1. To determine equilibrium price and quantity equate the supply and demand equations.
Qs = Qd.
2. Price elasticity of Demand
PEoD = % change in quantity demanded / %changed in price
From the above formula PEoD is also equal to P/Q * 1/ slope
- If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)
- If PEoD = 1 then Demand is Unit Elastic
- If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)
Revenue is maximized at PEoD = 1
- 3. Price elasticity of Supply
Same formula as Price elasticity of demand
PEoS = % change in quantity demanded / % change in price
If an equation Q = 40 - 2P, the inverse of slope is nothing but dQ/dP, a derivative of the above equation. dQ/dP = -2
4. Accounting profit = Total Revenue - Total Cost
5. Explicit costs: Actual payments a firm makes to its factors of production and other suppliers
6. Implicit Costs: The opportunity costs for the resources supplied by the firm's owners
7. Economic Profit = Accounting Profit - Explicit Costs - Implicit Costs
8. Normal Profit = Implicit Costs
9. If Total Cost = 0.1Q power 2 + 10Q + 50;
Marginal Cost = d(TC)/dQ = 0.2Q + 10
10. Profit maximizing quantity is determined by setting Price = MC(Marginal Cost)
