.

Calculations for HL students

● All answers must be given to 2dp.

● You must show all your workings – this will enable you to score
marks even if your final answer is wrong.
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● Calculate consumer surplus, producer surplus and community surplus from a

diagram.

Consumer surplus is the area below the demand curve but above the
market price.

Producer surplus is the area above the supply curve but below the
market price.

Community surplus is the sum of consumer surplus and producer

surplus.
Elasticities
● Calculate price elasticity of demand, change in price, quantity demanded or
total revenue from data provided.

PED= %ΔQd
%ΔP

- You must be able to explain why PED varies along a straight-line

demand curve, and is not represented by the slope of the demand
curve.

Revenue = price x quantity

 ● Calculate income elasticity of demand, change in income and quantity
demanded from data provided.

YED=%ΔQd
%ΔY

● Calculate price elasticity of supply, change in price or quantity supplied from

data provided.

PES=%ΔQs
%ΔP

WARNING
Students often lose marks by using the elasticity formulas the wrong way
around!
Always write down the formulas and check your answers several times to
ensure they are correct.
Interpreting the coefficients

COE>1 Elastic
COE<1 Inelastic
COE = 1 Unit Elastic
COE = 0 Perfectly inelastic
COE = ∞ Perfectly elastic

PED>PES Producers pay larger tax burden

PED<PES Consumers pay larger tax burden

YED +ve Normal good

>1 Luxury good
< 1 Necessity good

YED -ve Inferior good

● Calculate the effects on markets and stakeholders of:

PRICE CEILING (maximum price) – this is below the equilibrium

- Calculate possible effects from the price ceiling diagram, including the
resulting shortage and the change in consumer expenditure (which is equal
to the change in firm revenue).

[Link]
price/
 PRICE FLOOR (minimum price) – this is above the equilibrium

- Calculate the possible effects from the price floor diagram, including the
resulting surplus, the change in consumer expenditure, the change in
producer revenue, and government expenditure to purchase the surplus.

[Link]
oor/
 INDIRECT TAXES

Identify on a diagram/calculate:

- Price
- Quantity
- Consumer expenditure
- Producer revenue
- Government revenue
- Consumer tax burden/tax incidence
- Producer tax burden/tax incidence
- Consumer surplus
- Producer surplus
- Welfare loss triangle

Ad Valorem Tax
Specific Tax

Total Tax received = PcE2HPp

The tax per unit is the vertical distance between the two supply curves.
You must draw the vertical line between the two supply curves at the new
equilibrium (Q’(130)).

So the tax per unit is E2H above the new equilibrium of Q’(130).

WARNING - COMMON ERROR - students often draw the vertical line between the
two supply curves above the original equilibrium at Q’(140) - this is incorrect and
your analysis will be severely affected for its accuracy if you do this.
 SUBSIDIES

Identify on a diagram/calculate:

- Price
- Quantity
- Consumer expenditure
- Producer revenue
- Government cost of the subsidy
- Consumer benefit
- Producer benefit
- Consumer surplus
- Producer surplus
- Potential welfare gain (also known as welfare loss) triangle

See the ‘Jamboard Answer slides’ under the heading ‘Files during DLP’ under
‘Unit 2: Real World Issue 2’ on Classroom.

Total Subsidy paid = DWZP1

The subsidy per unit is the vertical distance between the two supply curves.
You must draw the vertical line between the two supply curves at the new
equilibrium (Q1)

So the subsidy per unit is WZ above the new equilibrium of Q1.

 WARNING - COMMON ERROR - students often draw the vertical line between the
two supply curves above the original equilibrium at Qe - this is incorrect and your
analysis will be severely affected for its accuracy if you make this mistake.

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● EXTERNALITIES

- Calculate welfare loss from a diagram

Formula of a triangle: 0.5 x base x height

—-------------------------------------------------------------
 WARNING - COMMON ERROR with EXTERNALITIES DIAGRAMS
- Students often draw the welfare loss area incorrectly.
You must create the triangle by drawing the vertical line above
where the market equilibrium actually is (Q1).

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HL: Unit 2.11 Market Failure – Market Power

● Calculate from data:

Total Revenue Price x Quantity

(AR) = TR = price x quantity = Price

Average revenue Q quantity

MR = ΔTR
Marginal revenue ΔQ

Total Cost Average cost x Quantity

(Fixed costs + Variable costs)

Average cost AC = TC
Q

Marginal cost MC = ΔTC

ΔQ

Profit Total Revenue – Total Cost

Demand curves

● A perfectly competitive firm is a price taker and faces a perfectly elastic

demand curve (MR=D=AR=P).

● A price maker firm which has market power and faces a downward sloping
AR and MR curve. This applies for monopolistic competition, oligopoly and
monopoly.

3 Types of profit

Normal Profit AR = AC TR=TC

Abnormal Profit AR>AC TR>TC
Loss AC>AR TC>TR
The profit maximising level of output

This occurs when MC=MR.

It is assumed that firms in all market structures produce at the profit maximising
point.

Alternative goals of firms

Revenue maximization MR = 0
Growth maximization AC=AR
Satisficing
Corporate social responsibility
(CSR)

Allocative efficiency

Resources are allocated in the most efficient way from society’s point of view.

It occurs where marginal cost is equal to average revenue (price) for an

individual firm.

MC = AR (price)

Productive efficiency

This occurs when an individual firm produces its product at the lowest possible unit
cost (average cost). This means that it combines its inputs together in the most
efficient way possible.

This occurs where MC = AC (since MC goes through the minimum of AC)

Allocative Allocative Productive Productive

efficiency efficiency efficiency efficiency

Short run Long run Short run Long run

Perfect Yes Yes No Yes

competition

Monopolistic No No No No
competition
 Allocative Allocative Productive Productive
efficiency efficiency efficiency efficiency

Short run Long run Short run Long run

Oligopoly No No No No

Monopoly No No No No

Concentration ratio

CR4 - A four firm concentration ratio measures the market share of the 4 largest
firms in an industry. From 50%-79%, an oligopoly is said to occur.

—--------------------------------------------------------------------------------------------------------------
 Unit 3: Macroeconomics

Calculating (nominal) GDP using the expenditure method:

Nominal GDP = C + I + G + (X-M)

Calculating GNP/GNI:

GDP + net property (factor) income from abroad

(difference between income earned abroad minus income
paid abroad).

Calculating GDP/GNI per capita:

GDP/GDI
Population

Calculating real GDP, using a price deflator

Real GDP = Nominal GDP

GDP deflator x 100

(GDP deflator = Nominal GDP/Real GDP x 100)

Calculating economic growth:

Growth rate = (Real GDP for (X+1) – Real GDP for X) x 100
Real GDP for X

Calculating the value of the multiplier:

1/(1-MPC)

OR

1/(MPS + MPT + MPM)

 Calculating the inflation rate

Inflation rate = Index for (X+1) - Index for X x 100

Index for X

Calculating the unemployment rate

Unemployment rate = Number of unemployed people x 100
Labour force (Employed + Unemployed)

Calculating the real interest rate:

Real interest rate = Interest rate - inflation rate

Equity in the distribution of income:

Cumulative
% of total
income

Cumulative %
of total population
How to construct a Lorenz Curve from data in quintiles

Gini coefficient = A
______

A+B

You will NOT need to calculate the Gini coefficient. You can be asked for the
formula & the Lorenz Curve Diagram.
Average Tax Rate = Total Tax paid x 100
____________
Total Income

—--------------------------------------------------------------------------------------------------------------

Unit 4: Global Economy

Calculation (HL only): from a diagram, the quantity of imports & import
expenditure.

Free trade diagram illustrating imports when the world price is below the
domestic price.

Calculation: from a diagram, the quantity of exports & export revenue.

Free trade diagram illustrating exports when the world price is above the
domestic price.
Diagram: linear PPC showing differing opportunity costs and the potential
gains from specialization and trade as a result of comparative advantage.

Absolute advantage - A situation where a country can produce a good using

fewer resources than another country

Comparative advantage - a situation where a country can produce a good

with a lower opportunity cost than another country.

France has an absolute advantage in wine and cheese.

France has a comparative advantage in wine.
Poland has a comparative advantage in cheese
Calculation: opportunity costs from a set of data in order to identify
comparative advantage.
 France has a comparative advantage in wine since it has a lower opportunity
cost in terms of cheese.

Poland has a comparative advantage in cheese since it has a lower

opportunity cost in terms of wine.

Calculation: from a diagram, the effects on stakeholders of tariffs.

Calculation: from a diagram, the effects on stakeholders of quotas.

Calculation: from a diagram, the effects on stakeholders of subsidies.
 EXCHANGE RATES

Calculating the exchange rate from the other perspective:

Formula = 1/exchange rate

Calculation: changes in the value of a currency from a set of data

Calculation: using exchange rates, the price of a good in different currencies

Calculation: elements of the balance of payments from a set of data.

You need to memorise the components of the balance of payments and understand
the relationship between the different sections so you can calculate missing values.

Current account (4 components)

● Balance of trade in goods
● Balance of trade in services
● Income
● Current transfers

Capital account (2 components)

● Capital transfers
● Transactions in non-produced, non-financial assets

Financial account (4 components)

● Direct Investment
● Portfolio Investment
● Reserve assets
● Official borrowing

Important: Current account = capital account + financial account + errors and

omissions
Review the class notes & look over calculations
[Link]
e6TIalnCXA/edit?usp=sharing

J-curve and Marshall Lerner condition

PEDx + PEDm > 1

If the Marshall-Lerner condition holds, a depreciation of a currency (which according

to economic theory will naturally result from a current account deficit) will cause the
current account to improve since export revenue will rise (as exports become
relatively cheaper) and import spending will fall (as imports become relatively more
expensive).

In practice, it is typically observed that the Marshall-Lerner condition does not

hold in the short run due to the existence of business contracts, but does hold
in the long run. Time is needed to purchase adjustments to made, with
contracts needing to expire before new ones can be formed.

This gives rise to the ‘J curve’ - the current account initially worsens following
a depreciation (due to contracts) and then improves in the long run (as new
contracts can be made).

Poverty cycle diagram

You can use either of these diagrams when asked to provide a ‘poverty cycle
diagram.
Low incomes lead to low levels of savings since the marginal propensity to
consume is high, this results in low levels of investment which leads to low
economic growth.

Low incomes lead to low levels of education and health care leading to low
levels of human capital which leads to low productivity and therefore low
incomes.