❖ The elasticity formula is the percent change in quantity over the percent change in price %Q/%P
❖ The Total Revenue is found from the Price * Quantity
1. Suppose the price increases, and as a result total revenue increases. This means that demand is: If you raise the price
the total revenue increases this will be Elastic
❖ If if the Elasticity is greater than 1, it is Elastic, if its less than 1 its Inelastic
❖ Elastic Demand less than 1 is Inelastic demand
❖ TR and P move in the same directions
❖ %Q/%P less than 1 means the %P is greater than %Q
❖ TR and P move in opposite directions
❖ Elastic Demand greater than 1
❖ %Q/%P is greater than 1 means
❖ Tax is the vertical distance between the supply curve and the Marginal Cost Curve
❖ S =MC MC+tax
❖ Income Elasticity of Demand is the responsiveness/sensitivity of the quantity demanded to a change in income
❖ E1=%Qd/%I
❖ Cross Price Elasticity is the Responsiveness/sensitivity of the quantity demanded of one good to a change in the price of
another good
❖ Exy= %Qx/Py
❖ Responsiveness/sensitivity of the quantity demanded to a change in income
❖ 𝐸𝐼 = %∆𝑄𝐷 %∆𝐼
❖ 𝐸𝐼 > 0 for normal goods
❖ 𝐸𝐼 < 0 for inferior goods
❖ Efficient quantity = total surplus is maximized
❖ TS = CS + PS
❖ There is no deadweight loss At any other quantity, total surplus will be smaller
❖ Consumer surplus = Willingness to pay – Actual price
❖ Producer surplus = Price firm charges – Production cost
❖ TS is Maximized at the efficient quantity,
❖ Price Ceiling is the Highest price at which it is legal to trade a particular good or service
❖ Binding if it is set below the equilibrium price
❖ Results in shortage
❖ When P = $30 (market price):
❖ CS = A + B
❖ PS = C + D + E
❖ When P = $20 (price ceiling):
❖ CS = A + C → consumers lose B and gain C
❖ PS = E → producers lose C and D
❖ DWL = B + D
❖ Price Floor is the lowest price at which it is legal to trade a particular good or service
❖ Binding if it is set above the equilibrium price
❖ Results in surplus
❖ When P = $30 (market price):
❖ CS = A + B + C
❖ PS = D + E
❖ When P = $40 (price floor):
❖ CS = A → consumers lose C and B
❖ PS = C+ E → producers lose D and gain C
❖ DWL = B + D
❖ Public Goods- Nonexcludable(No way of preventing and Nonrival(one person's consumption does not preclude
consumption by others)
❖ Private Goods- Rival(When one person consumes, not available to others) and Excludable(control over who gets to
consume)
❖ Common Resources- Rival and Nonexcludable
❖ Positive Externalities- Competitive Markets produces too little of the good at a price that too high Ex: Flu Shots,
Education
❖ Negative Externalities: Competitive market produces too much of the good at a price that too
❖ Coase Theorem- Property rights to exist, no transaction costs, small number of parties involved, with this private
transactions can produce efficient income