1. Production Possibilities Frontier/Curve

• Inefficient Production: Resources are not fully utilized, but production at this level is achievable.

• Unattainable Without More Resources: Production at this level is limited by scarcity and requires new resources or trade to become possible.

• Opportunity Costs and PPC Shape: If the PPC is concave, opportunity costs increase as resources are not equally suited for producing both goods. With constant opportunity costs, the PPC is a straight line.

• Outward PPC Shift: Improvements in resource quality, quantity, or technology can expand the PPC.

• Inward PPC Shift: A decline in resource quality or quantity will contract the PPC.

2. Supply and Demand Shifts

Single Shifts

• Demand Increases (↑): Price (P) rises, Quantity (Q) rises (Point 1 → 2).

• Demand Decreases (↓): Price (P) falls, Quantity (Q) falls (Point 1 → 8).

• Supply Increases (↑): Price (P) falls, Quantity (Q) rises (Point 1 → 6).

• Supply Decreases (↓): Price (P) rises, Quantity (Q) falls (Point 1 → 5).

Double Shifts

• Demand ↓ and Supply ↓: Price (P) is indeterminate, Quantity (Q) decreases (Point 1 → 8 → 7).

• Demand ↑ and Supply ↑: Price (P) is indeterminate, Quantity (Q) increases (Point 1 → 2 → 4).

• Demand ↑ and Supply ↓: Price (P) rises, Quantity (Q) is indeterminate (Point 1 → 2 → 3).

• Demand ↓ and Supply ↑: Price (P) falls, Quantity (Q) is indeterminate (Point 1 → 8 → 9).

3. Producer/Consumer Surplus

• Consumer Surplus: The gap between what consumers are willing to pay (based on the demand curve) and the actual price paid. It is measured from the price on the y-axis to the demand curve or the exchanged quantity (whichever is smaller), then vertically up to the demand curve.

• Producer Surplus: The difference between the price received by producers and their marginal production costs. It is calculated from the price on the y-axis to the supply curve or the exchanged quantity (whichever is smaller), then vertically down to the supply curve.

• Economic Surplus: The sum of consumer surplus and producer surplus.

4. Price Floor

• Deadweight Loss: Represented by the triangle, it reflects lost efficiency in the market.

• Producer Surplus: The benefit producers receive above their production costs.

• Consumer Surplus: The benefit consumers gain by paying less than what they are willing to pay.

• Market Surplus (Qs > Qd): Occurs when the quantity supplied exceeds the quantity demanded at the current price.

  • The actual quantity exchanged is Qd, as sales cannot exceed what consumers are willing to buy.

5. Price Ceiling

• Deadweight Loss (Triangle 1): The triangle represents the lost economic welfare due to market inefficiency.

• Producer Surplus: The benefit producers receive above their production costs.

• Consumer Surplus: The benefit consumers gain by paying less than what they are willing to pay.

• Market Shortage (Qs < Qd): Occurs when the quantity supplied is less than the quantity demanded at the current price.

  • The actual quantity exchanged is Qs, as producers are unwilling to sell more at the current price.

6. Per-Unit Tax with no Externalities

• Total Tax Revenue (1a + 1b): The sum of the tax burden on producers (1a) and consumers (1b).

  • 1a Producer Tax Burden: The portion of the tax paid by producers.

  • 1b Consumer Tax Burden: The portion of the tax paid by consumers.

• Deadweight Loss: The loss of economic efficiency caused by the tax, represented by the reduction in total surplus.

• Consumer Surplus: The benefit consumers receive when paying less than what they are willing to pay.

• Producer Surplus: The benefit producers receive when receiving more than their production cost.

• Qt: The quantity of the good produced and demanded in the market after the tax is imposed.

• Price of Tax (P1 - P2): The difference between the price consumers pay (P1) and the price producers receive (P2).

  • P1: The price consumers pay after the tax.

  • P2: The price producers receive after the tax.

• Per-Unit Excise Tax: A tax imposed on each unit of a good or service sold.

• Impact of Tax: The tax reduces market efficiency and creates deadweight loss.

• Tax Revenue: A portion of the total economic surplus, along with consumer and producer surplus, is taken by the tax.

7. International Trade and Tariff 

No Trade

• Pe and Qe: The equilibrium price (Pe) and quantity (Qe) without trade.

• Consumer Surplus (A): The area representing the benefit consumers receive.

• Producer Surplus (BCD): The area representing the benefit producers receive.

No Tariff (Free Trade)

• Pw: The world price at which goods are traded.

• Q1: The quantity produced domestically.

• Q4: The quantity consumed.

• Q4 - Q1: The quantity imported.

• Consumer Surplus (ABCEFGHIJ): The area representing the benefit consumers receive with free trade.

• Producer Surplus (D): The area representing the benefit producers receive with free trade.

With Tariff

• Pw + Tariff: The price consumers pay after the tariff is added.

• Q2: The quantity produced domestically with the tariff.

• Q3: The quantity consumed with the tariff.

• Q3 - Q2: The quantity imported after the tariff.

• Consumer Surplus (ABE): The area representing the benefit consumers receive after the tariff.

• Producer Surplus (CD): The area representing the benefit producers receive after the tariff.

• Tax Revenue (HI): The area representing the revenue generated by the tariff.

• Deadweight Loss (GJ): The lost economic efficiency due to the tariff, represented by the areas of deadweight loss.

​8. A Firm’s Cost Curves

• AFC (Average Fixed Costs): Represents the costs a business must pay to operate, even with zero output. These are also called sunk costs (e.g., rent, insurance, loan payments, lump sum taxes). A change in fixed costs only shifts AFC and ATC (average total cost) up or down.

• AVC (Average Variable Costs): Represents the costs associated with producing more or less output (e.g., labor, raw materials, per unit tax). A change in variable costs shifts AVC, ATC, and MC (marginal cost) up or down.

• ATC (Average Total Cost): The total cost per unit of output, calculated as AVC + AFC.

• MC (Marginal Cost): The cost associated with producing one more unit of output, which is impacted by changes in variable costs.

9. Perfect Competition from short-run loss to long-run equilibrium

• Economic Loss and Firm Exit: When firms experience economic loss, they exit the industry, causing the supply curve to shift left. This reduces supply, which increases the price until firms break even (where price equals average total cost).

• Allocative Efficiency (Long-Run and Short-Run): In both the short-run and long-run, allocative efficiency occurs when the price equals the marginal cost (P = MC), meaning resources are allocated in the most efficient way for society.

10. Perfect Competition from short-run profit to long-run equilibrium

• Economic Profit and Firm Entry: When firms earn economic profit, new firms are incentivized to enter the industry, shifting the supply curve to the right. This increases supply, which lowers the price until firms break even (where price equals average total cost).

• Productive Efficiency (Long Run): In the long run, firms are productively efficient, meaning they produce at the minimum point of the average total cost (ATC) curve, minimizing production costs.

​11. Monopoly Long-run profit

• Monopoly Price and Quantity (Pu and Qu): The price (Pu) and quantity (Qu) set by a monopoly when unregulated, where the firm maximizes profit by setting marginal revenue (MR) equal to marginal cost (MC).

• Allocatively Efficient Price and Quantity: The price and quantity that would occur in a perfectly competitive market, where Price = MC. A government price ceiling at this level would cause the monopoly to incur a loss, as it would be forced to sell at a lower price than the monopoly's profit-maximizing price.

• Fair Return Price: The price at which a monopoly covers its costs and earns a normal profit (where price equals average total cost, ATC). A price ceiling at this level would reduce deadweight loss but would still be inefficient compared to the allocatively efficient outcome. The firm would break even and continue operating in the long run.

• Monopolistically Competitive Market: In this market structure, if firms earn economic profit, new firms would enter the market, shifting the marginal revenue (MR) and demand curve (DARP) left, reducing the market share of existing firms.

• Monopoly Inefficiencies:

  • Excess Capacity: Monopolies often operate with excess capacity, meaning they do not produce at the minimum point of the ATC curve, which is indicative of being productively inefficient.

  • Allocative Inefficiency: Monopolies are not allocatively efficient when unregulated, as the price (P) is greater than marginal cost (MC).

  • Perfect Price Discrimination: If a monopoly perfectly price discriminates, the marginal revenue (MR) curve merges with the demand curve (DARP), making the monopoly allocatively efficient, as price would equal marginal cost (P = MC).

12. Monopolistic Competition Long-Run Equilibrium

• Productive Efficient Point: This is where the firm produces at the minimum of the Average Total Cost (ATC) curve, indicating productive efficiency. At this point, the firm is minimizing its production costs.

• Allocative Efficient Point: This is where Marginal Cost (MC) = Price (P), representing allocative efficiency, as resources are allocated in the most socially beneficial way. The quantity produced at this point is below the actual output.

• Actual Output (MR = MC): The monopoly's actual output is where Marginal Revenue (MR) equals Marginal Cost (MC), determining the profit-maximizing quantity. The price (P) is higher than MC and is found on the Demand curve (DARP), above the point where MR = MC at point 4.

• Unit Elastic Portion of the Demand Curve: This is where MR = 0, and it marks the boundary between elastic and inelastic demand. Demand is elastic above this point and inelastic below it.

• Deadweight Loss: The area of inefficiency, represented by the triangle between points 2 (allocative efficiency), 3 (actual output), and 4 (profit-maximizing price), shows the lost total surplus due to the monopoly's pricing above marginal cost.

• Firm's Profit and Market Entry:

  • Profit: If the firm is making a profit (where ATC is lower than price), new firms are attracted to the market, reducing the market share of existing firms. This causes both the DARP and MR curves to shift left.

  • Loss: If the firm is incurring a loss (where ATC is higher than price), firms will exit the market, causing the opposite effect, and DARP and MR will shift right.

13. Perfectly Competitive Factor Market

• Industry Labor Supply Decrease: When the supply of labor in the industry decreases (shifting the supply curve from S1 to S2), the wage rate increases, and the quantity of workers decreases. This reflects a tighter labor market, where fewer workers are available at higher wages.

• Firm's Labor Supply Response: The increase in wages shifts the firm's Marginal Resource Cost (MRC) curve upward, meaning the cost of hiring workers becomes higher. As a result, the firm hires fewer workers, reducing the quantity of workers hired (from Q1 to Q2).

​14. Monopsony Factor Market

• Hiring Decision (MRC = MRP): The firm will continue to hire workers up to the point where Marginal Resource Cost (MRC) = Marginal Revenue Product (MRP), which determines the optimal number of workers the firm employs.

• Monopsony Wage and Quantity (Pm and Qm): In a monopsony (a market with a single buyer of labor), Pm is the wage all workers are paid, and Qm is the number of workers the firm hires. A monopsony typically pays lower wages and hires fewer workers than a competitive market.

• Competitive Market Wage and Quantity (Pc and Qc): In a competitive labor market, the wage is Pc, and the number of workers hired is Qc. A monopsony hires fewer workers and pays lower wages compared to a competitive market, which has more labor supply and a higher equilibrium wage.

• MRC vs. Wage (Supply Curve): The MRC is higher than the wage (supply curve) because in a monopsony, the firm must raise the wage for all workers (not just the additional ones) when it hires more, leading to a higher cost of labor as it increases the quantity of workers.

• Deadweight Loss: The areas marked as 1 and 2 represent deadweight loss in a monopsony market, reflecting the inefficiency caused by hiring fewer workers and paying lower wages than would occur in a competitive labor market.

15. Negative Externalities with Per-Unit Excise Tax Correction

Output and Price Without Government Intervention

• Without government intervention, the market operates at an inefficient equilibrium where Marginal Social Cost (MSC) is greater than Marginal Social Benefit (MSB) due to the externality (e.g., negative externality like pollution).

• ABE represents the deadweight loss before the tax, which is caused by overproduction. The externality leads to more output than is socially optimal, creating inefficiency.

Output and Price After the Tax

• After the tax is imposed, the supply curve shifts left, reflecting the increased cost to producers due to the tax. This reduces the quantity produced and increases the price, moving the market closer to the socially optimal output.

• CBP2P3 represents the total tax revenue generated by the government, the area between the price points P2 and P3.

• P2 - P3 is the price of the tax, the difference between the price producers receive after the tax (P3) and the price consumers pay (P2).

• CDP1P3 shows the tax paid by the producer, the area between the price producers receive before and after the tax.

• BDP1P2 shows the tax paid by the consumer, the area between the price consumers pay before and after the tax.

Market Efficiency After the Tax

• The tax makes the market more efficient by reducing the deadweight loss, as it reduces overproduction and brings the quantity produced closer to the socially optimal level. The tax aligns the MSC and MSB, improving overall market efficiency.

16. Positive Externalities with Per-Unit Consumer Subsidy Correction

Output and Price Without Government Intervention

• Without government intervention, the market operates inefficiently because Marginal Social Benefit (MSB) is greater than Marginal Social Cost (MSC), indicating underproduction. This is due to a market failure where the benefits to society of additional output are not fully accounted for, leading to less production than is socially optimal.

• ABC represents the deadweight loss created by underproduction prior to the subsidy. There is inefficiency because the market is not producing enough to maximize social welfare. After the subsidy, the market moves closer to the efficient outcome, eliminating this deadweight loss.

Efficient Output and Price Where MSC = MSB

• The efficient output and price occur where MSC = MSB, which reflects the socially optimal level of production. At this point, the market no longer has deadweight loss and the quantity produced maximizes total social welfare.

Subsidy Effects:

• The value of the subsidy is represented by P2 - P3, the difference between the price consumers pay after the subsidy and the price producers receive.

• P2P3DC represents the total cost of the subsidy to the government, the area between the price points P2 and P3 and the quantity of output produced after the subsidy is applied.

Tax vs. Subsidy:

• A tax would increase deadweight loss by discouraging production and pushing the market further away from the efficient equilibrium (where MSC = MSB). On the other hand, a subsidy encourages production and helps bring the market closer to the socially optimal level, reducing deadweight loss and correcting the market failure.

17. Positive Externality with Per-Unit Producer Subsidy Correction

Output and Price Without Government Intervention

• Without government intervention, the market is inefficient because Marginal Social Benefit (MSB) is greater than Marginal Private Cost (MPC), indicating underproduction relative to the socially optimal level. This creates a market failure where the value to society of producing more is not fully reflected in the market, leading to less output than is optimal.

• BCE represents the deadweight loss caused by underproduction. This is the lost social welfare that occurs because the market is producing less than the efficient quantity. After the subsidy, this deadweight loss is eliminated, improving market efficiency.

Subsidy Effects:

• The subsidy is given to the producer, which shifts the supply curve to the right (from MPC to MPC - Subsidy), effectively lowering the cost of production for suppliers and encouraging them to produce more. This moves the market closer to the socially optimal output.

Efficient Quantity and Price (Q2):

• The efficient quantity is where MSB = MSC, the socially optimal output level. In this case, because there are no external costs, MSC = MPC. At this point, the market produces at the quantity that maximizes social welfare.

Prices After the Subsidy:

• P2 is the price suppliers receive after the subsidy.

• P3 is the price consumers pay after the subsidy.

• P2 - P3 represents the value of the subsidy, the amount the government provides per unit to incentivize producers to increase production.

Total Cost of the Subsidy (P2P3AB):

• P2P3AB is the total cost of the subsidy to the government, the area between the prices P2 and P3 and the quantity of output produced after the subsidy is implemented.

Tax vs. Subsidy:

• A tax would increase deadweight loss by discouraging production, pushing the market further away from the efficient equilibrium (where MSB = MSC). In contrast, a subsidy encourages production, reduces deadweight loss, and helps the market reach the socially optimal level of output, correcting the underproduction caused by the market failure.

18. Lorenz Curve

• The Lorenz curve is a graphical representation used to measure the distribution of wealth or income within a country. It shows the cumulative percentage of total income or wealth against the cumulative percentage of the population.

Line of Equality

• The line of equality represents perfect equality, where each percentage of the population holds the same percentage of wealth or income. The closer the Lorenz curve is to this line, the more equal the distribution of wealth is in the country.

Gini Ratio

• The Gini ratio is a numerical measure of income or wealth inequality, calculated as A / (A + B), where A is the area between the Lorenz curve and the line of equality, and B is the area under the Lorenz curve.

• Value of zero: A Gini ratio of 0 indicates complete equality, where everyone has the same income or wealth.

• Value of one: A Gini ratio of 1 indicates complete inequality, where one person or household holds all the wealth or income, and everyone else has none.