Key Concepts: Quizzes, Edgeworth Box, Demand & Elasticity

Quizzes & Grading Overview

• Quizzes: three per term; lowest dropped at end of semester; curve-based grading; some quizzes easier/harder; this quiz may be dropped, so focus on participation and consistency.

• Time and pace: upcoming exams/quizs may be tighter; adjustments to timing and scope anticipated.

• Top Hat quizzes: 10 minutes weekly, random versions (A, B, C, D); effort to keep fairness across participants.

• Score feedback: accumulated average by quiz; distribution shown as quizzes progress; early stage may not reflect final dropping policy.

• Grading policy caveat: final curve will be based on final grades; the policy on dropping lowest quizzes is applied at the end, so early estimates may misrepresent final standing.

• Review access issue: quizzes are handed back by TAs; sometimes questions are not shown in Top Hat after submission; report issues to TAs to enable review for midterm/final prep.

Quiz Structure, Review & Strategies

• Questions are delivered in versions (A–D); each student gets a version; answers are designed to be comparable in difficulty.

• Hint-based approach: use quick elimination techniques on MCQs to reduce options.

• Reviewing questions after quiz: look for tips previously given in class on shortcuts and problem-solving approaches.

• When unsure, remember it’s better to guess than leave blank; many MCQs give partial credit or any chance to earn points.

• Exam preparation: accumulate and review quiz questions/answers when available to learn patterns and common tricks.

Edgeworth Box: Setup, Specialization & Trade

• Edgeworth box: two goods (sugar and bananas) and two actors (Thailand and Philippines) with endowments/endowments of labor.

• Specialization move: individuals/countries specialize in the good for which they have a comparative advantage; the box expands and total production can increase (production efficiency).

• Production efficiency improvement: same resources yield more output via specialization.

• Consumption efficiency improvement: trade makes both parties better off; linked to consumer and producer surplus.

• Important: even if one country has absolute advantages in both goods, comparative advantage still drives specialization.

Absolute vs Comparative Advantage

• Absolute advantage: country that can produce more of a good with the same resources (higher intercepts/outputs).

• Comparative advantage: country with the lower opportunity cost in producing a good.

• Edgeworth box intuition: at specialization, one country produces only the good in which it has a comparative advantage; the other country produces the other good.

• Quick heuristic: look at who produces which good at the specialization point to identify comparative advantages (no need for full calculation).

• Example takeaway: a country may have absolute advantage in both goods but still specialize in only one good if it has the lower opportunity cost for that good.

Opportunity Cost & Intercepts in the Trade Diagram

• Opportunity cost is the slope of the production possibility frontier (PPF).

• In the reading example, Thailand’s productivity intercepts indicate higher output for both goods, but comparative advantage determined by relative slopes (e.g., oranges per apple or bananas per sugar in the specific framing).

• When calculating from graph distances: use vertical/horizontal distances from the origin to determine production levels at a given point.

• Key rule: the country with the lower opportunity cost in a good has the comparative advantage in that good.

Reading & Interpretation: Incomplete Information & Specialization Points

• Diagrams can show countries trading with different bundles; interpretation of intercepts and units matters (e.g., days of labor, sacks, bananas).

• Bolded text in questions often signals critical units or constraints (e.g., one day of labor input).

• Use simplifications and quick visual checks to identify who has comparative advantage and how the box expands with specialization.

Demand, Shifts, and Market Determinants

• Demand curve shifts are driven by non-price factors; price changes cause movement along the curve, not a shift.

• Normal good: when community income decreases, demand shifts left (less demanded at each price).

• Inferior good: when income decreases, demand shifts right (more demanded at each price).

• Substitutes: if the price of a substitute decreases, demand for the original good shifts left; for bread, a decrease in rice price (rice is a substitute) shifts demand for bread left.

• Complements: if the price of a complement decreases, demand for the related good shifts right; for bread, a decrease in butter price (butter and bread complements) shifts demand for bread right.

• Directionality: shifts depend on the relationship type (positive or negative) between the determinant and quantity demanded; slope of demand is not fixed by shifts.

• “Plausible” shifts: multiple paths can satisfy the question; the key is the direction of the shift.

Elasticity and Consumer Surplus

• Elasticity of demand (PED): measures magnitude, not just direction, of response to price change.

• Definition (point elasticity): PED = igg| rac{dQ}{dP} imes rac{P}{Q} igg|. If using discrete changes, it’s common to use the absolute value of rac{ rac{ riangle Q}{Q}}{ rac{ riangle P}{P}}.

• PED is unitless; no units for percentage changes.

• Interpretation:

  • If PED > 1: elastic (quantity responds a lot to price changes).

  • If PED < 1: inelastic (quantity responds little).

  • If PED = 1: unit elastic.

  • If PED → 0: perfectly inelastic; PED → ∞: perfectly elastic.

• Linear demand: along a straight-line demand, elasticity falls as you move down the curve; the midpoint has elasticity equal to 1.

• Consumer surplus: total value to all consumers minus amount paid; measured in dollars; area under the demand curve above the price; used to analyze welfare changes under taxes, policies, and market structure.

• Important: elasticity allows comparison across goods with different units; it normalizes changes into percentages.

• Practice example (definition): if coffee demand rises 10% when price falls 5%, PED =
  rac{10 ext{%}}{5 ext{%}} = 2. (unitless)

Point Elasticity Practice & Calculations

• Given a point (P, Q) and a slope, elasticity at that point: PED = igg| rac{dQ}{dP} imes rac{P}{Q} igg|. Use slope from two points on the curve, compute P and Q at the chosen point.

• Example pattern: at Point A with P = 7, Q = 300, slope from two points is
  rac{dQ}{dP} = - rac{3}{300} = -0.01. Then PED = |(-0.01) imes rac{7}{300}| = rac{0.07}{300} ext{ (per unit)}
  ightarrow a small unitless value; actual calculation may vary with the chosen two points.

• For a given point, if you compute and obtain PED > 1, demand is elastic at that point; if PED < 1, inelastic; if PED = 1, unit elastic.

• Practical note: different textbooks may present slight variations (midpoint vs point vs calculus-based); stick to the course’s point elasticity formula for consistency.

Quick Exam & Study Tips (Applied to This Course)

• Don’t leave questions blank; random guessing can yield positive points.

• Use quick elimination to narrow multiple-choice options.

• Focus on understanding the direction of shifts (normal vs inferior; substitutes vs complements).

• Remember core definitions: consumer surplus, producer surplus, elasticity types, and comparative vs absolute advantage.

• Practice with the Edgeworth box logic: identify who specializes in which good and why; relate to production vs consumption efficiency.

• For elasticity practice, compute at a point with given P and Q, use the point elasticity formula, and interpret the result in terms of elastic vs inelastic.

Core Formulas to Remember

• Opportunity cost (Edgeworth context):

  • Slope of the PPF; units vary by problem setup.

• Comparative advantage rule:

  • Lower opportunity cost in producing a good → comparative advantage in that good.

• Demand shifts (non-price determinants):

  • Normal good: income ↓ → demand curve shifts left

  • Inferior good: income ↓ → demand curve shifts right

  • Substitutes: price of substitute ↓ → demand for the other good shifts left; price ↑ → demand for the other good shifts right

  • Complements: price of complement ↓ → demand for the good shifts right; price ↑ → demand for the good shifts left

• Elasticity of demand (PED):

  • PED = igg| rac{dQ}{dP} imes rac{P}{Q} igg| (point elasticity)

  • PED = igg| rac{ riangle Q / Q}{ riangle P / P} igg| (arc form, if used)

  • Interpretations: PED > 1
    ightarrow elastic,
    eq 1
    ightarrow unit elastic,
    ightarrow 0
    ightarrow perfectly inelastic

• Consumer surplus: area under the demand curve above the market price; measured in dollars

• Midpoint/arc elasticity nuances exist in some texts; stay with course’s point elasticity approach for consistency