AP Micro unit 2

consumer surplus

amount ur willing to pay

found at price equalibirum Pe

consumer surplus rises when

price falls [Price ceiling is set or got lowered]

producer surplus

bare minimum a product must sell for

calculating producer/consumer surplus

consumer → area above equilibrium till demand curve

producer → area below equilibrium till supply demand

total/ Economic surplus

product surplus area + consumer surplus area [plus tax rev]

Allocation efficiency

when total surplus is maximized with no dead weight loss: found at equilibrium

calculating consumer surplus decreases

Cs₁ - Cs₂ = total Cs

Market Disequilibrium

when demand doesnt equal the supply

conditions in shortage

Qd > Qs → price is set below equilibrium

conditions in surplus

Qs > Qd → price is above equilibrium

determining graph when price increases or decreases

in market disequilibrium

graph de/increase of demand/supply curve

re-graph equilibrium

the new quantity is considered Qs [quantity in supply] and compare it to Qe

double shift in market disequilibrium

indetermanite = increases then decreases

[or vise versa]

in/decrease = if it occurs twice

get pic from yt

Individual to Market Demand

add up all the individual Qd for each column and keep the price 

Demand Vs Quantity Demand

demand

1. is the entire slope demand or table demand

2. A shift in price DOES NOT effect this kind of demand

Demand Vs Quantity Demand

quantity demand [Qd]

1. a specific quantity at a certain price

2. a shift in price =Qd is shifted up or down the slope

Determinates of Demand

*what shifts demand

1. taste and prefrence

2. market Size

3. Price of related goods

4. change in income

5. expectations

Determinates of Demand

taste and prefrence 

The popularity of the product going going up or down

Determinates of Demand

market size

an in/decrease in the number of buyers/population

Determinates of Demand

price of related goods

substitutes → an increase in price of good A causes a increase in demand of good B [and vice versa]

complements → noting peanut butter and jam need each other: cheaper jam means buying more peanut butter, expensive jam = less peanut butter

Determinates of Demand

change in income

normal goods → think of as the expensive brand, as wage goes up = demand goes up

---

inferior goods → think of as cheap brand,

as wage goes up = less demand

but as wage goes down =demand goes down

Determinates of Demand

expectations

expected price drop in the future =

decrease in demand

---

expected price increase in the future =

increases demand 

Demand general definition

as price goes up = qd goes down

---

MU goes down as u buy more so slope is downturned

as price goes up demand becomes less and less [vice versa]

Supply general definition

as price goes up so does Qs = more production

low price meand less Qs = less production

individual supply to market supply

same as demand, add the individuals up but keep the price

supply vs Qs

supply → price DOESNT change supply

Qs → price does change qs

Increase in supply

a shift to the right

decrease in supply

shift to the left

Determinates of Supply

in the short run

1. input prices

2. government tools

3. number of sellers

4. technology

5. price of other goods

Determinates of Supply

Input prices

production cost goes down

EX→ as the price of fertilizer [ability to produce] goes down, farmers will plant more wheat. 

but if it goes up, they will plant less wheat

Determinates of Supply

Government tools

1. taxes: increases cost of production = less produce

2. subsides: government paying = encourages more produce 

3. regulations: decreases production [banning smth]

Determinates of Supply

Number of sellers

more farmers = more production

less farmers = less production

aka more or less labor

Determinates of Supply

technology

increases productivity = more production

Determinates of Supply

prices of other goods 

strawberries dropped in price = farmers will make less strawberries due to its reduction in revenue → moving to wheat increase for more profit 

Price elasticity of supply

definition

how sensative consumers are to the change in price

Price elasticity derminantes

an item is a necessity, has few substitutes or is cheap

Demand is inelastic

Price elasticity Derterminintes

an item has many substitutes or is luxury

Demand is elastic

Price elasticity Derterminintes

shape of demand slope

steeper [vertical] = inelastic [as price increases drastically qd changes slightly]

wider [horizontal] = elastic [as price increases qd changes drastically]

Total Revenue relationship

Price decreases → Inelastic Demand

TR decreases

no change in TR when

Unit elastic

Total Revenue relationship

Price decrease → elastic Demand

TR increases [bc they stretch in motion]

TR with Marginal Revenue 

when MR hits the x-axis

we have reached unit elastic 

Marginal Revenue and TR relationship

if MR is + = elastic

if MR is 0 = unit elastic

if MR is - = inelastic

---

note:- its just called that dont think too hard curve doesnt change, only in name

determining graph when price increases or decreases

tax, subsidy, and Regulations

1. shift the supply curve 

2. find new Qe = Qd

3. find Qs by continuing from same price to new supply curve

Price flooring Definition

government imposes minimum price on product to sell for

Price ceiling Definition

government imposes max price of product set to sellers

Price floor binding

Pf must be placed above equilibrium

if not → non-binding or false

binding price

a market cant adjust naturally to equilibrium

leads to DWL

the market is affected

Pc or Pf is non-binding

Market is unaffected

Pf creates a

Surplus bc Qs > Qd

Pc creates a

Shortage bc Qd > Qs

How to graph Pc or Pf

1. Draw line across

2. Qd is found after hitting the demand slope and downwards

3. Qs is found after hitting the slope curve then downwards

price ceiling binding

Pc must be below Pe 

if not → is non-binding or false

subsidies

Subsidy Expenditure

Found by multiplying Qs by per unit subsidy

subsidies

Find DWL

Found using

per unit subsidy times Qs - Qe times 1/2

what occurs to the supply curve after a subsidy

a shift to the right

when a tax is added to the price 

the supply curve shifts to the left 

Tax overall graph

Cs and Ps got smaller = economic surplus decreases

Import Quota

limit on quantity of a good that can be imported

Autarky

a country at equilibrium doesnt trade 

PW

world price [pre-tax and tariffs]

Usually under Pe

CS/PS when Pw is charted

cs increases

ps decreases

CS/PS when Pw +tariff is charted

cs: still bigger but decreases

ps: still smaller but increase

→ still graphed under Pe

World trade

World price that is below Pe

The difference between Qd and Qs is the amount of imported goods.

Qd>Qs

World trade

Increases economic surplus (bc cs or ps got wayyy bigger)

World trade

World price above Pe

There will be an export of Qs - Qd

Qd < Qs

World trade

World price + tariff → find tax revenue

includes both PW and PW + tariff in order to find

Multiply (Pw + tariff - Pe) with new tariff (Qd - Qs)

World trade

Tariff effect on trade

decreases Economic surplus

Creates Dead weight loss

PES Elasticity Coefficients

Formula

Change in Quantity supply / change in price

Price of elasticity

Relatively Elastic

Curve of supply (y-intercept) is Greater than 1

Price of elasticity

Unit elastic

Curve of supply (y-intercept) is Exactly one

Price of elasticity

Relatively Inelastic

The supply curve (y-intercept) is less than 1

Price of elasticity

Perfectly Elastic

The supply curve is horizontal

Elasticity Coefficient is infinite or undefined

Price of elasticity

Perfectly inelastic

A vertical supply curve with one quantity at any price

Elasticity Coefficient = 0

Cross Price Elasticity

Change in percent Quantity Demand of Good A /change in percent of price of good B

Income Elasticity

Positive Coefficient

A normal good (more money more expensive stuff)

Income Elasticity

Negative coefficient

Inferior good (money goes down so cheap items bought are more)

Cross price elasticity

definition

How the price of one good changed Qd of another

Cross price Elasticity

Positive coefficient

Is therefore a substitute good (one cost goes up so the other gets bought more)

Cross price Elasticity

Negative Coefficient

A complement good (one increases $ so does D of the other)

Economic surplus only increases when

1. When Pw is set in place below or under Pe

2. When u maximize efficiency by returning to Equilibrium

Pc and Pf when binding cannot

be moved up or down when ur asked in a Question

World Trade

country is an importer

their Qd > Qs = Pw is under Pe

World Trade

country is an exporter

their Qd < Qs = Pw is over Pe

Price elasticity of SUPPLY

using the same formulas as elasticity coefficient

same elasticity types as demand

Elastic coefficient formula

[new - old] / old x 100

aka percent change formula

Income elasticity formula

change in % Q / change in % income

why does demand slope down?

2 reasons

1. g

2. h

“quit a job that pays 25k a yr per yr, what is the o.p.c after for 5 yrs”

multiply money lost with time