Economics Essentials: Goods, Demand, Supply, and Market Equilibrium
Economics Essentials: Goods, Demand, and Supply
A normal good means the coefficient multiplying income is positive. If it was negative, then it would be an inferior good.
Complementary and Substitute Goods
Complementary goods: If the price of one good increases, demand for both complementary goods will fall. Look at the coefficient.
Substitute goods: If the coefficient multiplying the good is positive, this means the other good’s demand will increase.
Demand and Supply Functions
Deriving a demand function: Plug in all variables with the exception of the good in question.
Inverse demand function: Isolate the good to one side and then set the price and quantity to 0 to find the x and y intercepts.
Demand & Supply Equilibrium: Set the demand and supply equations equal to each other and solve for the given variables to find equilibrium price and quantity.
Tax with Demand & Supply: First, plug in the given numbers to the demand curve and then derive the inverse supply by isolating the other variable. Then, add the tax amount and re-isolate the supply curve back to “Qs=.” Follow the steps above to find the new equilibrium.
Marginal Benefit and Firms
Marginal benefit: The total benefit from consuming four cheeseburgers minus the total benefit from consuming three burgers.
Firms: Are always in business to maximize profits.
Revenue, Profit, and Costs
Total Revenue: P * Q
Total Profit: TR – TC
Opportunity cost: Always includes both explicit and implicit costs, so Explicit + Implicit Costs.
Economic profit: Always includes the value of the “Next best alternative” and TR – (explicit + implicit costs).
Accounting Profit: TR – Explicit costs (only explicit costs).
Net Benefit: Is maximized when MB = MC.
Marginal Benefit and Marginal Cost Functions
Function for MB and MC: Is obtained from taking the first derivative. For example: B(Y) = 100Y – 8Y^2 and C(Y) = 10Y^2
Derivative = MB = 100 – 16Y and MC = 20Y. Then set them equal and solve for y to find net benefit.
Price Changes and Taxes
Price Change: Leads to movement along the demand curve, not a shift in demand.
Per-Unit Tax: Shifts the supply curve up parallel to itself by the amount of the tax.
Elasticity
Elasticity: Measures how much quantity responds to changes in price.
Price Elasticity of Zero: Means the demand curve is a vertical line.
Inelastic demand: Has an elasticity between 0 and 1.
Consumer and Producer Surplus
Consumer (CS) & Producer (PS) Surplus formulas:
CS = A = ((Qd y intercept – EqP) * EqQ) / 2
PS = B = ((EqP – Qs y intercept) * EqQ) / 2
Price Floor
Price floor (PF) Change in CS & PS after PF:
CS = -B – C = -(PF – EqP) * newQ – ((PF – EqP) / 2) * (EqQ – NewQ) = answer.
First, need to find the inverse of supply to find what producers would normally charge at the new quantity.
PS = B – E = (PF – EqP) * newQ – ((EqP – PsP) / 2) * (EqQ – NewQ) = answer. Deadweight loss (PF)
C + E = ((PF – EqP) / 2) * (EqQ – NewQ) + ((EqP – PsP) / 2) * (EqQ – NewQ) = DWL.
Price Ceiling
Price Ceiling (PC) Change in CS & PS after PC:
CS = D – C = (EqP – PC) * NewQ – ((PcP – EqP) / 2) * (EqQ – NewQ) = answer.
PS = -D – E = -(EqP – PC) * NewQ – ((EqP – PC) / 2) * (EqQ – NewQ) = answer.
Deadweight loss (PC):
C + E = ((PcP – EqP) / 2) * (EqQ – NewQ) + ((EqP – PC) / 2) * (EqQ – NewQ) = DWL.
Tax/unit: Use the inverse supply curve and add the tax and set equal to the inverse demand curve to find new EqP and EqQ.
Government Revenue and Deadweight Loss from Tax
Government revenue: tax * quantity, change in CS & change in PS after tax
CS = -B – C = -(TaxP – EqP) * NewQ – ((TaxP – EqP) / 2) * (EqQ – NewQ) = answer
PS = -D – E = -(EqP – PafterTax) * NewQ – ((EqP – PafterTax) / 2) * (EqQ – NewQ) = answer
Deadweight loss (tax):
C + E = ((TaxP – EqP) / 2) * (EqQ – NewQ) + ((EqP – PafterTax) / 2) * (EqQ – NewQ) = DWL
Deriving Demand and Supply Curves
Derive Demand curve & Supply: Qd = a + bP, Qs = a + bP
b = (ChQ / ChP) * (P / Q) multiply diagonally. Elasticity of Demand/Supply is (ChQ / ChP)
Plug in b and solve for a to get the demand curve Qd or Supply Qs