Tapar, Ylron Paul A.

BSN-3
July 8, 2015
1. Concept of Elasticity
a. Elasticity demand - is the measurement of how responsive an economic
variable is to a change in another. It gives answers to questions such as:
"If I lower the price of my product, how much more will I sell?"

"If I raise the price of one good, how will that affect sales of this other
good?"
"If the market price of a product goes down, how much will that affect
the amount that firms will be willing to supply to the market?

b. Income elasticity of demand - measures the responsiveness of the

demand for a good to a change in the income of the people demanding
the good, ceteris paribus. It is calculated as the ratio of the percentage
change in demand to the percentage change in income. For example, if, in
response to a 10% increase in income, the demand for a good increased
by 20%, the income elasticity of demand would be 20%/10% = 2.
c. Cross-price elasticity of demand measures the responsiveness of
the demand for a good to a change in the price of another good. It is
measured as the percentage change in demand for the first good that
occurs in response to a percentage change in price of the second good.
d. If the price increase had no impact whatsoever on the quantity demanded,
the medication would be considered perfectly inelastic. Economics
textbooks depict the demand curve for a perfectly inelastic good as a
vertical line, because the quantity demanded is the same at any price.
e. An elastic variable (with elasticity value greater than 1) is one which
responds more than proportionally to changes in other variables. In
contrast, an inelastic variable (with elasticity value less than 1) is one
which changes less than proportionally in response to changes in other
variables.

f. The price elasticity of supply measures how the amount of a good that a
supplier wishes to supply changes in response to a change in price. [2] In a
manner analogous to the price elasticity of demand, it captures the extent
of horizontal movement along the supply curve relative to the extent of
vertical movement. If the price elasticity of supply is zero the supply of a
good supplied is "totally inelastic" and the quantity supplied is fixed.
2. Consumer behavior & utility maximization
a. Consumer - is a person or organization that uses economic
services or commodities.
b. Goods and services are the outcome of human efforts to meet the wants
and needs of people. Economic output is divided into physical goods and
intangible services. Goods are items that can be seen and touched, such
as books, pens, salt, shoes, hats, and folders.
c.

Necessity good is a type of normal good. Like any other normal good,
when income rises, demand rises. But the increase for a necessity good is
less than proportional to the rise in income, so the proportion of
expenditure on these goods falls as income rises.
a luxury good is a good for which demand increases more than
proportionally as income rises, and is a contrast to a "necessity good", for
which demand increases proportionally less than income.

d. A free good is a good that is not scarce, and therefore is available without
limits. A free good is available in as great a quantity as desired with
zero opportunity cost to society.
A good that is made available at zero price is not necessarily a free good.
For example, a shop might give away its stock in its promotion, but
producing these goods would still have required the use of scarce
resources.
e. In economics and other social sciences, preference is the ordering of
alternatives, based on the relative happiness, satisfaction, gratification,
enjoyment, or utility they provide, a process which results in an optimal
"choice" (whether real or theoretical). The character of the individual
preferences is determined purely by taste factors, independent of
considerations of prices, income, or availability of goods.
f. Maslows hierarchy of needs

g. In economics, game theory, and decision theory the expected utility

hypothesis is a hypothesis concerning people's preferences with regard
to choices that have uncertain outcomes (gambles).
Marginal utility is an important economic concept because economists
use it to determine how much of an item a consumer will buy. Positive
marginal utility is when the consumption of an additional item increases
the total utility.
Total utility is the total satisfaction received from consuming a
given total quantity of a good or service, while marginal utility is the
satisfaction gained from consuming another quantity of a good or service.
Sometimes, economists like to subdivide utility into individual units that
they call utilities.
h. Consumer surplus is the difference between the total amount
that consumers are willing and able to pay for a good or service
(indicated by the demand curve) and the total amount that they actually do
pay (i.e. the market price)

3. The profit maximizing firm

a. In economics, factors of production, resources, or inputs are what is
used in the production process in order to produce outputthat is,
finished goods. The amounts of the various inputs used determine the
quantity of output according to a relationship called the production
function.
b. Labour economics looks at the suppliers of labour services (workers),
the demands oflabour services (employers), and attempts to understand
the resulting pattern of wages, employment, and income.
In economics,labour is a measure of the work done by human beings.
c.

Capital resources are goods produced and used to make other goods
and services. Basic categories of capital resources include tools,
equipment, buildings, and machinery.

d. Output in economics is the "quantity of goods or services produced in a

given time period, by a firm, industry, or country," whether consumed or
used for further production. The concept of national output is essential in
the field of macroeconomics.
e. In economics, any commodity which is produced and subsequently
consumed by the consumer, to satisfy its current wants or needs, is a
consumer good or final good. Consumer goods are goods that are
ultimately consumed rather than used in the production of another good.
f. Intermediate goods are goods that are used by a business in the
production of goods or services. Intermediate goods are also referred to
as producer goods. A consumer good, on the other hand, is
a good purchased by a consumer for personal consumption. In
fact, intermediate goods are used to make consumer goods.
g. In economics, factors of production, resources, or inputs are what is
used in the production process in order to produce outputthat is,
finished goods. The amounts of the various inputs used determine the

quantity of output according to a relationship called the production

function.
h. Labor intensive is used to describe any production process that requires
higher labor input than capital input in terms of cost.
capital-intensive production This refers to techniques of production, and
represents the proportion of capital (machinery, equipment, inventories)
relative to labour, measured by the capitallabour ratio. The term is
frequently used in the development literature to characterize the nature of
the industrialization process and to examine its consequences for growth
in employment vis--visoutput.

i. Short run: Quantity of labor is variable but quantity of capital

and production processes are fixed
Long run: Quantity of labor, quantity of capital, and production processes
are all variable
j. A fixed input is a resource or factor of production which cannot be
changed in the short run by a firm as it seeks to change the quantity of
output produced. Most firms have several fixed inputs in short-run
production, especially buildings, equipment, and land.
Total product is the overall quantity of output that a firm produces, usually
specified in relation to a variable input. Total product is the starting point
for the analysis of short-run production. It indicates how much output a
firm can produce according to the law of diminishing marginal returns.

k. In economics, diminishing returns (also called law of diminishing

returns, law of variable proportions, principle of diminishing
marginal productivity, or diminishing marginal returns) is the
decrease in the marginal (incremental) output of a production process as
the amount of a single factor of production is incrementally increased,
while the amounts of all other factors of production stay constant.

The law of diminishing returns states that in all productive processes,

adding more of one factor of production, while holding all others constant
("ceteris paribus"), will at some point yield lower incremental per-unit
returns. The law of diminishing returns does not imply that adding more of
a factor will decrease the total production, a condition known as negative
returns, though in fact this is common.
For example, the use of fertilizer improves crop production on farms and in
gardens; but at some point, adding increasingly more fertilizer improves
the yield by less per unit of fertilizer, and excessive quantities can even
reduce the yield. A common sort of example is adding more workers to a
job, such as assembling a car on a factory floor. At some point, adding
more workers causes problems such as workers getting in each other's
way or frequently finding themselves waiting for access to a part. In all of
these processes, producing one more unit of output per unit of time will
eventually cost increasingly more, due to inputs being used less and less
effectively.
The law of diminishing returns is a fundamental principle of economics. It
plays a central role in production theory.

l. In management accounting, fixed costs are defined as expenses that do

not change as a function of the activity of a business, within the relevant
period. For example, a retailer must pay rent and utility bills irrespective of
sales. In marketing, it is necessary to know how costs divide between
variable and fixed.
Variable costs are those costs that vary depending on a company's
production volume; they rise as production increases and fall as
production decreases. Variable costs differ from fixed costs such as rent,
advertising, insurance and office supplies, which tend to remain the same
regardless of production output.
m. Economic cost is the gains and losses in money, time and resources of
one course of action compared to another. The comparison includes the
gains and losses precluded by taking a course of action, as the those of
the course taken itself. Economic cost differs from accounting
cost because it includes opportunity cost.

n. In economics, marginal cost is the change in the total cost that arises
when the quantity produced is incremented by one unit. That is, it is the
cost of producing one more unit of a good. In general terms, marginal cost
at each level of production includes any additional costs required to
produce the next unit. For example, if producing additional vehicles
requires building a new factory, the marginal cost of the extra vehicles
includes the cost of the new factory. In practice, this analysis is segregated
into short and long-run cases, so that over the longest run, all costs
become marginal. At each level of production and time period being
considered, marginal costs include all costs that vary with the level of
production, whereas other costs that do not vary with production are
considered fixed.
The graph is plotted with Price, Cost and Revenue on the Y-axis and
Quantity on the X-axis.
If the good being produced is infinitely divisible, so the size of a marginal
cost will change with volume, as a non-linear and non-proportional cost
function includes the following:

variable terms dependent to volume,

constant terms independent to volume and occurring with the respective

lot size,

jump fix cost increase or decrease dependent to steps of volume increase.

In practice the above definition of marginal cost as the change in total cost
as a result of an increase in output of one unit is inconsistent with the
differential definition of marginal cost for virtually all non-linear functions.
This is as the definition finds the tangent to the total cost curve at the point
q which assumes that costs increase at the same rate as they were at q. A
new definition may be useful for marginal unit cost (MUC) using the
current definition of the change in total cost as a result of an increase of
one unit of output defined as: TC(q+1)-TC(q) and re-defining marginal cost
to be the change in total as a result of an infinitesimally small increase in q
which is consistent with its use in economic literature and can be
calculated differentially.
If the cost function is differentiable joining, the marginal cost is the cost of
the next unit produced referring to the basic volume.

If the cost function is not differentiable, the marginal cost can be expressed as
follows.

A number of other factors can affect marginal cost and its applicability to real
world problems. Some of these may be considered market failures. These may
include information asymmetries, the presence of negative or
positive externalities, transaction costs, price discrimination and others.