Elasticity of Demand PDF

Elasticity of Demand Price Elasticity of Demand : Refers to the degree of responsiveness of demand to cha...

Elasticity of Demand Price Elasticity of Demand : Refers to the degree of responsiveness of demand to change in price of own. good O 10 I 30 ↑ 20 I a ga Elastic Inelastic Ed I Ea < Factors affectingEa ① Nature of a commodity Essentials Luxury goods (water , Oxygen (car , AC ↓ Less Elastic DD More elastic DD Ea < 1 Ed > 1 @ Number of close substitutes/Availibility of Substitutes Goods having Goods having less no · Of few substitutes Substitutes - Water , Petrol > - Cold drinks Less elastic DD More elastic DR Diamond ③ Income of the buyer > Ed 2] - Rich Poor Ea < 1 En > 1 & No. of uses Many uses Less uses > - electricity > - Salt. Butter Ed > Ed ② Habit Ka Addicted - or t ① Price & Part total expenditure of own good of Expensive More Less part Cheap part Ea > 1 Ed < ( > - Cars > - Button Er > / Ed() esofto se 1) DD is Unit elastic Ea = I Y D " " Rectangular Hyperbola OR D D X X 2) DD is more than unit elastic Ea > I D > - D > - Thori si price increase why D seat ? in " D > - mein lot of fluctuation Q ai 3) DD is less than unit elastic En < !  D D Thori si price ↓ > - > - why fall mein only D Steep ? D > - little fluctuation 4) DD is perfectly inelastic Parallel to Y-aris [vertical] 3) DD is perfectly elastic - Ed = Parallel to U-axis [Horizontal ] > S Calculating Elasticity 1) Percentage Method / -x10 Ea =" Change in Q D.. / > AP in x 100 ~ change price- - -  Ed - ! = % change in &D · / o change in price To snow-ve relation b/w price and DD Ed 1x another = Q Formula When total expenditure is given Total Exp" = Price X Quantity as ↳ p = = = * slope Of DD curve : a 3 ope * Ea "T :. =ope : Slope and elasticity actively : - related (inverse relation) Total Exp"Method P Q D. TE P Q D. TE P Q D. TE 10 100 1000 10 100 100 0 10 100 100 0 ↓ ↓ ↓ ↓ ↓ ↓ ↓ ↓ 20 90 1808 20 40 So0 20 30 10 of PT > - TE4 P4- TEx (-ve relt) PM > TE constant [ - I Ltve relation ↳ Ed < I Ed) / Ed = 1 (Unit elastic  According method Ed is to this calculated by checking the relation between price and total expenditure TE = PX & I Positive relation : Ed is less than unit elastic. (Ed) 2) Negative relation : Ed is more than unit elastic (Ed > 1) 3) TE Does not change : Ed is unit elastic (2a = 1) Geometric/Graphic/Point Method used where Ed is to be calculated at different point demand curve in a straight line Calculated lower by taking ratio of segment of demand curve and upper segment of demand curve. Ed LowerSegmentent = · aor · B met needg · ment · Blower Ed = · a ⑳B us P Ed = = LS/US BE/AB LS :. Ed> eit Elastic C C · AE/0 · = a D D midt · · Eastic Perfect ~ tastic au · A · · B Ed = DE/AD Ed =.. Ed < / C C · Ea · Less than = 0 ⑨ unit elastic · a Per -E -  Production Function Production into a process of converting input output * Factors Production FixedFactors : Factor of input which remains E & Land Inputs O Labour Constant over a period of time · Capital · Entrepreneurship variable Factors : Factor input which car Time Period be changed over a period of time short L Long run run ↓ ↓ all the factors at least one factor is are variable fixed Production Function Technical relationship bu physical input and output Qx = f (L , k) Type of increasing rates : 1) Increasing at the same rates : kin , 18 18 - 10 20 30 48 2) Increasing at increasing rate : 10 20 20 - 10 20 40 so 7 7 ·  3) Increasing at Decreasing rate 7 10 a E - T 10 20 29 35 Total Physical Product Total amount of goods and services produced by a firm using a given set of inputs our a specific period time of Marginal Physical Product change in output that results from adding one unit more of an input. TP and MP curves Fixed variable TP MP Factor Factor To] stage 2 D 8 I 2 I 100 1 2 300 1 3 400 408 2007 Stage Y 350-30] I 1 Stage increases Stage I TP with increasing · : an rate and MP rises TP · Stage I : increases with decreasing and MP but rate falls stays positive.  Stage #I : TP starts falling and MP becomes negative TP Curve · Highest · Phase I · Phase I MP Curve · PhaseI MP = Tn-Tn-1 · bero d Factor Law of Variable Proportion as and units a more more of variable is used with factor a then fixed factor 1) Initially TP increases with Theory increasing rate , increases with decreasing rate then Starts falling 2) MP rises , starts falling and becomes negative Schedule : TP and MP (above) Diagram : TP and MP curve (above) Reasons for Operation Law Variable of of Proportion Phase I : 1) Better use of fixed factors Initially > - Quantity of fixed factor - Large : variable increased When - factors are it gives increasing returns. 2) Efficient use of variable factor variable factor is utilized in a more effective manner as there is a division of labour (specialization) 3) Indivisibility of fixed factor Fixed factors > - indivisible I cannot be divided into smaller units) ↑ & Average Product Average amount of output a company produces for each unit of input cannot = #P variable = (goes on ting) be-ve factor Ap curve -> inverted V Shape # Relationship between MP and AP 1) When MP = APAP is max. : MP Curve cuts MP at its peak MP Ap > = - 2) When MP > AP = AP rises 3) When MP < APE AP falls Assumptions for Law of Variable Proportion 1) Atleast one factor input is fined 2) Technique of production does not change. 3) Short Period production function 2) Factor Proportion is variable 5) Unit of variable factor are equally efficient  COST Cost incurred in production Money : expenditure of a commodity Total Fixedlost : lost incurred by a firm on fixed factors of production It remains constant regardless of the output. Variable lost : Lost that shows variations as per changes in production level Total l : Total Fixed + Total Variable cost cost cost TC I TFC + TVC Total FixedCost Expenses fined factors · on · Constant · TFC Curve - Parallel to u-axis Horizontal line TFC Curve TFC a output TFC 8 48 I 40 40 Z 40 3 40 "a M 40 Total variable Cost wel Changes based on the of output ↳ output - TVC & The curve : inverted S-shaped ↓ Initially TVC increases at decreasing rate and Then increases at increasing Mate ↳ Due how variable to of TUC Proportion s t Function : Functional relationship between cost & output & cost = f (a) Cost Me Total total TFC and Sum of TVC in TC Curve : inverted S-shaped paralle Tvc to curve - TC > TC = Tvc + TFC TUC a TFC  AverageCost cost unit output per of · divided Total cost of production by no · of units produced. Ac I = Q TC Al 2 10 10 9 ~ 218 7 3 24 & Y 32 S 3 45 9 AC curve : U-shaped AC Initially falls > reaches - rises minimum Average Variable Cost Total variable cost per unit of output = AvC Arc Curve [n-shaped & TVC AVC First it falls , reaches 110 10 minimum then rises ~ T 218 & again 3248 Y 32 8 3 45 9 Aver Fixed Cost age fixed cost per unit output * AFC AFC - AFC # Output curve = - AFC ↑ rectangular Output > - hyperbol  a TFC AFC AFC neverhe x-axis AFC decreases as I 4040 ↑ Output increases but it 2 40 20 can never be zero 340 fixed. 1 3. : TFC is ~ Y 40 10 O 3 40 S AC AVC > Ac = AFC + Auc AFC > Marginal Cost Additional lost of producing an additional unit of output Mc = TVCn - TVC no = Mc Mc curve : U-shaped then Initially Mc + reaches minimum it ↑  Relationship between AC and Mc · Mc curve cuts Ac at its minimum point : When MC = AC Ac is minimum · When Mc > Ac > Ac rises Mc When < AC = MR Al faxes AC Relationship between Arc and Mc · Mc curve cuts Arc at its minimum point : When MC = Arc is minimum · When Mc > A => Arc rises Mc When < AC = MR AVC faces AVC  Relationship 6/W TC and MC When MC falls > TC rises at decreasing · - rate When Mc is minimum > TC stops King at - · ↓ ing rate · When MC rises > - TC increases at an increasing rate M S M > Relationship 6/W TVC and MC When MC falls > TVC rises at decreasing · - rate When Mc is minimum > TVC Stops King at - · ↓ ing rate · When Mc rises > - TVC increases at an increasing rate M S M >  Formula Sheet Explicit costs These are actual costs that a firm incurs, such as paying for wages, rent, materials, or interest on loans. Explicit costs are also known as out-of-pocket costs. They are recorded and reported, and can be used to calculate both accounting and economic profit. Implicit costs These are costs that a firm incurs by using resources it already owns, such as the depreciation of equipment or the opportunity cost of quitting a job. Implicit costs are also known as imputed costs. They are not recorded or reported, and are only used to calculate economic profit. Payment: Explicit costs involve an actual payment, while implicit costs do not. Parties involved: Explicit costs involve the owner and outsiders, while implicit costs are the cost of self-payment. Examples: Some examples of implicit costs include interest on capital and rent of own land.