FNR 407 Forest Economics William L. (Bill) Hoover Professor of Forestry

Economics Allocation of scarce resources to unlimited wants –Market –Other, e.g.? Quantity (Q) Price (P) Demand (D) Supply (S)

Demand Curve Schedule of amounts consumers are willing and able to buy at various prices –Why is curve negatively sloped Declining marginal utility Substitution effect –Not same as consumption P Q P1P1 Q1Q1 P2P2 Q2Q2

Price Elasticity of Demand (Ep) % change in quantity demanded % change in price ∆Q/Q = ∆Q x P = ∆ Q P ∆ P/P Q ∆P ∆ P x 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 dQ/dP Absolute value, sign ignored

Point Elasticity Ep = P/Q x dQ/dP dQ/dP is inverse of dP/dQ from the demand curve as graphed: P = a - bQ P - a = -bQ a/b – (1/b)P = Q ∴ dQ/dP is inverse of b P Q a

Arc Elasticity Ep = %∆ Q / %∆ P P Q Q1Q1 Q2Q2 P1P1 P2P2 Q P %∆P = (P 2 – P 1 ) / [(P 1 + P 2 )/2] %∆Q = (Q 2 – Q 1 ) /[(Q 1 + Q 2 )/2] 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 (PxQ) $’s/unit (Unit Price) Q Q |Ep|>1 |Ep| = 1.0 |Ep|< 1.0 Demand Curve Total Revenue

Marginality Given the function Y = f(X), –Marginal change is change in Y per unit change in X – ∆Y/ ∆X, or –dY/dX (first derivative of Y with respect to X Example –Y ≡ yield, X ≡ year –dY/dX = current annual increment –Y/X = mean annual increment

Supply Curve Schedule of amounts producers are willing and able to supply at various price levels –Marginal cost curve above average total cost P Q

A Firm’s Supply Curve Marginal cost (MC) curve above average total cost (ATC) Can’t cover all costs in long-run with price below ATC P1P1 MC ATC Price (P) P2P2 Q2Q2 Q1Q1

Market Supply Curve is Sum of Individual Firms’ MC Curves Q 2,2 = 30 Q 2,1 = 15 Q 1,1 = 10 Q 1,2 = 20 Firm 1’s MC Curve Firm 2’s MC Curve Market Supply Curve Q m,1 = Q m,2 = PP P 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. P1P1 P2P2