FNR 407 Forest Economics

William L. (Bill) Hoover

Professor of Forestry

494-3580

743-4120

whoover@purdue.edu

Economics

• Allocation of scarce resources to unlimited wants– Market– Other, e.g.?

Quantity (Q)

Pri

ce (

P) Demand (D)

Suppl

y (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

P1

Q1

P2

Q2

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

Relationship of Ep to Total Revenue

• When Ep > |1|, decreasing price increases total revenue (the elastic range of the demand curve)

• When Ep = 0, total revenue is maximized

• When Ep < |1|, decreasing price decreases total revenue (the inelastic range of the demand curve)

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

Supply Curve

• Marginal cost (MC) curve above average total cost (ATC)

• Can’t cover all costs in long-run with price below ATC

P1

MCATC

Price (P)

P2

Q2 Q1