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)
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
P1
P2
Q1
Q2
Q
Price Elasticity of Demand
(Ep)
% change in quantity demanded
% change in price
∆Q/Q ∆Q
P
∆Q x P
∆ P/P = Q x ∆P = ∆ P
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 = 1, 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
P
– Marginal cost curve
above average total cost
Q
Supply Curve
Price (P)
ATC
MC
P1
P2
Q 2 Q1
• Marginal cost (MC)
curve above average
total cost (ATC)
• Can’t cover all costs
in long-run with
price below ATC