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# ECON 2G03 Study Guide - Spring 2019, Comprehensive Midterm Notes - Demand Curve, Marginal Cost, Stretch Fabric

Department
Economics
Course Code
ECON 2G03
Professor
Krishnakali Sen Gupta
Study Guide
Midterm

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ECON 2G03

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A good or service is considered to be high elastic if a slight change in price leads to a
sharp change in the quantity demanded or supplied
Elasticity can be 3 types:
1. Price elasticity
2. Income elasticity
3. Cross elasticity
If elasticity is greater than one, the curve is considered to be elastic. If it is less than one
the curve is said to be inelastic. If it is 1, curve is perfectly elastic.
1. Price Elasticity
Price elasticity of demand (Ep) shows the relationship btwn price and quantity
demanded
Ep=
2. Income Elasticity
The degree to which an increase in income will cause an increase in demand is called
income elasticity of demand
Elasticity =Ei
3. Cross Elasticity
The cross price elasticity of demand measures the change in emand for one good in
response to a change in price of another good
Complementary goods have a negative cross-price elasticity: as the price of one good
increases the demand for the second good decreases
Substitute goods have a positive cross price elasticity
Short run elasticity
Demand is likely to be more inelastic
Supply is completely inelastic
Long run elasticity
Both demand and supply are highly elastic
Effect of government intervention-price controls
A price ceiling occur when the price is artificially held below the equilibrium price and is
no allowed to rise
A price floor exists when the price is artificially held above thr equilibrium price nd is not
allowed to fall
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Unit 1: Introduction and the Basics of Supply and Demand
Shifts in the Demand Curve:
Shifts in Demand occur when we change things other than the price of the good
There are 5 main factors that shift the demand curve
1. Changes in income
2. Changes in the number of consumers
3. Change in the prices of related goods or services
4. Change in tastes
5. Change in expectations
Supply
Refers to the relationship that exists btwn the price of a good and the quantity supplied
Supply Curve
The curve which shows the quantity of a good that producers are willing to sell at a
given price, holding constant any other factors that might affect the quantity supplied
Qs=f(P)
(Only change in price will cause a movement)
Other factors determining the supply
1. Price of the inputs
2. Technology and productivity
3. Prices of related goods and services
4. Number of producers
Market Mechanism
Tendency in a free market for price to change until the market clears
Market Clearing Price (Equilibrium Price (clearing price))
Price that equates the quantity supplied to the quantity demanded
Changes in Market Equilibrium
Supply no change, demand increase/decrease
Demand no change, supply increase/decrease
Demand increase, supply decrease
Demand decrease, supply increase
Both demand and supply decrease/increase
Elasticity of Demand and Supply
The degree to which a demand or supply curve reacts to a change in price of the curves
elasticity
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Unit 2: Production
2.1 Technology of production
Theory of the firm
The theory of the firm describes how a firm makes cost-minimizing production decisions
and how the firms resulting cost varies with its output
Production Decisions of the firm
1. Production Technology
2. Cost Constraints
3. Input Choices
The Production Function:
It is a finction that shows the highest output that a firm can produce for every specified
combinations of inputs
If we take only 2 inputs, then,
Q= f(K, L)
Where Q= highest output a firm can produce
o K =capital
o L=labour
Inputs and outputs are flows
The above equation applies to a given technology
Production functions describe what is technically feasible when the firm operates
efficiently
The Short versus the Long Run
Short run: period of time in which quantities of one or more production of factors
cannot be changed
Long run:
Average and Marginal Products
Average product: output per unit of particular input
Average product of labour(APL) = Output/labour input= q/L
Marginal product: additional output produced as an input is increased by one unit
Marginal product of labour (MPL)= Change in output/Change in labour input
2.3 Production with Two Variable Inputs
Isoquant: curve showing all possible combinations of inputs that yield the same output
Isoquant Map
The isq
Types of Production
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