output.

Revenue

• Total Revenue (TR): Price (P) multiplied by quantity (Q).
• Marginal Revenue (MR): The change in TR from selling one more unit of output.

Profit

• Profit: Total Revenue (TR) minus Total Cost (TC).
• Economic Profit: Sales revenue minus economic cost (explicit costs plus implicit costs).
• Accounting Profit: Sales revenue minus explicit costs.

Practice Problems

• Example problem: Calculating own-price elasticity of demand.
• Example problem: Calculate profit given TC and demand equations.