Review from Test 1 Thursday December 4 2014 9 09 PM PPF Comp Advantage Gains from Trade Opportunity cost found on the Productions Possibilities Frontier Opposite Self Comparative Advantage When someone has a lower opportunity cost with one task over another This should be a ratio or a fraction comparison Absolute Advantage when someone is more productive than another at a task This should just be compared by looking at the value if all resources are going into that one task BIG IDEA there exists gains from trade that are driven by comparative advantages even when one party is better at everything How to draw a PPF 1 How many of one units can be produced if all resources are going into making that unit Continue doing this with each additional unit 2 Find the opportunity cost for each of these units 3 The smallest one should be the first one on the graph as it has the smallest opportunity cost 4 The opportunity cost acts as the slope and the graph itself should be getting steeper How to find the range of possible prices If people are to trade and specialize in a certain task each would produce what they have a comparative advantage in and the price would be somewhere between the two opportunity costs of the certain task Supply and Demand Equilibrium Competitive Market a market in which there are many buyers and sellers so that each has a negligible impact on the price Buyers and Sellers are the price takers Quantity Demanded the amount of a good that buyers are willing and able to purchase Price the price of the good Income changes in income or wealth can cause demand to either decrease or increase see normal inferior goods Expectations can affect demand due to possibly mistaken thoughts Tastes Preferences category to lump changes in the likes and dislikes of consumers fashionable in etc Price of other goods can affect the demand of a particular good see complements substitutes The Law of Demand other things equal the quantity demanded of a good falls when the price of the good rises Demand the relationship between quantity demanded and the price of the good holding all else constant demand curve is the graphical representation If the demand increases the demand curve shifts to the left Normal Good an increase in income increases demand Inferior Good an increase in income decreases demand Complements an increase in the price of the complement decreases demand Substitutes an increase in the price of a substitute decreases demand Quantity Supplied the amount of a good that sellers are willing and able to supply Price price of the good Cost of inputs Technology and regulations Expectations Number of producers Law of Supply other things equal the quantity supplied of a good rises when the price of the good rises Supply the relationship between quantity supplied and the price of the good holding all else constant supply curve is the graphical representation If a supply increases the supply curve shifts to the right Equilibrium refers to a situation where the price has reached the level where quantity supplied is equal to quantity demanded Finding the equilibrium Graphically it is where the supply and demand curve intersect With an Equation it is when you set the demand and supply equal to one another Comparative Status Shifting Supply and Demand X Price Supply Decreased Increased Demand Decreased Decreased Total Effect Indeterminate Supply Decreased Demand Increased Total Effect Increased Increased Increased Consumer Surplus and Producer Surplus How to find Consumer Surplus Quantity Decreased Decreased Decreased Decreased Increased Indeterminate 1 Graph the demand curve a Take the equation and set the price equal to 0 find the intercept the quantity when price is 0 aka the x axis value and then set the equation equal to 0 find the price when quantity is 0 aka the y axis value 2 Graph the price of the good and find its intersection with the demand curve a Put the price into the equation and find the quantity 3 The consumer surplus is between the demand curve and price to the quantity it creates a a To calculate this amount plug it into the 1 2 b h equation 1 Calculate the consumer surplus of the price given and then subtract the fee from the consumer triangle How to calculate with a fixed fee surplus Non Linear Pricing 1 Calculate the WTP willing to pay at whatever quantity given It should look like 30 4P i ii 30 the maximum quantity able to be bought at a certain price iii 4P from the original equation to find the slope of the demand curve 2 Compare this to the cost of having one more unit of the product i When WTP Cost ii When WTP Cost Then more units will be bought i i 3 Graph the price of the units of product 4 Shade in the area for the consumer surplus 5 Subtract the fixed fee if there is one Calculating Surplus with a Horizontal Demand No more units will be bought in addition to max quantity i You might need to combine two different area formulas CS would be zero because there is no area between the demand and the price PS is the area between the price and the supply curve Calculating Producer Surplus with a Vertical Supply PS would still be the area between the price and the supply curve Calculation Consumer Surplus with a Vertical Demand CS would be infinite as the vertical demand line is never ending Price Floors and Ceilings Price Ceiling the legal maximum that can be charged for a good or service It is binding if the equilibrium price is above the price ceiling Price Floor the legal minimum that can be charged for a good or service It is binding if the equilibrium price is below the price floor This creates a shortage This creates a surplus How to find the Consumer Surplus Producer Surplus and Dead Weight Loss Consumer Surplus The area between the demand curve willingness to pay and the price for the amount of people that can purchase the product Producer Surplus The area between the price ceiling floor and the supply curve Dead Weight Loss The area between the willingness to pay demand and the marginal cost supply this is not being produced These are the transactions that should be happening but are not Overall CS PS DWL this graph is from a price floor with the lowest cost to produce