Econ Review

elasticity general formula

%∆Qd / %∆P

Aggregate Income Elasticity of Demand (formula)

(TE/Qfood)*(∆Qfood/∆TE)

Income Elasticity of Demand for a Good "i"

(TE/Qi)*(∆Qi/∆TE)

Product-Product Decisions - Econ. Profitability - graph

- Depends on relative prices and opportunity costs - Produce where profit from growing last unit of corn = revenue lost from not growing wheat

Product-Product Decisions - Social Desirability - graph

- If tangency is not socially desirable, you can raise the price of a good to change the outcome - How much to change price depends on elasticities of supply

Total Factor Productivity (TFP) - definition

- a measure of an economy's long-term technological change or innovation -Total Factor Productivity is a measure of the efficiency of agricultural production and describes the output that is not explained by amount of inputs used in production -A good estimate for TFP growth in a growing developing economy would be 2-4% per year

Slope of a Elastic demand curve?

- flatter than 45 degrees - slope > (greater than) 1

Slope of a INelastic demand curve?

- steeper than 45 degrees - slope < (less than) 1

elastic demand

-- ex: luxury goods, not necessary. -- demand very sensitive to small price change. - will quickly replace it or not buy, if price increases. -- %change Demand is greater than %change Price (greater than -1)

INelastic demand

-- ex: staple goods, necessities, gasoline, milk, etc. -- demand NOT sensitive, stiff, to small price changes - will buy it regardless of price -- %change in Demand is smaller than %change Price

What does *Unit elasticity look like?

45 degree line

what causes *Shifts* of the Demand Curve?

At a given price, different quantity is demanded Causes: population growth, income growth, bio-energy(?)

Cross Price Elasticity

Eab = %∆Qa/%∆Pb Eab>0, positive: goods a and b are Substitutes Eab<0, negative: " " are Complements

Substitution and Income Effects - graph

Effects of an increase in the price of food

Own-Price Elasticity

Eii = %∆Qi/%∆Pi = (∆Qi/Qi)/(∆Pi/Pi) always negative

What does *perfect elasticity* look like?

Horizontal Line -----------------

TFP - concerns and criticisms

Option 1: Concern over TFP as a metric --Analysts worry about this concept sometimes because it isn't in meaningful units that lend themselves to a clear interpretation. Another concern is that TFP is a residual value that cannot be directly measured (2pts, only one concern needed for full credit). Option 2: Concern over the implications of TFP --Analysts worry about TFP because TFP is often considered the main driver of economic growth.

Timmer's Law - definition

Poor households are more sensitive to price changes than rich households, and often have fewer substitution options.

what causes moves *along* the Demand Curve?

Quantity Demanded in response to Prices

what causes moves *along* the Supply Curve?

Quantity Supplied in response to Prices

Solow & TFP - conclusions

Solow's central finding was that only about 1/8th of yield increases were due to increased inputs, while the rest was due to technical change (3pts). This is misleading as it applies to current global agriculture because it describes technological change as an exogenous factor, or something that "falls from the sky" and just happens. In reality, years of R&D and millions of dollars of investment are needed to create this technical change

What does *perfect INelasticity* look like?

Vertical Line l l l

Induced Innovation - definition

as factor (capital, labor) prices increase, there is increased scarcity. Which inputs are needed to produce Ag. products and which are higher priced? Essentially finding ways to reduce prices or invest in cheaper options EX: US - not many people but lots of land-->invest in mechanization EX: India - more investment in alternative resources, bc there is no land but lot of people

what causes *Shifts* of the Supply Curve?

at a given price, different quantity supplied. Causes: technology, climate, resources

Induced Innovation - graph

concept of: Ruttan and Hayami

elasticity

ratio of two % changes, and measures how responsive an economic variable is to another variable

Bennett's Law - definition

the proportion of calories derived from starchy staples declines as income increases

Engel's Law - definition

the proportion of household income spent on food in the aggregate declines as income rises

Indifference Curve - definition

• set of all consumption points which give the agent the same utility (=happiness) • Optimal choice: indifference curve is tangent to the budget line.