Unit 1- Price Ceiling and Price Floor

Price Ceiling and Price Floor

Price Ceiling

• Legal maximum price meant to help buyers.
• Keeps the price from getting too high(prevents price gauging).

Consequences

1. Lower prices for some consumers.
2. Shortages
3. Long lines for buyers
4. Illegal sales above the equilibrium price

Ex: Rent control

Price Floor

• Legal minimum price meant to help sellers.
• Keeps the product price from falling.

Consequences

1. Higher product prices which helps the seller
2. Surplus
3. Higher taxes or higher government debt if they buy a surplus
4. Waste

Ex: Minimum wage

Unit 1- Costs of Production

Costs of Production

Fixed Costs- A cost that doesn't change no matter how much is produced

Ex: Mortgage

Variable Costs- A cost that rises or falls depending upon how much is produced.

Ex: Electricity bills

Total Costs- Fixed Cost + Variable Cost

Marginal Revenue- The additional income from selling one more unit of a good

Marginal Cost- The cost of producing one more unit of a good.

Total Revenue- Price x Quantity

Formulas:

TC=TFC+TVC
ATC= AFC+AVC

AFC= TFC/Q
AVC= TVC/Q
ATC= TC/Q

TC= ATC x Q
TFC= AFC x Q
TVC= AVC x Q

MC = (New TC) - (Old TC)

Variables
Q: Quantity
TFC: Total Fixed cost
TVC: Total Variable Cost
TC: Total Cost
MC: Marginal Cost
ATC: Average Fixed Cost
AVC: Average Variable Cost
AFC: Average Total Cost

Source: http://www.economicsdiscussion.net/production/cost-of-production/short-run-cost-of-production-with-diagram/16366

Unit 1- Price Elasticity of Demand

Price Elasticity of Demand

Price Elasticity of Demand- Measure of how consumers react to a change in price

Elastic Demand

• Demand that is very sensitive to a change in price
• E > 1
• Product is not a necessity and there are available substitutes
• Example: Soda(water, milk), Steak(chicken, pork)

Inelastic Demand

• Demand that is not sensitive to a change in price.
• E < 1
• Product is a necessity and few/no substitutes 
• Example: Insulin

Unitary Elastic

• E = 1

Calculating Price Elasticity of Demand (PED)

1. Quantity: (New-old)/old
2. Price: (New-old)/old
3. PED = %Δ in quantity/ %Δ in price

Unit 1- Production Possibilities Graph

Production Possibilities Graph (PPG)

PPG- Graph showing alternative ways to use an economy's resources.

PPC- Production Possibilities Curve

PPF- Production Possibilities Frontier

Source: https://www.tutor2u.net/economics/reference/production-possibility-frontier

Point(s) on the graph meaning:

• Inside the curve- Underutilization, underemployment, unemployment.
• On the Curve- Efficient
• Outside the Curve- Unobtainable at the current time, requires economic growth or new technology to become obtainable.

Key Assumptions

1. Full employment (4-5% unemployment, 90% factory capacity)
2. Fixed resources
3. Fixed state of technology
4. No international trade
5. Two goods are produced.

Three Types of Movement on the PPC

1. Inside the PPC: Due to unemployment, underemployment, or underutilization 
2. Along the PPC: This results in producing more of one good and less of the other
3. Shifts of the PPC: Due to resource or technology changing

Allocative efficiency- products being produced are the ones that are most desired by society 

Product efficiency- products are being produced in the least costly way (any point on the PPC)

Underutilization- Using fewer resources than an economy is capable of using

Source: https://www.tutor2u.net/economics/reference/production-possibility-frontier

Law of increasing opportunity costs- As you produce more of one good, the opportunity cost will increase. Will result in a concave or bowed out curve.