Micro Macro Final

Three Types of Demand

- Individual

- Market

- Aggregate(GDP)

Individual Demand

how much of a good an individual is willing and able to

buy at a certain price point

Market Demand

total amount of a good demanded by all consumers at

certain price points (sum of all individual demands)

Aggregate

-GDP

-All goods and services across all markets

Why will the demand curve be downward sloping?

Buyers are willing to buy more when the price decreases and less when the price increases due to the:

1. Substitution effect - buy other things

2. Income effect - afford less

3. Law of Diminishing Marginal Utility

Quantity demanded changes if price changes

movement along the curve

If the overall demand for a good changes,

shift of the demand curve

What are the five shifters of demand?

“The Nice People Inspire Fun.”

T = Taste and preferences

N = Number of consumers

P = Price of related goods

I = Income

F = Future expectations

What are the five shifters of supply?

Mnemonic: “People Need To Get Everything.”

P = Prices of resources

N = Number of producers

T = Technology

G = Government actions (subsidies/taxes)

E = Expectations of future profit

Expectations- Demand

Expect a future drop in price - demand today will decrease

• Example: demand for new cars in June

• Expect a future rise in price - demand today will increase

• Example: gas prior to hurricanes

Population

More consumers = more demand at an individual price point

Quantity Supplied

The amount a supplier is willing and able to supply at a certain price

Change In Supply

Actual shift of the supply curve

Price Ceiling

maximum price sellers are allowed to charge for a good or service

-shortage

• Examples: rent in certain cities, max contracts in sports,

-Below eq

Price floor

-Minimum price buyers are required to pay for a good or

service.

-Creates a surplus

- Above eq

Quota

limits the quantity that is allowed to be supplied

Quota Rent

difference between demand and supply price at the quota

Surplus Formula

Qs-Qd units

Shortage Formula

Qd-Qs units

Quota Rent Formula

demand price - supply price

cross price elasticity of demand (formula)

% change in quantity of A demanded / % change in price of B

If cross elasticity is positive

goods are substitutes

if cross elasticity is negative

goods are complements

if income elasticity is negative

inferior good

if income elasticty is 0

"sticky good'

Price elasticity of supply

% change in quantity supplied / % change in price

If price elasticity < 1

supply is inelastic

Import Quotas

-Limit on amount of good that can be imported (typically over a year

period)

-Quotas DO NOT increase govt. rev

How do import quotas affect other factors of production

Import quotas will increase domestic production and domestic producer surplus

Tarifs

- Tarifs -> incrs of foreign gods

Tariff Revenue Formula

Tariff * the amount imported

What is the trade off with Tarrifs?

It leads to an incrs in producer suprlus BUT it could raise prices

Tarrif Shift

Horizontal supply curve shifts up by amount of tariff

Trade Benefits

- Can be good for other countries

Trade Negative Effects

-Lost jobs (structural unemployment)

-Overreliance on other countries

List three characteristics of goods with inelastic demand

-Necessities

-Have few substitutes

-Elasticity coefficient less than one

Inelastic (Price + TR)

- Price ↑ TR ↑

- Price ↓ TR ↓

Elastic (Price + TR)

- Price ↑ TR ↓

- Price ↓ TR ↑

Income Elasticity Formula

% change in quantity demanded / % change in income

Substitutes

-goods that can replace others

-If price of one good

increases, demand for a substitute good would increase

Complements

-goods that are used together

-If price of one good

increases, demand for complement would decrease

Inputs

• Prices of anything used to manufacture a good - labor, items

purchased from other firms, natural resources, capital, etc.

• Examples: minimum wage, steel for a car manufacturer, lumber,

Price of related goods (supply)

Complements- good produced together - If the price of a complement good increases, the supply would increase

Substitutes - if the price of a substitute good increases, supply of the other goods would decrease

Expectations (supply)

If producers expect prices to rise, they hold back supply; if they expect prices to fall, they sell more now.

Example Sentence: Because farmers expected corn prices to drop next month, they increased supply this week to sell before prices fell. 🌽

Demand ↑ Supply constant

Q ↑, P ↑ → both rise because buyers compete for limited goods

Demand ↓, Supply Constant

Q ↓, P ↓ → both fall because fewer buyers want the product

Supply ↑; Demand constant

Q ↑, P ↓ → sellers compete, lower prices, more output

Supply ↓; Demand constant

Q ↓, P ↑ → shortage raises prices, less produced

Supply ↑ and Demand ↑

Equilibrium Quantity: ⬆️ Increases

Equilibrium Price: ❓ Indeterminate

(Both raise Q, but price moves opposite directions — can’t tell.)

Supply ↓ and Demand ↓

Equilibrium Quantity: ⬇️ Decreases

Equilibrium Price: ❓ Indeterminate

(Both lower Q, but price effects cancel out.)

Supply ↑ and Demand ↓

Equilibrium Quantity: ❓ Indeterminate

Equilibrium Price: ⬇️ Decreases

(Price always follows demand’s direction.)

Supply ↓ and Demand ↑

Equilibrium Quantity: ❓ Indeterminate

Equilibrium Price: ⬆️ Increases

Marginal Benefit

dollar amount that someone is willing to pay for an

additional unit

Individual Surplus

difference between price of a good and what an

individual is willing to pay for the good

Total Consumer Surplus

at a given quantity exchanged in the

market, the difference between the total value to consumers and the total market value

Decreasing the price of a good has two effects on surplus:

-Increasing the surplus of current consumers

-Adding surplus of new consumers willing to buy at lower price

Marginal cost

the cost to a producer to make an additional unit of a good

Individual Producer Surplus

difference between price of good and the

lowest price a producer would be willing to sell a good

Total Producer Surplus

difference between total market value and total

cost of production (includes opportunity costs)

Deadweight Loss

-Created when some mutually beneficial transactions do not occur or non-beneficial transactions do occur

-Any market not in equilibrium has deadweight loss

Price of object

in general, the less expensive a product, the more

inelastic its demand

Passage of time

demand becomes more elastic as time goes by as

firms change production to meet new demands

Price elasticity of demand:

|% change in quantity demanded / % change in price|

If |ε| > 1

the demand is elastic

If |ε|< 1

the demand is inelastic

If |ε|= 1,

the demand is unit elastic

if cross price elasticity is 0

goods are unrelated

If price elasticity > 1

supply is elastic

if price elasticity = 1

unit elastic

Determinants of Price Elasticity of Supply

1. Availability of Inputs

• Inputs easy to get → Elastic supply

• Inputs hard to get → Inelastic supply

2. Time

• Short run → Inelastic

• Long run → More elastic (firms have time to adjust)

3. Marginal Cost (Cost of making each extra unit)

• If extra units cost a lot more to produce → Inelastic supply

• If extra units cost about the same → Elastic supply

Availability of Inputs

If inputs are easy to get → supply is elastic.

If inputs are scarce/hard to get → supply is inelastic

Time(Supply Elasticity)

In the short run, supply is less elastic. In the long run, supply becomes more elastic as producers adjust.

Marginal Cost (Supply Elasticity)

: If marginal cost rises quickly with more output → supply is inelastic. If marginal cost rises slowly → supply is elastic.

Types of tax structure

1. progressive

2. proportional(flat)

3. regressive

Progressive tax

Tax rate ↑ as income ↑ (equity focus)

Regressive tax

Average tax rate ↓ as income ↑ (heavier on low-income)

Proportional (flat) tax

Everyone pays the same % of income

Excise tax

-Per-unit tax on a good/service

- Generates $$$ for govt

Marginal tax rate

rate on the top chunk of your income (last dollar).

average tax rate

total taxes paid divided by total income

Effect of excise tax on curves

Shifts supply up/left (if on producers) or demand down/left (if on consumers).

Trade-off of taxes

Government revenue ↑ but total surplus ↓ (DWL).

DWL and elasticity

DWL is bigger when D or S is more elastic (more responsive

Who bears more tax burden

The side that is more inelastic (less flexible).

Pc vs Ps after a tax

Pc = price buyers pay (above Pe); Ps = price sellers receive (below Pe); Pc−Ps = tax wedge.

World Price Below Equilibrium

Similar to binding price ceiling, except the shortage is replaced with

imports

• Decrease in producer surplus

• Increase in consumer surplus

Elastic Supply

Supply is responsive to price changes.

Producers can increase output easily when prices rise (example: t-shirts, candy).

Inelastic Supply

Supply is NOT very responsive to price changes.

Quantity supplied is fixed or hard to change (example: concert tickets, seats on a flight).

DWL (with tax)

(Old CS+Old PS)−(New CS+New PS+Tax Revenue)

Efficiency

society gets maximum benefits from scare resources (maximum TOTAL surplus)

Equity

benefits of resources are equally distributed

equity-efficiency trade-off

Policies that promote equity often decrease efficiency and vice versa

Explicit costs

Money actually paid out (e.g., wages, rent, utilities).

Fixed costs

Costs that do not depend on output (e.g., rent, billboard ads).

Variable costs

Costs that change with output (e.g., labor, materials).

Implicit costs

Opportunity costs — the value of benefits you forgo.

Accounting profit

Revenue − Explicit costs.

Economic profit

Accounting profit − Opportunity (implicit) costs.

Normal economic profit

Economic profit = 0 (resources cannot be better used).

Economic profit non-negative

Resources cannot be better used elsewhere.