FNR 407 Forest Economics William L. (Bill) Hoover Professor of Forestry 494 -3580 743 -4120 whoover@purdue. edu
Economics y pp l Su Price (P) – Market – Other, e. g. ? (S ) • Allocation of scarce resources to unlimited wants De ma nd (D ) Quantity (Q)
Demand Curve • Schedule of amounts P consumers are willing and able to buy at various. P 1 prices – Why is curve negatively sloped • Declining marginal utility • Substitution effect – Not same as consumption P 2 Q 1 Q 2 Q
Price Elasticity of Demand (Ep) % change in quantity demanded % change in price ∆Q/Q ∆Q P ∆Q x P ∆ P/P = Q x ∆P = ∆ P Q Ep is function of (1) inverse of the slope of the demand curve and (2) the point on the demand curve
Ep is a pure number Ep = P/Q x d. Q/d. P Absolute value, sign ignored
Point Elasticity Ep = P/Q x d. Q/d. P is inverse of d. P/d. Q from the demand curve as graphed: P a P = a - b. Q Q P - a = -b. Q a/b – (1/b)P = Q ∴ d. Q/d. P is inverse of b
Arc Elasticity Ep = %∆ Q / %∆ P P P 2 %∆P = (P 2 – P 1) / [(P 1 + P 2)/2] %∆Q = (Q 2 – Q 1) /[(Q 1 + Q 2)/2] P P 1 Q Q 2 Q The point on the demand curve is the midpoint between P 1 and P 2, and Q 1 and Q 2
Relationship of Ep to Total Revenue • When Ep > |1|, decreasing price increases total revenue (the elastic range of the demand curve) • When Ep = 1, total revenue is maximized • When Ep < |1|, decreasing price decreases total revenue (the inelastic range of the demand curve)
$’s/unit (Unit Price) Demand Curve |Ep|>1 |Ep| = 1. 0 |Ep|< 1. 0 Q $’s (Px. Q) Total Revenue Q
Marginality • Given the function Y = f(X), – Marginal change is change in Y per unit change in X – ∆Y/ ∆X, or – d. Y/d. X (first derivative of Y with respect to X • Example – Y ≡ yield, X ≡ year – d. Y/d. X = current annual increment – Y/X = mean annual increment
Supply Curve • Schedule of amounts P producers are willing and able to supply at various price levels – Marginal cost curve above average total cost Q
A Firm’s Supply Curve Price (P) ATC MC P 1 P 2 Q 1 • Marginal cost (MC) curve above average total cost (ATC) • Can’t cover all costs in long-run with price below ATC
Market Supply Curve is Sum of Individual Firms’ MC Curves Market Supply Curve P P Firm 1’s MC Curve P Firm 2’s MC Curve P 2 P 1 Qm, 1 = 10 + 15 Qm, 2 = 20 + 30 Q 1, 1 = 10 Q 1, 2 = 20 Q 2, 1 = 15 Q 2, 2 = 30 For a specified price the quantity that the market would supply is the sum of the amounts that each firm selling in that market would produce and sell.
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