E_d ~ how quantity demanded responds to change in price

E_d = %ΔQ_d/%ΔP

                             = (ΔQd/ΔP) * (P/Qd)

elastic: abs(E) >1

inelastic: abs(E) <1

Unit Elastic: abs(E) = 1

income elasticity of demand

Ei = %ΔQd/%ΔIncome 

= (derivativeQd/DerivativeIncome) * (Income/Qd)

price elasticity of supply

Qs = g + f*p

Es = %ΔQs/%ΔP

slope(derivative) = f, so Es = f* P/Qs

arc elasticities(midpoint method)

((ΔQ/(Q1+Q2)*1/2)/(ΔX/(X1+X2)1/2)

elasticity across a range

short run vs. long run elasticity

price elasticity of demand - durable goods(long term) are more inelastic, non durable goods(short term) are more elastic

price elasticity of supply - more time = more elastic;  some goods draw on limited resources. these limitations can mean todays extraction reduces whats available tomorrow -> more inelastic

Willingness to pay - price paid

AREA, NOT LINEAR

willingness to pay = reservation price, or P(Qd)

P-P*

producer surplus = price received - marginal cost

marginal cost = P(Qs)

1.) Buyers receive all the benefits of the market

2.) Sellers face all the costs of the market

3.) full, complete, and perfect information exists in the market

failures of buyers benefits or sellers costs

(external benefits or costs)

positive externalities

minimum price, brings price level above equilibrium price, lowers consumer surplus, increases producer surplus and adds deadweight loss

price support - govt. will buy an unlimited quantity of good at a particular price Qs-Qd=price support

government cost = price support(Qs-Qd)

Maximum price set below equilibrium price

Qd-Qs = shortage

increases consumer surplus, creates deadweight loss, lowers PS

limit on the quantity produced(Qs)

two different prices ensue: demand & supply

Pd = willingness to pay by consumers

Ps =willingness to pay by producers(marginal cost)

price that prevails is market price

quota rent = opportunity cost of quota

2 types: per unit and percentage(ad valorem)

Pd-Ps = tax

a negative tax(basically)

Ps-Pd = subsidy

1.) completeness - all bundles can be ranked

2.) transitivity - if A is preferred to B, and B is preferred to C, then A is preferred to C

3.) nonsatiation - more is better

Marginal Rate of Substitution

negative slope

MRS = -(ΔY/ΔX)

diminishing marginal rate of substitution

as the consumer consumes more of a good, they require less of the other good to maintain satisfaction

constant marginal rate of substitution

ex.) 1 whole pizza vs. i slice of pizza

1 whole = 8 slices. forever. (nonsatiation)

goods that are consumed together, always consumed together in proportion to one another

SPECIAL CASE: Bads - products that are unwanted

-usually treat these by looking at their opposite (air pollution is bad)

measurement of "satisfaction"

ordinal, not cardinal

goal: maximize utility

MUx/MUy = -(Δy/Δx) = MRS

EXAMPLE

F: U0 = F*C

F+1:U1 = (F + 1)*C

MUx = dU/dQx

MUy = dU/dQy

where the indifference curve lies tangent to the budget constraint

MRS = Px/Py