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ECO 100 Lecture - OCT 1 JD.docx

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James Pesando

ECO 100 Lecture#7 Monday, Oct1, 2012 Mariginal cost(MC) = additional cost if action is taken MC consists of opportunity costs MC if output of shirts increases by one example1(you hire a worker) $2 for cloth $10 to sewer MC=$12 (opportunity cost of $!2 spent is $12) example2(you sew shirt yourself) $2 for cloth $20 (opportunity cost of your time) MC=$20(opportunity cost spent plus opportunity cost of your time) (Price) Elasticity of Demand percent change in quantity demanded/percent change in price) measures responsiveness of quantity demanded to a change in price(as move along DD curve) dd=downward demand PRICE ELASTICITY OF DEMAND AND TOTAL REVENUE total revenue=price *quantity in response to an increse in price, total revenue: - increase if demand is inelastic - is unchanged if demand is unit elastic - decreases if demand is elastic intuition revenue increases because customers who continue pay a higher price (p1-po)*q1 if demand is inelastic, most customers contunue to pay higher price. if demand is elastic most customers choose not to pay higher price you own the only spring in town, which produces sparkling water that you sell for $10 a bottle. you have no costs, so that your profit equals your total rvenue. total revenue equals price per bottle times quantity sold. 1. if you want to increase your total revenues: should you raise your price above $10 per bottle? 2. would your answer change if there were other springs in town that also sold sparkling water? you own only spring: few close substitutes=>demand inelastic = total revenue will rise if increase price there are other springs: many close substitutes=> demand elastic => total revenue will fall if increase price insight: ROM has discovered, at the current price of admission, the demand curve
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