8101/2024

Unit 7: Basic Concepts

>
- What is economics

> decisionse how to allocate income?

of income , time -

-
-
economicagents max satisfaction
(utility) - trade-offs
> Interactions between households and firms
-
scarcity > Of inputs , time -> decisionss what to produce/how
much?

↓ I Le max Profits/return of investments

buy goods and services produce and sell .

> trade-offs
and services
provides in put goods -

d
labor Prices return of investments
Capitale invest , wages ,

land

e
Economic activity : all production- GDP
>
-
Inputs
Labor human
·
: effort ,
mental and physical e most important
Capital equipment assets used to and
and intangible produce goods services
· :

· land : natural resources

>
- Tradeoff : cost-benefit analysis
corn us .
Wheat :
producers the most profit
TV .
us computer : consumers most satisfaction

e
efficiency : how to use input to max ,
profit , how to use income to max .
Satisfaction

>
-
equity : how to distribute income

cost cost-benefit
-
Opportunity :
analysis
&
-monetarylooa option sacrificed
 14/2/2024
>
- How People Interac

-
Marginal analysis- framework for economists about decision
making
thinking
e based on assumption of
rationality
-
Marginal Changes
MR =
↓ Mc= S
- Maximization principle - optimization - last Q that makes MR2 MC

- Economic systems

- Private Firms and consumers decide on production >

-
Capitalist economy
e Pure market intervention
economy government
no

Planned economic
systems production decided by central
-
planners

e Economic Methodologies

-
Microeconomics - smaller frameworks
e Macroeconomics - Larger Scale
- Use models that simplify reality
e reduce tuition by lokt , students will study
Peyears' all else is constant
Ceteris Paribus
Il
-
endogenous e final thing to be determined
e Variables - determined outside
of the model
exogenous

Practice
Government policies designed to promote at the equity
efficiency do So
·
expense of

↑
 IS/1/2024

Unit 11 : Intro to Supply and Demand

Assumptions of the model -

e
Competitive markets :
Competition comes from the good or service

Agricultural markets

P
The Danand Curve

Consumers different

&
e
A
Pe
:

buyers with different

to RB
willingness pay
D
Q Qu Ap
>
- Market demand : Sum of all

individual demands
- Income effect :
a fall in the
price of
any good means that consumers can now afford to buy more with

their income
>
- Substitution effect : consumers will choose to substitute the more expensive goods by the cheaper once .

ip(subd poss PDemand Public transportation

()
- -
exogenous
- As income increases demand increases e
,
exogenous

The Supply Curve

- Firms normally producers
,

price relates with the

> Minimum
-

cost
- Market
all individual
supply :
supply
- As the price of a
good increases the market becomes more profitable
farmer

-
wheat↑p corn

↓
decreases c shift

>
- Tech - #C efficiency
>
-
Natural disasters -
Equilibrium Price
>
- Stability
e Market mechanism takes time to adjust
Surplus sellers) people to
>
- :
willing pay
Shortage
>
- : Consumers willing to pay) sellers willing to sale
 2) / 1/2025

Unit III :
Elasticity

Price elasticity of demand % :

change in QP when PP by 7%

Determinants :

>
-
Availability of subs

>
-
Necessities vs. luxuries

>
-
Proportion of income devoted to the product
short inelastic
I
run :
>
-
Time horizon electic
long run:

Market/Product Definition
->
Broad (general) e clothing Linelastic
>
- Narrowe Specific brand (more elastic

Examples
>
- salt inelastic
:

-
housing : inelastic because of
necessity and no subs ,
elastic because of the price
e
Theatre ficeets elastic :

>
- Food : inelastic e broad
-
Specific brand of toothpaste : elastic

- Toothpaste in general : inelastic

Idl < 1 inelastic IEd/)/ selastic

Elasticity calculation
Ed
=
a .
Point Method .
b Midpoint methodelarger changes

whenIP) 10%

Dr
P ,
-
Q Q
· A

T
slope =b
Edit
Linear demand : Ed =b
Elasticity and TR

inelastic elastic

revenue
Grevenue
Rule:

1) 13dk1e if PETRT sinelastic >

- Pand TR same direction

1lEdSleif PreTRL-elastic e PandTR Opp ,

direction

Elasticity across a demand line

Q =
a + b P ·

Teak
· Ed

Q
a

Th

! Q
 22/1/2025

Unit III :
Elasticity

e
Income elasticity "1 in Qp
:
Ez =

%
S in I

Values Ei take
may
EISO

&
ierQd ↑I
S
↑I >
- ↓ QP

Sindependent
Normalgoes
goodsO
Inferior

or income

Cross Price Elasticity how much the responds to another

:
quantity demanded of one
good a change in the price of good

-
3 change ine
...
E Ec > @

--
[ I >

TQ-LD ↑ as TD

Complements Substitutes
d
J
Gasoline/cars Pepsi/ Coke

Elasticity of supply

Es = S2

more ca

Sie
Determinants :

time
Fre
-
Time period : + elastic in the long run

>
-
Productive capacity productivity
: +
,
+
supply
& Size of firm or industry
-
Mobility
firm
cans of
tuna A scanso
how or more
easy

workers
 Midpoint methode large changes
Point methods small changes

Practice :

Q5 1800 + 240p QS Qp
= -
equilibrium
Q = 3550- 266
 29/1/2025

Consumer and Producer Surplus

Consumer
surplus willingness to pay
· CS =
maxP-P
 4/2/2025

Taxes Specifics fixed Per

unit colda /C of gasoline
consumption

Indirecte
on

L 20% on milte
ad valorems percent cents)
over
price e p e tax 0 2 (20 .

(VAT) P = 2e tax = 0 4 (40

.
cents)

Directs on income

Effect of an Specific tax

-
tax
S+ - a tax will inc price , dec quantity
S
.

Pr
P ,
Data a n

ta
reduces price sellers receive

Pz

↓ P
Price sellers receive

>
- Tax revenue : tax x units
sold
$7
3
consumers
tax of $10 depends
-
sellers $3
on
elasticity

Effect of an ad valorem

Y
Stax

what Star S
①
· no tax

Py

-
If the VAT is 20 %

$20 +$4 VAT

$50 e $10 VAT
Elasticity and to incidens

e Who pays depends the side of the market less price

more on
elasticity ,
on where the price is elastic

>
- If demand is more elastic than supply , producers will carry the tax burden

Deadweight luss of the tax

e Fall in total surplus due to take

r S

greater the elasticities and the larger loss

-
The size of tar ,

Tax Revenue and Tax Size

- As tax plu ine , tax revenue increases be tax/u is higher
- Tax revenue decreases because the # a
of goldI

The optimal

-Tu
 S/2/2025

Unit VI Externalities
:

Intro
-
Externality :
uncompensated impact of one persons actions on the wellbeing of a
bystander

Externalities
-
Production - supply Consumptione Demand

i -
Positive Negative Positive Negative
d d ↓ d
Education
education pollution eigs
Vaccines

cost
- social
cost

external S
- Private costs for firms
ze

ene
⑧

-
Externality : cost for society
Social cost Private
: cost+ external cost

&

Q Q2

-
cost

Socalumprium Sociaare private

Q2
↑
⑧

Pi ⑧

De Private cost
& Q

Example : -

Q P
Q3Q
=
300 pe Private benefit :
- =
300 -

= 200

Q 2P Private =
pw(200
= - cost : P P = 100

133 -
166 7)
.
-
E
100

= Sopho 90. + so = 300 -

a
S

Sc = So Q= 166 166 200

+ .
7

P 135 3
= .
 Marginal Social Benefit

C MSB : P B + E B
Sep .
.
. .

Proc Whe
P ,
⑧

PB
De . .

S
Q Q soc

Private Solutions
>
- Social norms

- Charities

defined eHumili
>
- Coase Theorem :
Property rights wer

-> Transaction costs

Regulations
>
- forbid certain behaviors
or
require
-
Requires good info
>
-
Pigovian taxes - equal to external cost

- Pollution Permitss create a market for permits & E' Pix Q

=

Always want
to be part of supply

-
 12/1/2025

Unit 7: Public Goods and Common Resource

Different types of goods

-
Excludability charging
: a price is easy

>
-
Rivalry : One's person use diminishes others' use - limited
quantity

commonly
Rival
no
private o yes
Sector
o private
club goods

gooda 6
public goods

commonlya
A Education : private or
public sector ,
but private good (excludable and rival

A free riders prevent the private sector from selling public goods
A cost-benefit analysis study: that compares costs and benefits to society of
providing a
public goods
A Tragedy of the Commons : tendency of people to overuse common goods e
negative externality
 1812/2025
Unit VIII : Background to Demande The Rational Consumer

Intro
>
- Trade-off

-
Assumptions
1) Buyers are rational

2) More is preferred to less

3) Buyers seek to max, utility
4) Self-interest

>
-
Marginal analysis - A in revenue

>
-
Optimum : MRLMC

Budget Constraint :

- Slope
:le
Diee n

Equimarginality Rule

Murde
Practice :

Inc $50
:
,
Price of Books =10 :
,
Price of beer : E2

Books
a)
MB MBehe should buy more e a

S
Y

2
b) MRS is 0 .
2 ,e = 0 .
2 - Optimum ,
books better than besa
T

S 18 IS
Beers
2) not in the optimum be its within the budget
 19/2/2013

final Exam Review

-
1) B 21) A
Sh

X Si
↑
20) D

>
Di Dr

2) C Q= 80-10P

So 3e max

no
willingness to pay,
surplus

3) C -more general

4) C - not related with marginality principle

5) E e we don't know about budget

6 E eQ = 200-0 1P .

,
P = zo

0 = 200 -
0 . IP

P = 2008

Q(30) 197 =
,
Cs =
(2000-30)197big .

7) C

8) A if income consumers willdemand for normal

goods
income effect

9) Be one consumer is dif .

between Eq and min willingness to pay

11) D

19) B

22 A
-P = 15
 22/2/2025

Midterm Review

Q = 80-104
So= 80-10P
C
to
P=
0503e max
willingers pay ,
no surpluso

O - depends on the
price

1P Q (30) = 197

a
0 = 200 - 0 .

P 200/0 )
-30
=
.
:

P = 2008

O
 Books

Su
O 2
T

S 18 IS
Beers

&

unit
1st
-

330-10

O
8

O
?

O
O

O -
500
S

O
O

· >
- inelastic
,
consumers are willing to pay high taxes

O
O

O
37) De shortages occur when the price is below the eq.

38)e-
quantity budgetbudgetprea -32 quantity

39) A -
surplus Preg ,
:
Eq = 85-41 = unecost = Mr
40) B MRS = 7 for
perfect substitutes

41) A -
equal cost and value CPE e ↑Pa-TDB e Subse En > 0
↑Pa e ↓Dre comp e Eco
42) B - tall makes it excludable

43) C > initial surplus final surplus

-

44) A SS) A 66 B

45) Be the deadweight loss of a tax when the SG) c 67) B

supply or demand is elastic

46) A S7) D68) B

47) D so D69) B

48)C 59) C 70) Il units

49) B 60) C

so) C elp-uppee normal 61) A

goods

5) C 62) B

S2) B 63) A

S3) C 64) B

54) A 66) A