Summary Micro economics
Lecture 1
- Shift of demand curve: Change in quantity demanded at any given price (keeping
price constant)
- Movement along demand curve: a change in quantity demanded arising from a
change in price
- Changes in the prices of related goods
• Substitutes: rise in price of good 1 increases demand for good 2
• Complements: rise in price of good 1 decreased demand for good 2
- Changes in income:
- Normal Goods: rise in income increases demand
- Inferior goods: rise in income decreases demand
- Individual consumer surplus: Is the net gain to an individual buyer from the
purchase of a good. It is equal to the di erence between the buyer’s willingness
to pay and the price paid
- Total consumer surplus: In a market is the sum of the individual consumer
surpluses of all the buyers if a good
- —> The total consumer surplus generated by purchases of a good at a given
price is equal to the area below the demand curve but above that price
- A decrease in price increases consumer surplus
- A shift in the supply curve: change in the quantity supplied at any given price
(keeping price constant)
- Movement along curve: change in the quantity supplied as a result of a change in
the price
- Individual producer surplus: is the net gain to a seller from selling a good. It is
equal to the di erence between the price received and the seller’s cost
1
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,- Total producer surplus: In a market is the sum of the individual producer
surpluses of all the sellers of a good
- Opportunity cost: Are the cost of any activity measured in terms of the value of
the best alternative that is not chosen
- —> The Toal producer surplus from sales of a good at a given price is the area
above the supply curve but below that price
- Price above its equilibrium level creates a surplus
- Price below its equilibrium level creates a shortage
- Excess demand: incentive to increase price
- Markets price moves towards equilibrium price
- When demand increases and supply decreases, the price rises, but the change in
quantity is ambiguous
- In competitive markets, the maximum possible total surplus (highest possible
gain to society) is achieved at the market equilibrium
- In the market equilibrium there is no way to make some people better o without
making others worse o —> competitive markets are e cient
2
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, - Total surplus generated in a market is the Toal net gain to consumers and
producers from trading in the market. It is the sum of the producer and the
consumer surplus
- The market allocates consumption of the good to the potential buyers who value
it the most
- The market allocates sales to the potential sellers who value the right to sell the
good most
- The market ensures that every consumer who makes a purchase values the good
more than every seller who makes a sale—> all transactions are mutually
bene cial
- The market ensures that every potential buyer who doesn’t make a purchase
values the good less than every potential seller who doesn’t make a sale
The market equilibrium maximises total surplus because the market…
1….allocates consumption of the good to the potential buyers who value it the most
2…allocates sales to the potential sellers who value the right to sell the good most
3…ensures that every consumer who makes a purchase values the good more than
every seller who makes a sale—> all transactions are mutually bene cial
4…ensures that every potential buyer who doesn’t make a purchase values the
good less than every potential seller who doesn’t make a sale
Lecture 2:
- Price ceilings lead to ine ciency in the form of:
- Ine cient allocations of goods to consumers, Wasted resources, Ine ciently low
quality of the good, Provide incentive for illegal activities, ine ciency arising from
low quantity traded, resulting in a deadweight loss
- Price ceiling causes an e ciency loss called the deadweight loss to society,
because less of the good is produced and consumed than in the absence of the
ceiling. As a result, some mutually bene cial trades between producers and
consumers do not take place
- Deadweight loss of policy X= loss in total surplus that occurs if policy X reduces
the quantity transact below the e cient quantity=
- Maximum possible attainable total pro t before policy X minus total
attainable pro t after policy X
3
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Lecture 1
- Shift of demand curve: Change in quantity demanded at any given price (keeping
price constant)
- Movement along demand curve: a change in quantity demanded arising from a
change in price
- Changes in the prices of related goods
• Substitutes: rise in price of good 1 increases demand for good 2
• Complements: rise in price of good 1 decreased demand for good 2
- Changes in income:
- Normal Goods: rise in income increases demand
- Inferior goods: rise in income decreases demand
- Individual consumer surplus: Is the net gain to an individual buyer from the
purchase of a good. It is equal to the di erence between the buyer’s willingness
to pay and the price paid
- Total consumer surplus: In a market is the sum of the individual consumer
surpluses of all the buyers if a good
- —> The total consumer surplus generated by purchases of a good at a given
price is equal to the area below the demand curve but above that price
- A decrease in price increases consumer surplus
- A shift in the supply curve: change in the quantity supplied at any given price
(keeping price constant)
- Movement along curve: change in the quantity supplied as a result of a change in
the price
- Individual producer surplus: is the net gain to a seller from selling a good. It is
equal to the di erence between the price received and the seller’s cost
1
ff ff
,- Total producer surplus: In a market is the sum of the individual producer
surpluses of all the sellers of a good
- Opportunity cost: Are the cost of any activity measured in terms of the value of
the best alternative that is not chosen
- —> The Toal producer surplus from sales of a good at a given price is the area
above the supply curve but below that price
- Price above its equilibrium level creates a surplus
- Price below its equilibrium level creates a shortage
- Excess demand: incentive to increase price
- Markets price moves towards equilibrium price
- When demand increases and supply decreases, the price rises, but the change in
quantity is ambiguous
- In competitive markets, the maximum possible total surplus (highest possible
gain to society) is achieved at the market equilibrium
- In the market equilibrium there is no way to make some people better o without
making others worse o —> competitive markets are e cient
2
ff ffi ff
, - Total surplus generated in a market is the Toal net gain to consumers and
producers from trading in the market. It is the sum of the producer and the
consumer surplus
- The market allocates consumption of the good to the potential buyers who value
it the most
- The market allocates sales to the potential sellers who value the right to sell the
good most
- The market ensures that every consumer who makes a purchase values the good
more than every seller who makes a sale—> all transactions are mutually
bene cial
- The market ensures that every potential buyer who doesn’t make a purchase
values the good less than every potential seller who doesn’t make a sale
The market equilibrium maximises total surplus because the market…
1….allocates consumption of the good to the potential buyers who value it the most
2…allocates sales to the potential sellers who value the right to sell the good most
3…ensures that every consumer who makes a purchase values the good more than
every seller who makes a sale—> all transactions are mutually bene cial
4…ensures that every potential buyer who doesn’t make a purchase values the
good less than every potential seller who doesn’t make a sale
Lecture 2:
- Price ceilings lead to ine ciency in the form of:
- Ine cient allocations of goods to consumers, Wasted resources, Ine ciently low
quality of the good, Provide incentive for illegal activities, ine ciency arising from
low quantity traded, resulting in a deadweight loss
- Price ceiling causes an e ciency loss called the deadweight loss to society,
because less of the good is produced and consumed than in the absence of the
ceiling. As a result, some mutually bene cial trades between producers and
consumers do not take place
- Deadweight loss of policy X= loss in total surplus that occurs if policy X reduces
the quantity transact below the e cient quantity=
- Maximum possible attainable total pro t before policy X minus total
attainable pro t after policy X
3
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