Lec 2:

- Market: a group of buyers and sellers of a particular good or service

- Competitive market: a market where there are many buyers and sellers.
Each has a negligible impact on market price
- Perfectly competitive market: 2 charactistics: –
+ Goods offered for sale are exactly the same
+ Buyers and sellers are numerous
• No single buyer or seller has any influence over
the market price
• Must accept the price determined on the market
– Price takers
- Demand:
+The amount of a commodity that will be purchased at a given price by
consumers at a point in time
+ illustrated by the whole demand curve
+ change in demand: cause a shift + factors: non-price (real income,
prices of related goods, tastes, change in population, expectation,
advertising, climatic change)
- Quantity demanded: – Amount of a good + Buyers are willing and able
to purchase
+ illustrated by a point on the demand củve
+ Change in Qd: cause a movement + factor: price
- Law of demand: when Other things equal, the price of the good rises,
Quantity demanded of a good falls
- Market demand: Sum of all individual demands for a good or service
- Supply:
- Quantity supplied: Amount of a good, Sellers are willing and able to sell
- Law of supply: Other things equal, When the price of the good rises,
Quantity supplied of a good rises
- Market supply: Sum of the supplies of all sellers for a good or service
- Determinants of supply: Input prices, Technology, Expectations,
Number of sellers
- Equilibrium: Market price has reached the level : Quantity supplied =
quantity demanded
- Equilibrium price: Balances quantity supplied and quantity demanded
- Equilibrium quantity: Quantity supplied and the quantity demanded at
the equilibrium price
- Disequilibrium:
 Surplus
–Quantity supplied > quantity demanded
 – Excess supply
–Downward pressure on price
 Shortage
–Quantity demanded > quantity supplied
– Excess demand
–Upward pressure on price
- Three steps to analyzing changes in equilibrium
1. Decide whether the event shifts the supply or demand curve
(or perhaps both).
2. Decide in which direction the curve shifts.

3. Use the supply-and demand diagram to see how the shift

changes the equilibrium price and quantity.

Lec 3:
- Elasticity: is a measure of how much buuyers and sellers respond to
changes in market conditions.
- Demand is inelastic if demand shifts only slightly when the price of the
good changes.
- Price elasticity of demand: Measure of how much quantity demanded of
a good responds To a change in the price of that good
Formula: Percentage change in quantity demanded Divided by the
percentage change in price

- Determinants of price elasticity:

 - Total revenue and price elasticity of demand
Inelastic demand
– Increase in price
• Increase in total revenue

Elastic demand
– Increase in price
• Decrease in total revenue

- Income elasticity of demand: Measure of how much the quantity

demanded of a good responds To a change in consumers’ income
Formula: Percentage change in quantity demanded Divided by the percentage
change in income
–Normal goods: positive income elasticity
– Inferior goods: negative income elasticities
- Cross-price elasticity of demand: Measure of how much the quantity
demanded of one good responds To a change in the price of another good

Formula: Percentage change in quantity demanded of the first good

Divided by the percentage change in price of the second good

– Substitutes: Positive cross-price elasticity

– Complements: Negative cross-price elasticity
- Price elasticity of supply: Measure of how much the quantity supplied of
a good responds To a change in the price of that good
Formula: Percentage change in quantity supplied Divided by the
percentage change in price

Lec 4:
- Welfare economics: the study of how the allocation of resources affects
economic well-being
- Willingness to pay: the maximum amount that a buyer will pay for a
good
- Consumer surplus: Amount a buyer is wtp for a good minus amount the
buyer actually pays for it
+ CS = WTP – real price
+ Area below the demand curve and above the price
 - Producer Surplus: Amount a seller is paid for a good minus the seller’s
cost of providing it.
+ PS = Price – Cost
+ area below the price and above the supply curve
- Market efficiency:
+ measure: TS = CS + PS = (WTP-P)+(P-C)= WTP – C
+ maximium at equilibrium point

LEC 5:
- Price control: The government/policy makers set the price controls When
Policymakers believe that the market price is unfair to sellers or buyers
- price ceiling: a legal maximum on the price at which a good can be sold
+ Not binding: above the equilibrium price and no effect
+ Binding: Below the equilibrium price, cause shortage
- Price floor: a legal minimum on the price at which a good can be sold
+ Not binding: Below equilibrium price and no effect
+ Binding: above the equilibrium price and cause surplus
- Tax incidence: the manner in which the burden of a tax is shared among
participants in a market
+ tax on seller:

+ tax on buyer:
 -
- Tax wedge: P(buyer) – P(seller)
- Taxes levied on sellers and taxes levied on buyers are equivalent.
- Who pay more tax:
+ Elastic S, Inelastic D => buyer pay more
+ Inelastic S, elastic D => seller pay more
- Tax revenue:
T = the size of the tax
• Q = the quantity of
the good sold
• T x Q = Tax Revenue
- DWL: The fall in total surplus that results from a market distortion, such
as a tax.
- Determinants of DWL: The greater the elasticities of demand and
supply:
 the larger will be the decline in equilibrium quantity and,
 the greater the deadweight loss of a tax.

LEC 6:
- The theory of consumer choice examines: the tradeoffs inherent in
decisions made by consumers.
- Budget constraint: Limit on the consumption bundles that a consumer
can afford
- Slope of the budget constraint: Rate at which the consumer can trade
one good for the other. Not the same at all points
= Change in the vertical distance Divided by the change in the horizontal
distance
= Q1/Q2 = P2/P1 = y/x
+ Graph: straight line connect the max output of 1 good to another
- Indifference curve: Shows consumption bundles that give the consumer
the same level of satisfaction
+ Combinations of goods on the same curve
•Same satisfaction
 + Slope: Marginal rate of substitution is Rate at which a consumer is
willing to trade one good for another
- Four properties of indifference curves
1. Higher indifference curves are preferred to
lower ones
– Higher indifference curves – more goods
2. Indifference curves are downward sloping
3. Indifference curves do not cross
4. Indifference curves are bowed inward

+ Special case:
 Perfect substitute: Straight line
 Perfect complements: L shape
- Optimization:
+ Point where indifference curve and budget
constraint touch
+ Best combination of goods available to the
consumer
+ Slope of indifference curve
• Equals slope of budget constraint

• Marginal rate of substitution = relative price

+ Change in income: Shift BC to the right( IC increase) and to the
left( IB decrease)
+ Change in price: