1. Chap 4: The market forces of supply and demand
1.1. A competitive market has many buyers & sellers, each of whom has little or no influence on the market price
1.2. Economist use the supply & demand model to analyze competitive markets
1.3. Besides price, demand depends on buyers' income, the price of substitutes & complements, and number of buyers.
1.4. In market economies, prices are the signals that guide economic decisions & allocate scare resources.
1.5. Can use the supply-demand diagram to analyze the effects of any event on a market.
1.5.1. 1. Determine whether the event shifts one or both curves
1.5.2. 2. Compare the new equilibrium the direction of the shifts
1.5.3. 3. Compare the new equilibrium to the initial one
1.5.4. The downward-slopping demand curve reflects the law of demand => the quantity buyers demand of a good depends negatively on the good's price
1.5.5. The upward-sloping supply curve reflects the Law of Supply => The quantity sellers supply depends positively on the good’s price
1.6. Other determinants of supply include input prices, technology, expectations, and the # of sellers. Changes in these factors shift the S curve.
1.7. The intersection of S and D curves determines the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded.
1.8. If the market price is above equilibrium => surplus results => the price to fall.
1.8.1. If the market price is below equilibrium => a shortage results => the price to rise.
2. Chap 5: Elasticity & its application
2.1. 1. Definition
2.1.1. Is a numerical measure of the responsiveness of Qd or Qs to one of its determinants
2.2. 2. Price elasticity of demand
2.2.1. Price elasticity of demand = % change in Qd/ % change in P
2.3. 3. Midpoint method
2.3.1. {(end value - Start value)/midpoint} x 100%
2.4. 4. The price elasticity of demand depends on:
2.4.1. The extent to which close substitutes are available
2.4.2. Whether the good is a necessity or a luxury
2.4.3. How a broadly or narrowly the good if defined
2.4.4. The time horizon - elasticity is higher in the long run than the short run
2.5. 5. The variety of supply curves
2.5.1. Perfectly inelastic
2.5.2. Perfectly elastic
2.5.3. Unit elastic
2.5.4. Elastic
3. Chap 6: Supply, demand, & government policies
3.1. 1. Price controls
3.1.1. Price celling: A legal maximum on the price of a good or service
3.1.1.1. Eg: rent control
3.1.2. Price floor: A legal minimum on the price of a good or service
3.1.2.1. Eg: Minimum wage
3.2. 2. Taxes
3.2.1. Taxes a specific amount on each unit bought/sold which the govt make buyers or sellers pay
3.2.2. A tax on buyers shifts the D curve down by the amount of the tax
3.2.3. A tax on seller shifts the D curve up by the amount of the tax
3.3. 3. The incidence of a tax
3.3.1. How the burden of a tax is shared among market participants
3.3.2. The incidence of the tax depends on the price elasticities of supply and demand
4. Chap 7: Consumers, producers, & the efficiency of marketes
4.1. Welfare economics
4.1.1. Studies how the allocation of resources affects economic well-being
4.2. Willingness to pay (WTP)
4.2.1. A buyer’s willingness to pay (WTP) for a good is the maximum amount the buyer will pay for that good
4.3. Consumer surplus
4.3.1. is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP - P
4.3.2. Total CS equals the area under the demand curve above the price, from 0 to Q.
4.4. Cost
4.4.1. Is the value of everything a seller must give up to produce a good (i.e., opportunity cost).
4.5. Producer surplus (PS)
4.5.1. The amount a seller is paid for a good minus the seller’s cost : PS = P - Cost
4.5.2. Total PS equals the area above the supply curve under the price, from 0 to Q.
4.6. CS, PS and total surplus
4.6.1. CS = (value to buyers) – (amount paid by buyers) = buyers’ gains from participating in the market
4.6.2. PS = (amount received by sellers) – (cost to sellers) = sellers’ gains from participating in the market
4.6.3. Total surplus = CS + PS = total gains from trade in a market = (value to buyers) – (cost to sellers)
4.7. Efficiency means
4.7.1. That total surplus is maximized
4.7.1.1. The goods are consumed by the buyers who value them most highly.
4.7.1.2. The goods are produced by the producers with the lowest costs.
4.7.1.3. Raising or lowering the quantity of a good would not increase total surplus
4.8. Iaissez faire ( French for "allow them to do")
4.8.1. The notion that govt should not interfere with the market.
5. Chap 8: Application the costs and tax
5.1. The deadweight loss of taxation
5.1.1. Remember that it does not matter who a tax is levied on; buyers and sellers will likely share in the burden of the tax
5.1.2. A tax places a wedge between the price buyers pay and the price sellers receive. Because of this tax wedge, the size of the market for that good shrinks
5.1.3. The benefit received by buyers in a market is measured by consumer surplus. The benefit received by sellers in a market is measured by producer surplus.The benefit received by the government is measured by tax revenue
5.1.4. Tax revenue = T x Q
5.2. Deadweight loss
5.2.1. Is the fall in total surplus that results from a market distortion, such as a tax
5.3. Deadweight losses and the gains from trade
5.3.1. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.
5.3.2. This occurs because the quantity of output declines; trades that would be beneficial to both the buyer and seller will not take place because ofthe tax
5.4. The price elasticities of supply and demand will determine the size of the deadweight loss that occurs from a tax
5.4.1. Given a stable demand curve, the deadweight loss is larger when supply is relatively elastic
5.4.2. Given a stable supply curve, the deadweight loss is larger when demand is relatively elastic
5.5. Deadweight Loss and Tax Revenue as Taxes Vary
5.5.1. As the tax increases, the deadweight loss from the tax rises more quickly than the size of the tax
5.5.2. As the tax increases, the level of tax revenue first rises; but then, as the taxgets larger, tax revenue falls because the higher tax reduces the size of the market
5.5.3. The Laffer curve depicts the relationship between the size of a tax and the level of tax revenue