Formulas - Intro to Economics semester 1

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Formulas - opportunity cost

Opportunity cost

  •  the value of the best alternative you must sacrifice.
  • slope of the PPF
  • what you are sacrifing /what you are gaining
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Consumer and Producer surplus

Consumer surplus

  • difference between the price that you pay and the value that you place on the product
  • Maximum price - actual price
  • check the area = maximum price, actual price and equilibrium price

Producer surplus 

  • amount that sellers benefit by selling at a amarket price that is higher than they would be willing to sell for.
  • difference between what producers are williung to supply and the price they actually receive
  • Attention: not always the consumer/producer surplus is a triangle, check carefully
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Price ceiling and price floors

  • remeber to observe which surplus is changing.
  • if surplus is getting smaller: bad thing
  • if surplus is getting larger: good thing
  • this is due to the fact that consumer/producer surplus represent what the consumer/ producer 'gain' from the market
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Excess demand/excess supply

  • prices that are below the price equilibrium - excess demand
  • prices that are above the price equilibrium - excess supply
  • how to calculate: excess demand (or supply) - price equilibrium
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Elasticities demand and cross price

Price elasticity of demand: is the percentage change in the quantity demanded divided by the corresponding percentage change in the price

  • elasticities observe how the quantity demanded changes to a change in price
  • arc elasticity of demand: % change in Q / % change in price
  • point elasticity of demand: derivative of the demand function * P/Q
  • percentage change: ( new P - Old P / average of P ) * 100

Cross price elasticity: the effect on the quantity demanded of good A when the price of good B is changed

  • Arc Elasticity: % change in Q A/ % change in price B
  • Point elasticity: (derivative of the demand function A / derivative of the price B)* PB/QA
  • positive = substitutes
  • negative = complements
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Elasticieties - income and supply

income elstiacity of demand: how the quantity demanded chqanges when consumers income changes

  • Arc elasticity: % change in quantity / % change in income
  • Point Elasticity: (derivative of Q/derivative of Y) * Y/Q
  • normal good: positive
  • inferior good: negative
  • luxury good: > 1
  • necessity: 0<X<1

Elasticity of Supply: respondiveness of the quantity supplied to a change in price of that commodity

  • % change in quantity / % change in price
  • Always positive
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Taxes

  • Ps = Pd - t
  • inelastic demand, elastic supply : tax mainly borne by consumers
  • elastic demand, inelastic demand: tax mainly borne by producers
  • tax revenue: area between the price equilibrium after tax is applied and the quantity equilibrium after tax is applied
  • DWL: amount that is dispersed and no one gains
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Marginal rate of substitution - indifference curve

Marginal rate of substitution

  • -y/x
  • slope of the indifference curve
  • it is always negative

Indifference curve:

  • U = x * y (normal goods) = x and y quantitites of the two goods
  • utility of C = all those values of x and y that multipled together give C
  • U = x + y - substitutes goods MRS - Y = - x
  • U = min {x,y} - complementary goods - consider the minimal value between the two goods
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budget constrain and budget line

  • budget constraint: M = Px *X + Py*Y
  • budget line: Y = (M/Py) - (Px/Py) * X
  • slope of the budget line = - Px/Py
  • chosen bundle= point at which an indifference curve is tangent to the budget line - MRS = slope of the budget line
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