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!