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Chapter Four. Total Revenue Price x Quantity = Total Revenue (TR) $10 x 100 = $1,000 P $10 100 Q SDSD.

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Presentation on theme: "Chapter Four. Total Revenue Price x Quantity = Total Revenue (TR) $10 x 100 = $1,000 P $10 100 Q SDSD."— Presentation transcript:

1 Chapter Four

2 Total Revenue Price x Quantity = Total Revenue (TR) $10 x 100 = $1,000 P $ Q SDSD

3 Marginal Utility Additional satisfaction received beyond what the total satisfaction already is

4 The Law of Diminishing Marginal Utility The additional satisfaction one receives from further consumption will fall at some point

5 When Income Changes There is a Shift in the Demand Curve

6 Elasticity Generally how responsive economic agents are to changes in circumstance. How responsive one variable is to changes in another.

7 Price Elasticity of Demand How responsive consumers are to changes in price. % Qd / %P = (Qd / Qd) / (P / P) Elastic > 1 Consumers are responsive Unit Elastic = 1 Balanced response Inelastic < 1 Consumers are unresponsive

8 Determinants of Price Elasticity: the influence of substitution DEMAND 1. In the long run the demand curve is more elastic e.g. ed for gas during the 70s 2. The less of a necessity, the more elastic is the demand curve, e.g., insulin vs. cheesecake 3. The more narrow a good is defined, the more elastic is the demand curve, e.g., cigarettes vs. Marlboro

9 Supply 1. Instantaneous, or momentary, supply es < 1 2. Short run supply curve is more elastic because substitution is possible 3. Long run supply curve is very elastic

10 Price Elasticity of Supply % Qs / %P = (Qs / Qs) / (P / P) Elastic > 1 Firms are responsive Unit Elastic = 1 Balanced response Inelastic < 1 Firms are unresponsive

11 Where do households spend most? Households spend about 40% on housing


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