Abstract
Asked what something costs, your reply will almost surely be in the form of a number, expressed in dollars if you are an American. But why is the number what it is? Why does a sandwich cost $3.50, a gallon of gas $4.00, some books $20, others $40, a new car $20,000? Probably you have some sense of the answer, which involves the costs for the things needed to make these items. Sandwiches need meat and bread, and books need paper and ink. Cars need rubber, several kinds of metals, upholstering, and all manner of other resources. All of these things cost money, as does the time of workers hired.
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Notes
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2Technically, it is the value of what the dollars would have been used for, although it is often convenient to summarize this way as long as we remember what the dollars really stand for.
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3Note that that word forgone shows up a lot in discussion of opportunity cost, because you have to forgo some action to take some other action.
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4Which, frankly, is often a mistake, because you will be spending so much time at work that enjoyment of it is also an important consideration.
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6I consider in more detail the problem of costly information in Chapter 4 .
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7There is a strict mathematical definition of elastic versus inelastic demand. The formula for calculating the numerical value of elasticity over some interval of the demand curve in which we study the effect of a price change from P 0 to P 1 is \(\left|\frac{\frac{{Q}_{1}-{Q}_{0}}{{Q}_{0}}}{\frac{{P}_{1}-{P}_{0}}{{P}_{0}}}\right|\), which just means the absolute value of the percentage change in quantity divided by the percentage change in price. If this number is greater than 1, we say that demand is elastic, that is, quantity demanded is relatively sensitive to changes in price; if it is less than 1, we say that demand is inelastic, that is, quantity demanded is relatively insensitive to changes in price. If by some strange coincidence elasticity of demand were exactly equal to 1, demand would be unit-elastic.
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© 2013 Evan Osborne
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Osborne, E. (2013). Supply and Demand, Considered Separately. In: Reasonably Simple Economics. Apress, Berkeley, CA. https://doi.org/10.1007/978-1-4302-5942-8_2
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DOI: https://doi.org/10.1007/978-1-4302-5942-8_2
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