Micro Final Notecard

Chapter 3

4 types of goods
o private (excludable, rival)
o common property/resources (non-excludable, rival)
o club (excludable, non-rival)
o public (non-excludable, non-rival)
Perfectly competitive makers have a large number of buyers and sellers, and the good that is
produced and traded is standardized
Why individuals demand curve is downward sloping
o income effect of price change
o substitution effect of price change
o diminishing marginal utility
Determinants of demand
o taste/preferences
o income (normal v. inferior goods)
o prices of related goods (substitute v. complement goods)
o number of buyers (individual v. market demand)
o expectations about the future
To derive market demand/supply, sum quantity demanded/supplied by each consumer/market
at a given price and repeat over range of prices (horizontally sum collection of individual
demand/supply curves)
Supply curves are upward sloping because given per-unit costs of production, a higher price may
lead to greater profit, which creates the incentive for the firm to increase output/production
Determinants of supply
o input prices
o level of technology embedded in the production process (given quantity of output can
be produced with less input, given quantity of input yields more output)
o taxes and subsidies
o prices of substitutes in production
o number of firms in the market
o expectations about the future
At prices above P*, quantity supplied exceeds quantity demanded, resulting in a surplus of units;
as a result, competition amongst sellers puts downward pressure on price
At prices below P*, quantity demanded exceeds quantity supplied, resulting in a shortage of
units; as a result competition amongst buyers puts upward pressure on price
When both demand and supply change in opposite directions, change in equilibrium price can
be determined, but change in equilibrium output cannot
o Decrease/increase in demand and increase/decrease in supply will cause fall/increase in
equilibrium price
When both demand and supply change in the same direction, change in equilibrium output can
be determined, but change in equilibrium price cannot
 o If both demand and supply increase/decrease, there will be an increase/decrease in the
equilibrium output

Chapter 4

Total value individual obtains each period from good is equal to sum of consumers WTP on each
unit purchased
Total value comprised of total expenditures on good and surplus
Consumer surplus equal to difference between WTP and price on each unit (area under demand
curve and above price)
Firm surplus equal to difference between price that it receives and minWTA (area below price
and above supply curve)
Total economic surplus equal to sum of CS and PS over consumers and producers
Examples of ad valorem taxes
o Sales tax, excise tax
Examples of specific taxes
o Gasoline tax, income tax, sin tax, soda tax
Tax causes supply curve to shift vertically upward by amount equal to tax
Tax revenue = t * Q*tax

Chapter 6

Elasticity of demand = E(D) = E(Q,P) = %Q / %P = ((Q(1) Q(0)) / Q(0)) / ((P(1) P(0)) / P(0))
o % change in affected variable / % change in affecting variable
Why elasticity is preferred:
o they are invariant or robust to the units in which the variables are measured
o they provide for a more informative comparison of the effects or price changes between
products or services
Elasticity of demand is negative because demand curves are downward sloping (standard to
drop the negative sign)
Elasticity of demand values of interest:
o If %Q < %P, then E(D) < 1 and demand is said to be inelastic (consumers relatively
insensitive to changes in price)
o If %Q > %P, then E(D) > 1 and demand is said to be elastic (consumers relatively
sensitive to changes in price)
o If %Q = %P, then E(D) = 1 and demand is said to be unit elastic
Midpoint formula for E(D) = (((Q(1) Q(0)) / ((Q(0)+Q(1)) / 2))) / (((P(1) P(0)) / ((P(0)+P(1)) /
2)))
2 groups interested in measuring E(D): firms and governments
Total revenues = TR = P*Q
How TR changes depending on E(D):
o If demand is inelastic, P and TR move in same direction
o If demand is elastic, P and TR move in the opposite direction
o If demand is unit elastic, changes in P have no effect on TR
Determinants of E(D)
 o number of close substitutes for good
if good has few substitutes, demand for good may be relatively inelastic
compared to one that has many substitutes
o how narrowly or broadly the good is defined
the more broad the good, the smaller the elasticity, and vice versa
o whether good is a luxury or a necessity
o share of the good in the consumers budget
o time period over which consumers are able to respond to a price change
over short period of time, demand may be relatively inelastic compared to long
period of time (supply curve steeper over short period)
Cross-price elasticity of demand = E(Qy,Px) = %Qy / %Px
If Y and X are
o complements, then E(Qy,Px) is negative
o substitutes, then E(Qy,Px) is positive
o independent goods, then E(Qy,Px) is zero
Income elasticity of demand = E(Q,I) = %Q / %I
o if good is normal and a necessity, then E(Q,I) > 0 but E(Q,I) <= 1
o if good is normal and a luxury, then E(Q,I) > 1
o if good is inferior, then E(Q,I) < 0
Price elasticity of supply = E(s) = %Qs / %P
o if E(s) > 1, then supply is elastic
o if E(s) < 1, then supply is inelastic
o if E(s) = 1, then supply is unit elastic
Primary determinant of E(s): length of time over which the firm is able to respond to a price
change

Chapter 10