midterm review session 1€¦ · midterm review session 1 jijian fan. material covered •chapter 1...
TRANSCRIPT
Midterm Review Session 1Jijian Fan
Material Covered
• Chapter 1 to 8
• (1) Introduction, (2) Trade off, (3) Supply and demand, (4) Surplus, (5) Price/quantity control, (6) Elasticity, (7) Taxes, (8) International trade
• Chapter 1 and 2 have some easy but important concepts
• Chapter 3 is the core of the graphical/numerical/mathematical analysis in the following parts
Outline
• This review covers the main story line and some concepts are left. You should also know them!
• Opportunity Cost, Marginal Decisions, PPF
• Micro/macro economics topics
• Tax principles, US Tax system
• Comparative advantages
• Etc..
Supply, Demand, p*, q*, CS and DS
Demand
Supply
Equilibrium quantity q*
Equilibrium price p*
• Difference between• Change in Demand• Change in quantity demanded
• When and to which direction does S/D move?• And how they affects the p* and q*?
p
q
Supply, Demand, p*, q*, CS and DS
Consumer Surplus: Area from 0 to q*, above p* and below demand
Producer Surplus: Area from 0 to q*, below p* and above supply
p
q
Supply, Demand, p*, q*, CS and DS
• Alternative way of presenting demand and supply:• Chart
• Like this:
• Equation• E.g., Pd=4-Q, Ps=2+Q
Price Demand Supply$2.0 9,000 0$3.0 8,000 500$4.0 7,000 1,000$5.0 6,000 1,500$6.0 5,000 2,000$7.0 4,000 2,500$8.0 3,000 3,000$9.0 2,000 3,500$10.0 1,000 4,000$11.0 0 4,500
Price Control – Price Floor
Consumer Surplus: Area from 0 to quantity, above price and below demand
Producer Surplus: Area from 0 to quantity, below price and above supply
p
q
Price Floor: binding only when higher than p*
New quantity
Deadweight loss
Surplus
Price Control – Price Ceiling
Consumer Surplus: Area from 0 to quantity, above price and below demand
Producer Surplus: Area from 0 to quantity, below price and above supply
p
q
Price Ceiling: binding only when lower than p*
New quantity
Deadweight loss
Shortage
Quota Control
p
qQuota
Wedge: Quota Rent
Deadweight loss
Elasticity
• 𝐴 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐵 =𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 B
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴=
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 B
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴×
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 A
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐵
• E.g., price elasticity of quantity demand =∆𝑄
∆𝑃×
𝑃
𝑄
• Midpoint elasticity use Average Value of A and B rather than initials.
• E.g., (midpoint) price elasticity of quantity demand =∆𝑄
∆𝑃×
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑄
= 𝑄2−𝑄1
𝑃2−𝑃1×
(𝑃1+𝑃2)/2
(𝑄1+𝑄2)/2=𝑄2−𝑄1
𝑃2−𝑃1×
𝑃1+𝑃2
𝑄1+𝑄2
Taxes and Subsidy: Facing different price
p
q
p
q
Tax Imposed on ProducerLift the Supply
Tax Imposed on Consumer:Lower the demand
S’
S
D
D’
Deadweight loss
Deadweight loss
Pc
Ps
Pc
Ps
Note: subsidy can be viewed as a negative tax
Tax Revenue
Tax Revenue
Tax Burden and Elasticity
• When the amount of tax t is fixed, whether it is imposed on consumer or producer does not matter.
• Actual tax burden depends on elasticity
• Whoever being elastic get less burden
DWL and Elasticity
• DWL is larger when• Tax is larger
• Demand is elastic
• Supply is elastic
Trade
Consumer Surplus
Producer Surplus
p
q
Autarky price
World price
Domestic S
Domestic DImports
QdQs
• Import occurs when world price is lower than autarky price
• Domestic producer produces less, consumer consumes more
• Difference between Qd and Qs is imports
• Surplus shifts from producer to consumer
• Net gain in surplus
Trade
Consumer Surplus
Producer Surplus
p
q
Autarky price
World price
Domestic S
Domestic D
Exports
Qd Qs
• Export occurs when world price is higher than autarky price
• Domestic producer produces more, consumer consumes less
• Difference between Qs and Qd is exports
• Surplus shifts from consumer to producer
• Net gain in surplus
Trade Protection
• Why?
• Imposing an import tariff
• Providing an export subsidy
• Quota control
Tips for the exam
• 1-hour closed-book
• Bring: student ID, pens, Pink scantron, papers
• Don’t leave questions blank, try whatever you know. Partial credits will be given
• Show your logic (equation, when using math) clearly
• Good luck!