Formulas To KnowChapter 5 NotesElasticities of Demand and Supply LectureChapter 6 NotesChapter 8 NotesEfficiency of Markets LectureChapter 7 NotesPrice Ceilings and Price Floors LectureTest 2 Study Guide:Lecture and TextbookECO 2023Dr. McCalebTable of Contents:FORMULAS TO KNOW 38 CHAPTER 5 NOTES 40 ELASTICITIES OF DEMAND AND SUPPLY LECTURE 44 CHAPTER 6 NOTES 51 CHAPTER 8 NOTES 54 EFFICIENCY OF MARKETS LECTURE 56 CHAPTER 7 NOTES 61 PRICE CEILINGS AND PRICE FLOORS LECTURE 63 37Formulas To KnowReview from Midterm 1: - Slope of a Line:o M = Change in Y over change in X o M = ΔY/ΔXo M = Y2-Y1/X2-X1- Net Benefit (NB):o NB = Total Benefit – Total Cost o NB = TB - TC- The optimal amount of any activity:o Is when the Marginal Benefit is equal to the Marginal Costo When MB = MC- Marginal Benefit (MB):o MB = Change in Total Benefit/Change in Quantityo MB = ΔTB/ΔQ o MB = (TB2-TB1)/(Q2-Q1)- Marginal Cost (MC):o MC = Change in Total Cost/ Change in Quantityo MC = ΔTC/ΔQ o MC = (TC2-TC1)/(Q2-Q1)- When to increase the amount of an activity (Production Possibilities Frontier):o If Marginal Benefit > Marginal Costo If MB > MC - When to decrease the amount of an activity (Production Possibilities Frontier):o If Marginal Cost > Marginal Benefit o If MC > MB - Labor Force (LF):o = Employed + Unemployedo = E + U- Market Equilibriumo When the quantity demanded equals the quantity supplied. o Equilibrium: QD=QSMidterm 2:- Price Elasticity of Demand:o Elasticity (η) = % Change in Quantity Demanded / % Change in Priceo = %ΔQD / %ΔP-Midpoint Method to Calculating the Price Elasticity:o Percent Change in Quantity = [(New Quantity – Initial Quantity) / ((New Quantity + Initial Quantity) / 2)] x 100o %ΔQ = [(Q2 - Q1) / ((Q2 + Q1) / 2)] x 100o Percent Change in Price = [(New Price – Initial Price) / ((New Price + Initial Price) / 2)] x 100o %ΔP = [(P2 - P1) / ((P2 + P1) / 2)] x 100- Price elasticity of supply:38o Elasticity (η) = % change in quantity supplied / % change in priceo = %ΔQS / %ΔP- Cross elasticity of demand:o Elasticity (η) = % change in quantity demanded of a good / % change in the price of one of its substitutes or complements. o = %ΔQD / %ΔPS/C- Income elasticity of demand:o Elasticity (η) = % change in quantity demanded / % change in incomeo = %ΔQD / %ΔI- Total Revenue and the Price Elasticity of Demando Total Revenue (TR) = Total Expenditure (TE) = Price (P) x Quantity (Q)o TR = PQ or TE = PQ o Change in Total Revenue = Change in Price + Change in Quantity Demandedo ΔTR = ΔP + ΔQ- Consumer Surpluso Consumer Surplus (CS) = Marginal Benefit – Priceo CS = MB - P- Producer Surpluso Producer Surplus (PS) = Price – Marginal Costo PS = P – MC- Efficient Quantityo When Marginal Benefit = Marginal Costo When MB = MC- Market Equilibriumo When quantity demanded = quantity suppliedo Where QD = QS- Consumer Surpluso The marginal benefit from a good or service in excess of the price paid for it, summed over the quantity consumed o CS = MB / QD- Producer Surpluso The price of a good in excess of the marginal cost of producing it, summed over the quantity supplied. o PS = MC / QS- Total Surpluso The sum of producer surplus and consumer surplus. o TS = PS + CS- Deadweight Losso The Total Surplus of Efficient quantity and price (TSE) – the total surplus of the inefficient quantity and price (TSI)o TSE- TSI3940Chapter 5 NotesCitation:Bade, Robin, and Michael Parkin. Foundations of Microeconomics. 6th ed. Boston: Pearson/Addison-Wesley, 2013. Print.The Price Elasticity of DemandA measure of the responsiveness of the quantity demanded of a good to change in its price when all other influences on buyers’ plans remain the same (112). Percentage Change in PricePercentage Change in Price = [(New Price – Initial Price) / Initial Price] x 100Because elasticity compares the percentage change in the quantity demanded with the percentage change in price, we need a measure of percentage change that does not depend on the direction of the price change. This new method is called the midpoint method. Midpoint MethodPercentage Change in Price = [(New Price – Initial Price) / ((New Price + Initial Price) / 2)] x 100Because the average price is the same regardless of whether the price rises or falls, the percentage change in price calculated by the midpoint method is the same for a price rise or a price fall. It gives the absolute value or magnitude. Percentage Change in Quantity DemandedPercentage Change in Quantity = [(New Quantity – Initial Quantity) / (New Quantity + Initial Quantity) / 2)] x 100Elastic DemandWhen the percentage change in quantity demanded exceeds the percentage change in price (114). Unit Elastic DemandWhen the percentage change in quantity demanded equals the percentage change in price (114).Inelastic DemandWhen the percentage change in quantity demanded is less than the percentage change in price (114). Perfectly Elastic DemandWhen the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price (114). Consumers are willing to buy a product at a given price but none at a higher price. Perfectly Inelastic DemandWhen the percentage change in quantity demanded is zero for any percentage change in price (114). 41Consumers are willing to buy the same amount of a product no matter what the price is. Availability of SubstitutesThe demand of a good is elastic if a substitute for it is easy to find. The demand for a good is inelastic if a substitute for it is hard to find. - Luxury Vs. Necessityo Necessity- has poor substitutes and is therefore inelastico Luxury- has many substitutes and is therefore elastic- Narrowness of Definitiono Narrow Goods- such as a specific brand is elastic because there are substitutes.o Broad Goods- such as a type of food is inelastic because other foods are not necessarily goodsubstitutes for it. - Time Elapsed Since Price Changeo The longer the time has elapsed since the price change, the more elastic the demand for the goodis.Price Elasticity of DemandPrice elasticity of demand= percentage change in quantity demanded / percentage change in price. If the price elasticity of demand is greater than 1, demand is elastic.If the price elasticity of demand equals 1, demand is unit elastic. If the price elasticity of
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