ELASTICITY OF DEMAND

- It is a measure of how consumers react to a change in price.

Elastic Demand

- Demand that is very sensitive to a change in price. E>1

- The product is not a necessity and there are available substitute.

- Ex; soda, T-bone and steaks.

Inelastic Demand

- Demand that is not very sensitive to a change in price. E<1.

- The product is a necessity and there are few substitute, therefore people will always buy.

- Ex; gas and medicine

Unit/ Unitary Demand.

- E=1.

Price Elasticity of Demand (PED)

Step 1: Quantity.

          New quantity - Old quantity/ Old quantity.

Step 2: Price

          New price- Old price/ Old price.

Step 3: PED

          % change in quantity demanded/ % change in price.

Costs of Production

Total Revenue

- The total amount of money a firm receives from selling goods and services.
- P.Q

Fixed Cost

- A cost that does not change no matter how much of a good is produced.
- Ex; mortgage, insurance, rent and salary.

Variable Cost

- A cost that rises or falls depending on how is produced.
- Ex; electricity bill.

Marginal Cost

- The cost of producing one more unit of a good.
- New TC - Old TC.

Formulas

TFC + TVC = TC.
AFC + AVC =ATC.
TFC / Q = AFC.
TVC / Q = AVC.
TC / Q = ATC.
TFC = AFC (Q).
TVC= AVC (Q).