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Lecture 19

HON 1302 Lecture Notes - Lecture 19: Customer Service, Marginal Revenue, Economic EquilibriumPremium

4 pages48 viewsSpring 2017

Department
HON - HONORS
Course Code
HON 1302
Professor
Tomic
Lecture
19

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Microeconomics
Review for Quiz #3
Includes material from Quizzes 1, 2, and 3
Supply and Demand
1. Consider the market for cars, which use steel in production. If the cost of steel increases,
what is the effect on supply and/or demand?
a. The cost of steel is part of the cost of production for car companies
b. Costs of production is a determinant of supply, thus supply is affected
c. Since cost of production increases, supply decreases
d. As a result, equilibrium price increases and equilibrium quantity decreases
Elasticity and Percentage Changes
1. Elasticity of demand = percentage change in quantity/ percentage change in price
a. Shows you the how much the quantity changes as a result in the change in price
2. If you know the elasticity, you can know how total will be affected
3. If elasticity is…
a. Less than 1 = inelastic good
i. If good is inelastic, a firm should raise prices to increase total revenue
b. Equal to 1 = unity elasticity
i. If good has unity elasticity, one cannot raise revenue by changing prices,
so instead the firm should focus on decreasing costs of production
c. Greater than 1 = elastic good
i. If good is elastic, a firm should decrease prices to increase total revenue
4. Cross elasticity of demand = percentage change in quantity of Product A / percentage
change in price of Product B
a. Shows how strongly two goods are either complements are substitutes
5. If cross elasticity is…
a. Less than 0 = two goods are complimentary
b. Greater than 0 = two goods are substitutes
Costs and Revenues for a Firm
Total Cost (TC) the sum of all costs in production
o TC = Costs X Quantity
o Calculated by finding the area under the average costs curve on the graph
Total Revenue (TR) the sum of all money received from sale of goods
o TR = Price X Quantity
o Calculated by finding the area under the average revenue curve on the graph
Average Cost (AC) the sum of all costs divided by the quantity of goods sold
o AC = TC/Q
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