Equimarginal Principle – states that consumers maximize their utility or satisfaction when the marginal utility they get per price of a certain good is the same as the marginal utility achieved per price of any other good.
MU for Milk MU for Bread
Price of Milk Price of Bread
Marginal Rate of Substitution (MRS ) - It measures the maximum amount of one good given up in order to consumer more units of the other good. It is also the slope of indifference curve.
Law of Diminishing Marginal Rate of Substitution –It indicates that consumer gives up less and less amount of cookies in favor of additional units of candies.
Budget/Income – It is the amount allocated for buying the goods.
Consumer Equilibrium – It is attained at the point of tangency (the point where the budget line touches but does not cross the indifference curve) between the budget line and the highest possible indifference curve.
A. ELASTIC DEMAND – Coefficient is less than 1, demand is said to be price –elastic. This means that the percentage change in price results in a greater percentage change in quantity demanded. Goods with many close substitutes are price-elastic.
B. INELASTIC DEMAND – Coefficient is greater than 1.Percentage change in quantity demand is smaller than the percentage change in price. Goods that consume a smaller portion of the consumer’s income are price-inelastic.
C. UNIT-ELASTIC DEMAND – Coefficient elasticity is equal to 1. Percentage change in quantity demand is equal to the percentage change in price. Goods that are semi-luxury or semi-essential goods.
D. PEFECTLY ELASTIC DEMAND & PERFECTLY INELASTIC DEMAND
A. Elastic Demand – price elasticity is infinite. Even a slight change in price can result in an infinitely large change in quantity demanded. This implies that consumers face several choices and that a slight increase in the price of one good can result in a large decrease in demand for that good, and an increase in demand for other goods.
B. Inelastic Demand – zero price elasticity (Quantity Demanded stays the same, no matter what the change in price is.)
The Relationship between Product Price and Total Revenue at various elasticity Table 2 Value of Demand Elasticity Definition Price Total Revenue <1 (inelastic) Percent change in quantity demanded is less than percent change in price If price increases Total Revenue increases If price decreases Total Revenue decreases = 1 (unit-elastic) Percent change in quantity demanded is equal to percent change in price If price increases Total Revenue is constant If price decreases Total Revenue is constant
Percent change in quantity demanded is greater than percent change in price If price increases Total Revenue decreases If price decreases Total Revenue increases
Supply Function - The relationship between the price of the good and the various quantities that a seller is willing and able to sell can be expressed in mathematical form which is called the supply function.
In solving for equilibrium price and quantity, we equate the demand and supply function :
Qd = Qs
18 - 2P = 2 + 6P
-2P-6P = 2 – 18
-8P = -16
-8 = -8
P e = P2.00
We can substitute the equilibrium price P = P2.00 for the demand and supply function, to get the equilibrium quantity (Q e )
18-2(2) = 2 + 6(2)
18-4 = 2+12
14 = 14
Q e = 14 units
Table 3 Table 3 shows the demand and supply schedules for cookies. At P2.00, the demand for cookies at 14 units is equivalent to the supply of cookies. Price Quantity Demanded Qd e Quantity Supplied Qs e 0 18 2 1 16 8 2 14 14 3 12 20 4 10 26 5 8 32
Price Floor - It is the price set by the government that is
higher than the equilibrium level.
Price Ceiling - It is the price set below the equilibrium price.
Tax Incidence - It refers to the final resting of a tax burden. It crucially depends on how the demand and supply curves are drawn. It is largely dependent on price elasticity of demand and supply; the flatter the demand curve (more elastic) is than the supply curve, the lesser will be the burden on consumers.
Production Period - It is the length of time within which the firm can vary the amount of production inputs to be used.
3 Classifications of Production Period
1. Immediate period – the time is too short for the firm to vary the quantity of its inputs. This is why it is sometimes called the very short run , or the market period.
2. Short-run period – the time is long enough for the firm to vary some – but not – all of its inputs. Thus, some inputs are variable while others are fixed. Land, buildings, machinery, and heavy equipment are usually held fixed in the short-run period; raw materials, laborers, and power supply are available.
3. Long-run period – is extensive enough for the firm to vary the quantity of all inputs used. Therefore, in the long run, all inputs are variable. No fixed inputs exist.
Social Cost/benefit - can either be positive or negative in terms of effect on society. Sometimes, production may involve the benefits to the community and not negative costs.
Example: The residents in a community wherein industries are put up will benefit through jobs generated and business opportunities created, like canteens, dormitories for workers. However, they suffer in terms of pollution and a possibly high crime rate in the area.
It is characterized by the presence of several sellers or producers in the market who offer homogeneous or identical goods. Examples are sellers of farm products like rice, corn, coconuts, and sugar.
Since numerous firms are engaged in farm products, a single seller is relatively small in comparison to the entire market or industry. Because of this, a single seller under perfect competition is a price taker , who cannot affect the market price.
Under perfect competition, there is complete mobility of goods and resources, which means that producers and sellers can freely enter into or leave the market whenever they wish.
It comes from two Greek words – mono, meaning “one”, and polist, meaning “seller”. Therefore, it refers to one seller dominating the market. This type of market structure is the exact opposite of perfect competition.
Example: Public Utility firms (Meralco)
Patent - It is the exclusive right granted an inventor to enable him to control the use of his invention – also hinders other firms from penetrating the market.
In this kind of competition, there are many firms competing and it is easy for a firm to enter and exit the market. Note that these characteristics are the same as those of perfect competition.
The difference is that the products sold in monopolistic competition are not completely homogeneous. Different producers/firms make it appear as if their own product was unique and different from the rest, but in reality, the products available in the market are close substitutes.
In an oligopoly, only a few sellers control a big share of the market. In this market structure, there is some degree of control over the market price and the sellers are interdependent – a phenomenon called collusion.
Oligopolists forge price agreements to promote their own economic interests. The biggest producer among them is the price leader. In the case of oil, the price leader is Saudi Arabia. There is also some sort of output agreement among oligopolists to avoid surplus, which will cause a decline in the price of their products.