Microeconomics Review Session

oh yeah sick all right we are ready to begin all right welcome to microeconomics this is the review session hosted by the IBO discord this is hosted by me JP so the plan for today is to go through most of microeconomics we will not do the higher level theory of the firm stuff because I've decided to do that to Thursday which is to April 18th and this we have 1400 GMT on Tuesday we'll go through the macro and on Wednesday we'll go through international economics all right people have begun to join so I guess will you start so this all begins with the foundation of economics which is centered around the idea of scarcity which is that there are unlimited wants and limited fulfillment this is symbolized with a PPC curve or production possibilities curve as you can see here you can see that you have schools on the y-axis and motorcars on the x-axis which shows that you can either produce schools or cars this is very simplified but it will it shows the concept and so since the the reason for the graph here being curved is that you can never make full amount of schools or Philon of cars but that's just not possible because you have a limited fulfillment or limited factors of productions that you can use so we talk about factors of production which which is what what's used to make these things from schools or cars so a change in any of this or an increase in in any of these may either cause you to move inside a movement from V to W or it could cause a shift is T if the improvement is large enough there's a vibration what the yeah one second check that mm-hmm they shouldn't be reverb nice just probably my room being a echo Center yeah so so a change in any of these could cause the PBC to shift which is natural reefs resources which is such as land or oil for example labor that's that's all human input oh there is echo oh I know it's my head being on say yeah I'll try to fix it you [Music] you you we can hear me this is great okay and start recording again yeah okay okay next slide so the fundamental questions of economics is what to produce how much to produce or for whom from for whom to produce and then this is sort of a philosophical answer who has the answer the government the market or both and the IB economics takes the stance of a mixed market economy which is where the government and the market decides what to produce so I definition you have to know here is that market this is where potential buyers and potential sellers meet so the market is run by market forces demand supply or as Adam Smith called it the invisible hand of the market and also the government which I guess you could say they exist to fix the inefficiencies which we'll talk about in the end so the man that's the willingness and ability for customers to pay a certain price in the market to obtain a good or service this is represented by downward sloping curve as you can see here this is due to the wealth effect which is that when you have a lot of money then spending a low amount or when something costs so little as 0.62 dollars then you can buy a lot of it because you feel richer well if it's to others then you're like oh this is kind of expensive I might not buy that much and the principle of marginal returns which says that for example when you eat the ice cream the first spoon of ice cream tastes really good but 1/10 maybe not as much and this this this is the same for hair and buying soft drinks and then you have the substitution effect which is that when something becomes expensive here are two dollars the people might instead just run over to the Pepsi shop and get some Pepsi in instead of buying coke since Pepsi might cost point 50 if you take higher level you should know that the quantity demanded is supported by this function a is just the price at zero demand and some shown here but it should across this curve when you draw it on the exams and the B is unconstant it's it's simple algebra yes this will be recorded and the law of demand states there's an inverse relationship between the price of a good and quantity demanded of sell you yeah so something can cause shifts in demand which is when the man curve shifts in or out this is caused by the non-price determinants of demand which is the public perception of a good for example certain Goods may shift in and out of fashion thereby causing fluctuations in demand for Harrison and shifts in demand for example nowadays people wearing each 80s clothes they're really popular now but in 10 years people start wearing I don't know some fancy-ass sweatpants and 80s calls anymore so then the demand for a these clothes might shift inside of course you have the old classic vaccines cause autism so for example when people start saying oh no vaccine causes autism then the demand for vaccines might shift inwards because people think okay I'm I'm not gonna buy this vaccines I want my kids to have autism it also changes with income that that's like the income for the whole economy so say if all people earn five thousand dollars more per year they will spend more money because they feel richer and this would cause a shift outwards in the map same with substitutes which also relates to the cross price elasticity of demand or example if cost coke costs point to euros less than Pepsi then you're probably going to buy Coke and a Pepsi because it's cheaper and it has almost the same taste although this is a hotly debated topic and also if if the good has any clothes complements for example if Mac McDonald's has a $1 Burger deal then you're probably going to go in there and you're gonna buy a whole as menu with chips and drink which would shift in the out for example ships and drinks then we have supply supplies the willingness and ability of firms to produce a good or a service at a given price this is shown as an upward sloping curve the reason why it is upward sloping is because that existing firms will earn more profit because the guy down here who is willing to sell his stuff for 0.5 dollars one point five dollars he if he makes more and more more like he's so efficient at making negative that when the price suddenly shifts to know when the quantity shifts to 3,000 and he's like oh I can make more and make even more money but also as more firms enter market as I see oh here's some someplace because I'm not as efficient but when the price is high enough hi I am efficient enough to cover my costs and I can enter the market and hence the supply will increase the law of supply states that there's an indirect relation there's a direct relationship between price of a good and quantity demanded this is mathematically expressed as quantity supplied is to see which is the supply at at zero dollars or like when it crosses the curve here yeah when when the quantity is zero that's the price and then this is the gradient of the curve supply also has non-price determinants this these are mostly changes in cost of production but saying if something costs more to make then you need to increase your price per unit to stay in business and if it cost less you have to you may decrease the price and maybe sell more of that you then make more profit something that influences the cost of production our cost of raw materials minimum wages government intervention and technology which increases efficiency or for example tech technology will increase the efficiency of the production and the cost of raw material minimum wage or government intervention such as taxes or subsidies changes the cost of production directly so here you can see a shifts in the supply curve make sure when you draw this on your exams that you label it correctly which is price and then quantity and you should always have a title of what to do this so when the market is in equilibrium that is when supply and demand meet there are no inefficiencies present since those who are prepared to pay and supply it P equilibrium get what they want so that these people down here are not willing or able to pay a price PE for a good therefore they should not get the good same here the they don't want to supply as much here because they won't make you enough profit so the nation together at all so it's an equilibrium in the center here and you can solve this on your paper threes by setting the function for quantity demanded equals to quantity supplied and you then you you can solve for the equilibrium price and once you have that price you can substitute that into whichever of these to find the quantity okay so hey are there any questions just write them out in the chat no sound stop baiting me doesn't matter I take that as there are no questions therefore I will continue until the next topic which are elasticity's alright so we have something called price elasticity of demand or PE d this is a measure of the responsiveness of the man to change in price this can be mathematically expressed as the percentage change in quantity demanded over the percentage change in price and you should always neglect the minus sign in the final answer at least when it comes to P the calculations so if the PE D is more than 1 then it's elastic which which means that if the if the price changed it a bit then the quantity demanded will change a disproportionately amount more or a change and then if it's inelastic then that's opposite that's if the price changes by a lot then the quantity demanded might not change as much you know in microeconomics we don't talk about crowding out that's a part of macroeconomics which we'll talk about tomorrow yeah so here so this this shows an inelastic curve it's it's very steep and you you can see that the box of the change in price is larger than a change in quantity demanded and here's an elastic curve this shows that the for its small change in price this box here there's a a lot larger change in the box of quantity demanded there are also some special cases that you have to know if PD goes to infinity that means that it's perfectly elastic that means that any change in price will lead to a pretty much indefinitely change in quantity demanded or you can say that there will be no country demanded at all just as you can see here even if the price goes down use a little bit then there won't be any demand at all it can also be unit elastic which is here which is that it's not really responsive at all that means that the changes are equal of at all points and then we have PD equals 0 which is that it's perfectly inelastic and then at any price quantity demanded will remain unchanged so the quantity demanded is a vertical line and it will not change with the price there are some determinants of PD for example the closeness of substitutes for example if you have a Coke and Pepsi if Coke decides to increase their prices by a dollar then people are going to buy Pepsi so it's more responsive to a change in price the coke that is and also the Pepsi if if coke suddenly increases prices or changes them fruits are due you don't find for example you can't replace apples with something else maybe you could say that pear pears are almost the same but no they're not so therefore fruits are inelastic since that people will still want apples and there are only one type of apples then it also depends on the necessity of the good for example medicine people will need their medicine and if the change in price is high then people will still have to buy their medicine because they can't live without it for example it liberation shoes or whatever so therefore it's inelastic which you can see here it's inelastic and in a time period how long does it take to change from for example the Apple ecosystem - I don't know Android some people are not willing to spend the time to change and therefore they will not change so then it's more of a inelastic curved demand curve same goes for the cost of switching if suddenly gas-powered cars went up in price or for example the the fuel went up in price and many people have gas-powered cars yeah youyou could say that the type of apples there are different type of apples but Apple has a good in its own its you know nothing but for example granny smith apples or some other brand of apples there they're elastic which is so emission which is sown shown in the perfect competition topic so when we're talking about substitutes or complements then we can also measure this using the cross price elasticity of demand xcd which is a measure of the responsiveness of a quantity demanded of a good x2 a change in the price of good-y which you can see mathematically expressed here so if and here you cannot neglect the minus sign keep that in mind so if Exedy is more than zero that means that the goods are substitutes and if it's a lot more than zero then there are close substitutes and if the XE d is less than zero then the goods are complements and if it's a lot less than zero then the goods are very close complements for example McDonald's burgers and their soda and sub substitutes you can say Coke or Pepsi and if Exedy is 0 then the goods are unrelated which means that whatever change happens to good Y or good X then there will be no change in the month all right or they have no relationship then we have the income elasticity which is a measure of the responsiveness of a good to a change in income this is expressed as Y D equals percentage change in quantity demanded of a good over the percentage change in an income so if yd is more than zero that means that it's a normal good which means that as income Rises the quantity demanded will also rise and if the income elasticity is less than zero then they're inferior kids which means that the quantity demanded goes down with a change in income and this is shown here by the angle curve which is so say for example potatoes are used here so as income rises to a certain extent people will buy more more potatoes and then it's gonna plateau and then it's going to decrease once people earn a lot more because then they might think oh I can buy some fancies a rice or pasta or whatever and stop buying cheap potatoes I have not seen them ask about the angle curve but you can mention it if you want to and a paper one [Music] what the value is la crater I haven't I'm not really sure if it's a lot greater or like what the value can be a lot greater but say if it's 1000 heard and then then they're obviously close substitutes and if it's minus 1000 here then there are obviously close components the last part of this is the price elasticity of supply PS this is a measure of the responsiveness of supply to a change in price and this is almost the same as price elasticity of demand although we're talking about supply I think you have to go all of these because we're going to promise PD they also have some non-price determinants for example the nature of the good primary goods such as oil take a lot of time to make for example if if the demand for all will skyrocket it or like know the the the price for oil went up a lot then it's going to be hard to start searching for new places to find oil under the ocean well if you're making toothpicks then it's pretty easy for you to start making more toothpaste because they are manufactured goods and you have almost instant access to raw materials and this also depends on the ability to store stock for example oil can be responsive if they are storing a lot of stock for example if they have the gas tanks with oil so when the price goes up they they will start emptying those tanks to respond to the market price and spare capacity which is almost the same at least and the mobility of the factors of production for example if you're a company that makes long boards and skateboards and suddenly the price for skateboards went up a lot and then you can stop making long boards and begin making skateboards a lot faster since they're technically the same good well if you for example growing apples and making go-karts and then it's really hard for you to change the good that you're prioritizing to produce then we have government intervention are there any questions for the elasticities part perfectly elastic yeah they are goods that make for example apples they are in perfect competition it's cold and that's because the like companies making apples they are no real way for them to make their their apples different from others and therefore if the price for your apple suddenly goes up by dollar then people will use buy apples from somebody else okay next is government intervention so a form of intervention is indirect tax all of them check if I'm recording as I am the definition of an indirect tax is a or attacks is that a government levy on the sale of a good or a service in issue to discourage behavior or production so there are two types there there's a specific tax which is a fixed amount for example $1 and when you draw your tax curves you will see that the price and then the quantity here and then you have to have some label of the market only paper once and you will shift the curve vertically upwards by the amount of the tax on paper one they are not to know about it being to scale but on paper three they will ask you to change it exactly one dollar but but you you will get like a net here and so lucky grid then I have a ad valorem tax which is a percentage amount so that as the price increases the tax also increases which is shown as a curve that is that has a steeper slope than the supply curve shifting upwards there are some inefficiencies due to taxation people who were getting the good they wanted before no longer does and this is what you may call deadweight loss so here we they were making or the market equilibrium was at Q 1 and P 1 but since they added the tax it's now at p2 and q2 so all these people here here the consumers were buying these goods and here the producers were supplying so there's a loss of their surplus and when they asked about this in paper once you have to analyze the stakeholders how are they affected for example here producers will lose revenue as they can't produce as much as they did before and yeah so they they can't make as much as a day before and the government here of course they are well off because they are making a revenue on this tax they're making this revenue box here I know they are making this sorry this in this entire box this is the tax and consumers they are also losing because they cannot buy the good that I wanted although you could evaluate this to say that oh but if the good is bad for the consumers themselves then the government is sort of saving them and this is also dependent on the price elasticity of demand for example if the demand curve is inelastic then the consumers will pay most of the tax since they are the most dependent I guess you could say well the producers don't pay as much and if if the demand curve is elastic then the producers pay more as they will just stop buying Goodman go somewhere else the consumers subsidies that's a per-unit payment to a firm granted by the government and it's usually issued to encourage behavior I want you to draw this on your exams then you will of course draw a curve shifting downwards by the amount of the subsidy keep in mind that you have to of course throw the supply curve because they are the ones who are directly affected by this then you of course have to analyze the stakeholders here for example it's expensive for the government to keep paying two dollars per unit sold all the time which may cause them to spend less money on for example health care or schooling and they have less money available to spend on other subsidies consumers are better off here since they are getting the goods more goods for cheaper although this also depends if it's a merit or demerit good and then producers are better off because they're earning more revenue you can analyze this with PD saying that if if the demand is inelastic and then the sub subsidy will have a low effect since the change in the band will not be as big as it would have been if the demand curve was more elastic another way the government can intervene is through the use of plies price floors which is a government set a minimum price in the economy this is shown here is premium this is usually set above the market equilibrium since that's only when it has an effect an example this is minimum wage for example if if you were to draw a way to diagram which you can on the exam you will label this this the price of labour or cost of labour and the quantity of labour yeah so this causes inefficiencies as you can see suppliers now get signals that ok we are getting a payment so we should make more Goods and they do make more goods but the customers don't want to buy as many goods they only want to buy q1 amount of goods and so there's an excess supply which means that they're essentially wasting their factors of production so to assure and also what may happen is that these may begin to start having large sales or something which will undercut this minimum price the government also want this so they might step in and start buying out the excess supply which will shift the demand curve out and it will cancel this excess supply area while keeping it at the minimum price although of course you can evaluate this and say that this is expensive for the government and this area Reata this will have an effect on stakeholders and stuff like that they can also set price ceilings this is a government set maximum price and it's you should usually issued to protect consumers for example they can set a price ceiling of Medicine which tend to be really expensive but consumers need these medicines or rent as people need somewhere to live and sometimes their rent can skyrocket in the market although this leads to an inefficiency demand is a lot greater than supply as you can see here my taxes demand this is also called a shortage to ensure that the consumption happens on q2 the government may step in and subsidize it which will shift the supply out as the factors of production are more are cheaper which will then meet the demands of the market okay are there any questions I'll take that as a note and I can share the PowerPoint after the presentation okay so market failure this is topic 1.4 and a market failure is defined or a market failure exists when the price mechanism fails to allocate resources at the socially optimal level which is that a social cost is the same as the social benefit so then this brings up the idea of externalities which is the idea that there are external costs or benefits of an economic transaction or or spillover effects an example this is the oversupply of demerit Goods where the merit goods are goods that cost negative externalities for example cigarettes and alcohol or a under supply of Americans where marriage goods are goods that cost positive externalities for example solar panels or gym membership when you're drawing diagrams for X T naught is in production you will change the sort of supply side curve of this which is the social cost and private cost so here it's a negative externality here they are producing painted seams and the production of paint may be harming the environment so that these social costs are higher than the costs of making the good and this is not desirable so as you can see in here there's a welfare loss also when when you're shading this area usually you can think up when it's a loss then this will be like an arrow that points inwards and when it's a game then they will point ours so the government can fix this situation by for example issuing a tax taxing the producers of the good this will shift the private cost curve or the supply curve upwards which will minimize the welfare loss and you could evaluate this to say that this is only possible if you have perfect information and the government so to speak never have that so they might overshoot it or undershoot it and that will cause inefficiencies on its own then we have positive externalities for example firms that offer training so for example this firm might be training people how to print stuff so here you can see that the social costs are lower than the private costs which means that the the overall costs could be a lot lower if you were making more at the Q's Q star which is 10 showed by the water gain area and the government could fix this by for example subsidizing or which would shift this curve down which will increase the output of that firm [Music] also imperfect information the the government doesn't have these diagrams exactly they have to sort of do some guesswork and so they might overshoot it and tax them way more than they should have done which which will cause welfare gains or potential both for gains if this is up here and there will be a gain area down here and then they might tax them too little which will cause which actually happen here which will show that they're still super lost in the economy hope that clarifies it there are also externalities in consumption and when you draw this you manipulate the benefits curves so that the social benefits or the private benefits so for example a good that is a demerit good for example cigarettes that they cost negative externalities that this shows that the private benefits of smoking cigars are greater than the social benefits so there's a negative externality here and this is again signified by the world for us the government could then fix this by taxing the production of of cigars since this will shift the equilibrium position in the market and which may move the quantity the equilibrium quantity to Q star as seen here this is the optimum point so the tax may move it up to Q star another thing they can do is to try to change the demand side by for example changing the public opinion of smoking cigarettes which you will probably have seen on the cigarette packs where our big sign that says smoking kills you positive externalities may also occur for example with health care that's a marriage good because it causes a positive externality or maybe schooling is a better example so that the the private benefits of going to school is lower than the social benefits or the the social benefits are higher which again signifies that there is a potential gain the government can for example fix this because they want to move back to QQ starkest that's the optimum point they might subsidize schooling for example if if your country only has private schools or something then they equilibrium the new equilibrium point will be on q-star the last thing is that there are public goods they are also seen as market failures and the definition of a public good is that it's a good that exerts positive externalities and follow the characteristics of being non rivals which means that no one can use up the good for example if you're buying Pepsi then if you buy a can of Pepsi then the supply of Pepsi cans will be one less well this is not the case for public goods and they're also non-excludable which means that everyone can benefit from these goods which then causes the free-rider problem that people who doesn't even pay for it may be able to benefit from it so this causes private firms to be extremely unlikely to want to supply this good but you cannot say that public goods are goods that are provided by the government only exam cases they will give you marks for this and this will absolutely kill you and you will drop down on a lot of marks if you miss this basic definition yes it is usually provided by the government but it's it's not the meaning of public good at least in this syllabus why it is a market failure it's because the price mechanism in the economy fails to allocate the resources to the to the socially optimum level so that the government has to step in and supply these goods because they private market does not want to alright that's it for today so tomorrow will it's at 1300 GMT we will talk about macroeconomics and again Wednesday is international economics and then on Thursday we're talking about theory of the firm and we might go through some mock paper trees all right thank you [Music]

oh yeah sick all right we are ready to begin all right welcome to microeconomics this is the review session hosted by the IBO discord this is hosted by me JP so the plan for today is to go through most of microeconomics we will not do the higher level theory of the firm stuff because I&#39;ve decided to do that to Thursday which is to April 18th and this we have 1400 GMT on Tuesday we&#39;ll go through the macro and on Wednesday we&#39;ll go through international economics all right people have begun to join so I guess will you start so this all begins with the foundation of economics which is centered around the idea of scarcity which is that there are unlimited wants and limited fulfillment this is symbolized with a PPC curve or production possibilities curve as you can see here you can see that you have schools on the y-axis and motorcars on the x-axis which shows that you can either produce schools or cars this is very simplified but it will it shows the concept and so since the the reason for the graph here being curved is that you can never make full amount of schools or Philon of cars but that&#39;s just not possible because you have a limited fulfillment or limited factors of productions that you can use so we talk about factors of production which which is what what&#39;s used to make these things from schools or cars so a change in any of this or an increase in in any of these may either cause you to move inside a movement from V to W or it could cause a shift is T if the improvement is large enough there&#39;s a vibration what the yeah one second check that mm-hmm they shouldn&#39;t be reverb nice just probably my room being a  echo Center yeah so so a change in any of these could cause the PBC to shift which is natural reefs resources which is such as land or oil for example labor that&#39;s that&#39;s all human input oh there is echo oh I know it&#39;s my head being on say yeah I&#39;ll try to fix it you [Music] you you we can hear me this is great okay and start recording again yeah okay okay next slide so the fundamental questions of economics is what to produce how much to produce or for whom from for whom to produce and then this is sort of a philosophical answer who has the answer the government the market or both and the IB economics takes the stance of a mixed market economy which is where the government and the market decides what to produce so I definition you have to know here is that market this is where potential buyers and potential sellers meet so the market is run by market forces demand supply or as Adam Smith called it the invisible hand of the market and also the government which I guess you could say they exist to fix the inefficiencies which we&#39;ll talk about in the end so the man that&#39;s the willingness and ability for customers to pay a certain price in the market to obtain a good or service this is represented by downward sloping curve as you can see here this is due to the wealth effect which is that when you have a lot of money then spending a low amount or when something costs so little as 0.62 dollars then you can buy a lot of it because you feel richer well if it&#39;s to others then you&#39;re like oh this is kind of expensive I might not buy that much and the principle of marginal returns which says that for example when you eat the ice cream the first spoon of ice cream tastes really good but 1/10 maybe not as much and this this this is the same for hair and buying soft drinks and then you have the substitution effect which is that when something becomes expensive here are two dollars the people might instead just run over to the Pepsi shop and get some Pepsi in instead of buying coke since Pepsi might cost point 50 if you take higher level you should know that the quantity demanded is supported by this function a is just the price at zero demand and some shown here but it should across this curve when you draw it on the exams and the B is unconstant it&#39;s it&#39;s simple algebra yes this will be recorded and the law of demand states there&#39;s an inverse relationship between the price of a good and quantity demanded of sell you yeah so something can cause shifts in demand which is when the man curve shifts in or out this is caused by the non-price determinants of demand which is the public perception of a good for example certain Goods may shift in and out of fashion thereby causing fluctuations in demand for Harrison and shifts in demand for example nowadays people wearing each 80s clothes they&#39;re really popular now but in 10 years people start wearing I don&#39;t know some fancy-ass sweatpants and 80s calls anymore so then the demand for a these clothes might shift inside of course you have the old classic vaccines cause autism so for example when people start saying oh no vaccine causes autism then the demand for vaccines might shift inwards because people think okay I&#39;m I&#39;m not gonna buy this vaccines I want my kids to have autism it also changes with income that that&#39;s like the income for the whole economy so say if all people earn five thousand dollars more per year they will spend more money because they feel richer and this would cause a shift outwards in the map same with substitutes which also relates to the cross price elasticity of demand or example if cost coke costs point to euros less than Pepsi then you&#39;re probably going to buy Coke and a Pepsi because it&#39;s cheaper and it has almost the same taste although this is a hotly debated topic and also if if the good has any clothes complements for example if Mac McDonald&#39;s has a $1 Burger deal then you&#39;re probably going to go in there and you&#39;re gonna buy a whole as menu with chips and drink which would shift in the out for example ships and drinks then we have supply supplies the willingness and ability of firms to produce a good or a service at a given price this is shown as an upward sloping curve the reason why it is upward sloping is because that existing firms will earn more profit because the guy down here who is willing to sell his stuff for 0.5 dollars one point five dollars he if he makes more and more more like he&#39;s so efficient at making negative that when the price suddenly shifts to know when the quantity shifts to 3,000 and he&#39;s like oh I can make more and make even more money but also as more firms enter market as I see oh here&#39;s some someplace because I&#39;m not as efficient but when the price is high enough hi I am efficient enough to cover my costs and I can enter the market and hence the supply will increase the law of supply states that there&#39;s an indirect relation there&#39;s a direct relationship between price of a good and quantity demanded this is mathematically expressed as quantity supplied is to see which is the supply at at zero dollars or like when it crosses the curve here yeah when when the quantity is zero that&#39;s the price and then this is the gradient of the curve supply also has non-price determinants this these are mostly changes in cost of production but saying if something costs more to make then you need to increase your price per unit to stay in business and if it cost less you have to you may decrease the price and maybe sell more of that you then make more profit something that influences the cost of production our cost of raw materials minimum wages government intervention and technology which increases efficiency or for example tech technology will increase the efficiency of the production and the cost of raw material minimum wage or government intervention such as taxes or subsidies changes the cost of production directly so here you can see a shifts in the supply curve make sure when you draw this on your exams that you label it correctly which is price and then quantity and you should always have a title of what to do this so when the market is in equilibrium that is when supply and demand meet there are no inefficiencies present since those who are prepared to pay and supply it P equilibrium get what they want so that these people down here are not willing or able to pay a price PE for a good therefore they should not get the good same here the they don&#39;t want to supply as much here because they won&#39;t make you enough profit so the nation together at all so it&#39;s an equilibrium in the center here and you can solve this on your paper threes by setting the function for quantity demanded equals to quantity supplied and you then you you can solve for the equilibrium price and once you have that price you can substitute that into whichever of these to find the quantity okay so hey are there any questions just write them out in the chat no sound stop baiting me doesn&#39;t matter I take that as there are no questions therefore I will continue until the next topic which are elasticity&#39;s alright so we have something called price elasticity of demand or PE d this is a measure of the responsiveness of the man to change in price this can be mathematically expressed as the percentage change in quantity demanded over the percentage change in price and you should always neglect the minus sign in the final answer at least when it comes to P the calculations so if the PE D is more than 1 then it&#39;s elastic which which means that if the if the price changed it a bit then the quantity demanded will change a disproportionately amount more or a change and then if it&#39;s inelastic then that&#39;s opposite that&#39;s if the price changes by a lot then the quantity demanded might not change as much you know in microeconomics we don&#39;t talk about crowding out that&#39;s a part of macroeconomics which we&#39;ll talk about tomorrow yeah so here so this this shows an inelastic curve it&#39;s it&#39;s very steep and you you can see that the box of the change in price is larger than a change in quantity demanded and here&#39;s an elastic curve this shows that the for its small change in price this box here there&#39;s a a lot larger change in the box of quantity demanded there are also some special cases that you have to know if PD goes to infinity that means that it&#39;s perfectly elastic that means that any change in price will lead to a pretty much indefinitely change in quantity demanded or you can say that there will be no country demanded at all just as you can see here even if the price goes down use a little bit then there won&#39;t be any demand at all it can also be unit elastic which is here which is that it&#39;s not really responsive at all that means that the changes are equal of at all points and then we have PD equals 0 which is that it&#39;s perfectly inelastic and then at any price quantity demanded will remain unchanged so the quantity demanded is a vertical line and it will not change with the price there are some determinants of PD for example the closeness of substitutes for example if you have a Coke and Pepsi if Coke decides to increase their prices by a dollar then people are going to buy Pepsi so it&#39;s more responsive to a change in price the coke that is and also the Pepsi if if coke suddenly increases prices or changes them fruits are due you don&#39;t find for example you can&#39;t replace apples with something else maybe you could say that pear pears are almost the same but no they&#39;re not so therefore fruits are inelastic since that people will still want apples and there are only one type of apples then it also depends on the necessity of the good for example medicine people will need their medicine and if the change in price is high then people will still have to buy their medicine because they can&#39;t live without it for example it liberation shoes or whatever so therefore it&#39;s inelastic which you can see here it&#39;s inelastic and in a time period how long does it take to change from for example the Apple ecosystem - I don&#39;t know Android some people are not willing to spend the time to change and therefore they will not change so then it&#39;s more of a inelastic curved demand curve same goes for the cost of switching if suddenly gas-powered cars went up in price or for example the the fuel went up in price and many people have gas-powered cars yeah youyou could say that the type of apples there are different type of apples but Apple has a good in its own its you know nothing but for example granny smith apples or some other brand of apples there they&#39;re elastic which is so emission which is sown shown in the perfect competition topic so when we&#39;re talking about substitutes or complements then we can also measure this using the cross price elasticity of demand xcd which is a measure of the responsiveness of a quantity demanded of a good x2 a change in the price of good-y which you can see mathematically expressed here so if and here you cannot neglect the minus sign keep that in mind so if Exedy is more than zero that means that the goods are substitutes and if it&#39;s a lot more than zero then there are close substitutes and if the XE d is less than zero then the goods are complements and if it&#39;s a lot less than zero then the goods are very close complements for example McDonald&#39;s burgers and their soda and sub substitutes you can say Coke or Pepsi and if Exedy is 0 then the goods are unrelated which means that whatever change happens to good Y or good X then there will be no change in the month all right or they have no relationship then we have the income elasticity which is a measure of the responsiveness of a good to a change in income this is expressed as Y D equals percentage change in quantity demanded of a good over the percentage change in an income so if yd is more than zero that means that it&#39;s a normal good which means that as income Rises the quantity demanded will also rise and if the income elasticity is less than zero then they&#39;re inferior kids which means that the quantity demanded goes down with a change in income and this is shown here by the angle curve which is so say for example potatoes are used here so as income rises to a certain extent people will buy more more potatoes and then it&#39;s gonna plateau and then it&#39;s going to decrease once people earn a lot more because then they might think oh I can buy some fancies a rice or pasta or whatever and stop buying cheap potatoes I have not seen them ask about the angle curve but you can mention it if you want to and a paper one [Music] what the value is la crater I haven&#39;t I&#39;m not really sure if it&#39;s a lot greater or like what the value can be a lot greater but say if it&#39;s 1000 heard and then then they&#39;re obviously close substitutes and if it&#39;s minus 1000 here then there are obviously close components the last part of this is the price elasticity of supply PS this is a measure of the responsiveness of supply to a change in price and this is almost the same as price elasticity of demand although we&#39;re talking about supply I think you have to go all of these because we&#39;re going to promise PD they also have some non-price determinants for example the nature of the good primary goods such as oil take a lot of time to make for example if if the demand for all will skyrocket it or like know the the the price for oil went up a lot then it&#39;s going to be hard to start searching for new places to find oil under the ocean well if you&#39;re making toothpicks then it&#39;s pretty easy for you to start making more toothpaste because they are manufactured goods and you have almost instant access to raw materials and this also depends on the ability to store stock for example oil can be responsive if they are storing a lot of stock for example if they have the gas tanks with oil so when the price goes up they they will start emptying those tanks to respond to the market price and spare capacity which is almost the same at least and the mobility of the factors of production for example if you&#39;re a company that makes long boards and skateboards and suddenly the price for skateboards went up a lot and then you can stop making long boards and begin making skateboards a lot faster since they&#39;re technically the same good well if you for example growing apples and making go-karts and then it&#39;s really hard for you to change the good that you&#39;re prioritizing to produce then we have government intervention are there any questions for the elasticities part perfectly elastic yeah they are goods that make for example apples they are in perfect competition it&#39;s cold and that&#39;s because the like companies making apples they are no real way for them to make their their apples different from others and therefore if the price for your apple suddenly goes up by dollar then people will use buy apples from somebody else okay next is government intervention so a form of intervention is indirect tax all of them check if I&#39;m recording as I am the definition of an indirect tax is a or attacks is that a government levy on the sale of a good or a service in issue to discourage behavior or production so there are two types there there&#39;s a specific tax which is a fixed amount for example $1 and when you draw your tax curves you will see that the price and then the quantity here and then you have to have some label of the market only paper once and you will shift the curve vertically upwards by the amount of the tax on paper one they are not to know about it being to scale but on paper three they will ask you to change it exactly one dollar but but you you will get like a net here and so lucky grid then I have a ad valorem tax which is a percentage amount so that as the price increases the tax also increases which is shown as a curve that is that has a steeper slope than the supply curve shifting upwards there are some inefficiencies due to taxation people who were getting the good they wanted before no longer does and this is what you may call deadweight loss so here we they were making or the market equilibrium was at Q 1 and P 1 but since they added the tax it&#39;s now at p2 and q2 so all these people here here the consumers were buying these goods and here the producers were supplying so there&#39;s a loss of their surplus and when they asked about this in paper once you have to analyze the stakeholders how are they affected for example here producers will lose revenue as they can&#39;t produce as much as they did before and yeah so they they can&#39;t make as much as a day before and the government here of course they are well off because they are making a revenue on this tax they&#39;re making this revenue box here I know they are making this sorry this in this entire box this is the tax and consumers they are also losing because they cannot buy the good that I wanted although you could evaluate this to say that oh but if the good is bad for the consumers themselves then the government is sort of saving them and this is also dependent on the price elasticity of demand for example if the demand curve is inelastic then the consumers will pay most of the tax since they are the most dependent I guess you could say well the producers don&#39;t pay as much and if if the demand curve is elastic then the producers pay more as they will just stop buying Goodman go somewhere else the consumers subsidies that&#39;s a per-unit payment to a firm granted by the government and it&#39;s usually issued to encourage behavior I want you to draw this on your exams then you will of course draw a curve shifting downwards by the amount of the subsidy keep in mind that you have to of course throw the supply curve because they are the ones who are directly affected by this then you of course have to analyze the stakeholders here for example it&#39;s expensive for the government to keep paying two dollars per unit sold all the time which may cause them to spend less money on for example health care or schooling and they have less money available to spend on other subsidies consumers are better off here since they are getting the goods more goods for cheaper although this also depends if it&#39;s a merit or demerit good and then producers are better off because they&#39;re earning more revenue you can analyze this with PD saying that if if the demand is inelastic and then the sub subsidy will have a low effect since the change in the band will not be as big as it would have been if the demand curve was more elastic another way the government can intervene is through the use of plies price floors which is a government set a minimum price in the economy this is shown here is premium this is usually set above the market equilibrium since that&#39;s only when it has an effect an example this is minimum wage for example if if you were to draw a way to diagram which you can on the exam you will label this this the price of labour or cost of labour and the quantity of labour yeah so this causes inefficiencies as you can see suppliers now get signals that ok we are getting a payment so we should make more Goods and they do make more goods but the customers don&#39;t want to buy as many goods they only want to buy q1 amount of goods and so there&#39;s an excess supply which means that they&#39;re essentially wasting their factors of production so to assure and also what may happen is that these may begin to start having large sales or something which will undercut this minimum price the government also want this so they might step in and start buying out the excess supply which will shift the demand curve out and it will cancel this excess supply area while keeping it at the minimum price although of course you can evaluate this and say that this is expensive for the government and this area Reata this will have an effect on stakeholders and stuff like that they can also set price ceilings this is a government set maximum price and it&#39;s you should usually issued to protect consumers for example they can set a price ceiling of Medicine which tend to be really expensive but consumers need these medicines or rent as people need somewhere to live and sometimes their rent can skyrocket in the market although this leads to an inefficiency demand is a lot greater than supply as you can see here my taxes demand this is also called a shortage to ensure that the consumption happens on q2 the government may step in and subsidize it which will shift the supply out as the factors of production are more are cheaper which will then meet the demands of the market okay are there any questions I&#39;ll take that as a note and I can share the PowerPoint after the presentation okay so market failure this is topic 1.4 and a market failure is defined or a market failure exists when the price mechanism fails to allocate resources at the socially optimal level which is that a social cost is the same as the social benefit so then this brings up the idea of externalities which is the idea that there are external costs or benefits of an economic transaction or or spillover effects an example this is the oversupply of demerit Goods where the merit goods are goods that cost negative externalities for example cigarettes and alcohol or a under supply of Americans where marriage goods are goods that cost positive externalities for example solar panels or gym membership when you&#39;re drawing diagrams for X T naught is in production you will change the sort of supply side curve of this which is the social cost and private cost so here it&#39;s a negative externality here they are producing painted seams and the production of paint may be harming the environment so that these social costs are higher than the costs of making the good and this is not desirable so as you can see in here there&#39;s a welfare loss also when when you&#39;re shading this area usually you can think up when it&#39;s a loss then this will be like an arrow that points inwards and when it&#39;s a game then they will point ours so the government can fix this situation by for example issuing a tax taxing the producers of the good this will shift the private cost curve or the supply curve upwards which will minimize the welfare loss and you could evaluate this to say that this is only possible if you have perfect information and the government so to speak never have that so they might overshoot it or undershoot it and that will cause inefficiencies on its own then we have positive externalities for example firms that offer training so for example this firm might be training people how to print stuff so here you can see that the social costs are lower than the private costs which means that the the overall costs could be a lot lower if you were making more at the Q&#39;s Q star which is 10 showed by the water gain area and the government could fix this by for example subsidizing or which would shift this curve down which will increase the output of that firm [Music] also imperfect information the the government doesn&#39;t have these diagrams exactly they have to sort of do some guesswork and so they might overshoot it and tax them way more than they should have done which which will cause welfare gains or potential both for gains if this is up here and there will be a gain area down here and then they might tax them too little which will cause which actually happen here which will show that they&#39;re still super lost in the economy hope that clarifies it there are also externalities in consumption and when you draw this you manipulate the benefits curves so that the social benefits or the private benefits so for example a good that is a demerit good for example cigarettes that they cost negative externalities that this shows that the private benefits of smoking cigars are greater than the social benefits so there&#39;s a negative externality here and this is again signified by the world for us the government could then fix this by taxing the production of of cigars since this will shift the equilibrium position in the market and which may move the quantity the equilibrium quantity to Q star as seen here this is the optimum point so the tax may move it up to Q star another thing they can do is to try to change the demand side by for example changing the public opinion of smoking cigarettes which you will probably have seen on the cigarette packs where our big sign that says smoking kills you positive externalities may also occur for example with health care that&#39;s a marriage good because it causes a positive externality or maybe schooling is a better example so that the the private benefits of going to school is lower than the social benefits or the the social benefits are higher which again signifies that there is a potential gain the government can for example fix this because they want to move back to QQ starkest that&#39;s the optimum point they might subsidize schooling for example if if your country only has private schools or something then they equilibrium the new equilibrium point will be on q-star the last thing is that there are public goods they are also seen as market failures and the definition of a public good is that it&#39;s a good that exerts positive externalities and follow the characteristics of being non rivals which means that no one can use up the good for example if you&#39;re buying Pepsi then if you buy a can of Pepsi then the supply of Pepsi cans will be one less well this is not the case for public goods and they&#39;re also non-excludable which means that everyone can benefit from these goods which then causes the free-rider problem that people who doesn&#39;t even pay for it may be able to benefit from it so this causes private firms to be extremely unlikely to want to supply this good but you cannot say that public goods are goods that are provided by the government only exam cases they will give you marks for this and this will absolutely kill you and you will drop down on a lot of marks if you miss this basic definition yes it is usually provided by the government but it&#39;s it&#39;s not the meaning of public good at least in this syllabus why it is a market failure it&#39;s because the price mechanism in the economy fails to allocate the resources to the to the socially optimum level so that the government has to step in and supply these goods because they private market does not want to alright that&#39;s it for today so tomorrow will it&#39;s at 1300 GMT we will talk about macroeconomics and again Wednesday is international economics and then on Thursday we&#39;re talking about theory of the firm and we might go through some mock paper trees all right thank you [Music]

Transcript for:Microeconomics Review Session

Transcript for:
Microeconomics Review Session