| Term | Definition |
| Reservation price def | most a single consumer would pay for a unit of good |
| Reservation price solve | set x = 0, find U when all y is bought, then set x = 1 and y = m - r and same utility |
| Consumer surplus def | area under curve above price to quantity purchased |
| Quasilinear consumer surplus | no income effects on nonlinear good, consumer surplus is measure of change in utility form purchasing good |
| Compensation variation def | what is least extra income that at new prices, just restores original utility level |
| Compensation variation = | original income - compensating income |
| Equivalent variation def | money loss a consumer would consider to be equivalent to a price increase (take away income + old prices) |
| Equivalent variation = | original income - equivalent income |
| Quasilinear changes | CV = EV = change in consumer surplus |
| ration coupon area on graph | where tax revenue normally is |
| Gross surplus def | total WTP up to amount, area under curve up to amount |
| Net surplus def | area under curve above price |
| Cobb Douglas x & y equilibriums | x = am/ (a+b)p1 & y = bm / (a+b)p2 |
| perfect compliments equilibriums | x = m/(p1+p2) |
| derivative of lnx = | 1/x |
| demand curve cobb douglas = | p1 = am/x |
| Producer surplus def | difference between minimum amount willing to sell and what they actually sell x units for |
| effective price def | price that would induce consumers to demand certain quantity |
| market demand def | horizontal sum of quantities demanded by each consumer at every price |
| Elasticity def | measures sensitivity of one variable with respect to another |
| Own price elasticity = | percent change x / percent change y |
| Arc own price elasticity = | p' / ((x upper - x lower)/2) * ((x upper - x lower)/2h, where h is the difference between price bounds and center price |
| Point own price elasticity = | p'/x' * dx/dp |
| Own - Price elasticity for p = a - bx | E = p/((a-p)/b) * (-1/b) |
| if -1<E<0 then | inelastic |
| if -infinity<E<-1 | elastic |
| if E = -1 | unit elastic |
| if x = kp^a then own price elasticity is | E = -a everywhere (constant) |
| Revenue = | p * q |
| inelastic demand causes sellers rev to ___ as price rises | increase |
| elastic demand causes sellers rev to ___ as price rises | decrease |
| Marginal Revenue = | p(q) * (1+1/E own price) |
| if unit elastic own price elasticity then MR | 0 |
| if elastic own price elasticity then MR | greater than zero |
| if inelastic own price elasticity then MR | less than zero |
| If Demand < Supply | excess supply, downward pressure |
| If Demand > Supply | excess demand, upward pressure |
| When D(p) = a - bp and S(p) = c + dp then p & q are | p = a - c/b+d & q = ad + bc/ b + d |
| excise tax def | tax levied on sellers |
| sales tax def | tax levied on buyers |
| t = | pb - ps |
| With tax D(p) = a - bp and S(p) = c + dp then p&q are | ps = a - c - bt / b + d & q = ad + bc - bdt / b + d |
| tax incidence = | pb - p' / p' - ps |
| Price elasticity of demand (changes) = | (change q / q') / (pb - p'/p') |
| Price elasticity of supply (changes) = | (change q / q') / (ps - p'/p') |
| tax incidence (elasticity) = | Es / Ed |
| fraction of tax to buyers increases when | supply more elastic or demand more inelastic |
| fraction of tax to suppliers increases when | supply more inelastic or demand more elastic |
| Elasticity is | slope of the demand function |
| Price elasticity of demand for q = a - bp | E = -bp/a-bp |
| Normal good has what income elasticity | positive |
| inferior good has what income elasticity | negative |
| perfectly elastic | horizontal supply curve |
| perfectly inelastic | vertical supply curve |
| Pareto efficiency | no way to make anyone better without making anyone worse off |
| partial equilibrium | equilibrium in particular market |
| general equilibrium | interact in several markets |
| feasible allocation = | xA + xB = WA + WB |
| edgeworth box dimensions | width is total amount of x and height is total amount of y |
| net demand = | xA - WA |
| Walrasian equilibrium | set of prices that each consumer is choosing their most preferred affordable bundle |
| Walras law def | value of aggregate excess demand is identically zero |
| First Theorem of Welfare Economics | guarantees a competitive market will exhaust all gains from trade and will be pareto efficient |
| Second Theorem of Welfare Economics | when preferences are convex, a pareto efficient allocation is an equilibrium for some set of prices |
| Assumption of First Theorem | consumption externality (competitive) |
| Total cost curve = | cv(y) + F |
| Average total cost = | c(y)/y + F/y |
| Marginal cost = | dc(y)/dy |
| MC intersects AVC at | minimum point |
| area under MC is | total cost of y units |
| SR ATC intersects SR MC at | ATC minimum |
| LR total cost curve consists of | lower envelope of SR total cost curves |
| Pure competition | market price independent, everyone price taker |
| profit = | py - c(y) - F |
| choose level of output at | p = MC(y) |
| shutdown if | AVC > P |
| producer surplus = | py - cv(y) |
| find the min average cost for firm | find average cost, find derivative, set = to 0, find critical points, plug back in |
| Monopoly | one seller that determines supply and sets market clearing price |
| Oligopoly | few firms producing same product, decisions of each influence profits and payoffs |
| Dominant firm | many firms, but 1 large firm that affects decisions of small firms |
| Monopolistic competition | many firms each slightly different products, each firm's output is small relative to total |
| Perfect competition (4) | many firms, same product, no influence on market price, price takers |
| find max profit level | take derivative of profit function, critical points, second derivative should be negative |
| produce in short run if | p > min AVC |
| produce in long run if | p > min AC |
| short run supply curve find | p = MC(y) then solve for y |
| Long Run producer surplus | profit |
| market supply curve def | sum of individual supply curves |
| long run market supply curve is | flat at p = min AC, profits driven to zero |
| tax burden in long run | all of burden is on consumers |
| find industry supply at given price level | find MC for each, find supply curve for each, add together, input given price level |
| saw - toothed LR supply curve is | relevant SR supply curves above min AC (y) and increasingly flat |
| steps to find n and p for long run (5) | 1. find inverse supply functions for one firm 2. solve for supply function 3. lowest possible p = min AC 4. set S(market) = D at p to find n 5. if n is fraction round down and solve for p |
| Price elasticity (formula) | E = p/q * dq/dp |
| Income elasticity (formula) | E = I/Q * dq/di |
| If q = Ap^a then PED does not depend on | price |
| In SR if MC is decreasing as output increases then | total cost is increasing |
| a profit maximizing firm may ___ money in the SR | lose |
| a small firm in perfectly competitive market, the marginal revenue is ___ over the output range it operates | horizontal |
| Revenue equation is | R(p) = D(p) * p |
| To find maximum revenue then | derivative of R(p) then find critical points |
| Expected revenue = | P(survive)*P(not confiscated)*Price |
| Expected cost = | P(confiscated)*fine + cost |
