ECONOMICS MIDTERM — COMPLETE COMBINED NOTES
1. DEMAND AND SUPPLY
(Source: Week 3)
Demand
Law of Demand
Price and quantity demanded have a negative relationship:
Price ↑ → Quantity demanded ↓
Price ↓ → Quantity demanded ↑
Determinants of Demand (Non-price factors)
1. Income
- Normal goods: Income ↑ → Demand ↑
- Inferior goods: Income ↑ → Demand ↓
2. Price of Related Goods
- Substitutes: Psubstitute ↑ → Demand for main good ↑
- Complements: Pcomplement ↑ → Demand for main good ↓
3. Other Factors
- Consumer preferences
- Future expectations
- Number of buyers
Supply
Law of Supply
Price and quantity supplied have a positive relationship.
Revenue Relation
Total Revenue (TR) = Price × Quantity
2. EQUILIBRIUM, SHORTAGE, SURPLUS
(Source: Week 6)
Equilibrium
Occurs where:
Qd = Qs
Determines the market price and quantity.
Shortage
Qd > Qs
Occurs when price is set below equilibrium.
Surplus
Qs > Qd
Occurs when price is above equilibrium.
3. ELASTICITIES
(Source: Week 5 + handwritten notes)
Elasticity = responsiveness of Qd or Qs to a change in price, income, or related goods’ prices.
A. Price Elasticity of Demand (PED)
PED = (%ΔQd) / (%ΔP)
Methods
1. Standard Method
%ΔQd = (Q2 - Q1) / Q1 × 100
%ΔP = (P2 - P1) / P1 × 100
2. Midpoint Method (Preferred)
%ΔQd = (Q2 - Q1) / ((Q2+Q1)/2) × 100
%ΔP = (P2 - P1) / ((P2+P1)/2) × 100
PED = %ΔQd / %ΔP
Interpretation
- |PED| > 1 → Elastic
- |PED| < 1 → Inelastic
- |PED| = 1 → Unit elastic
Extreme Cases
- Perfectly inelastic → PED = 0
- Perfectly elastic → PED → infinity
B. Income Elasticity of Demand (IED)
YED = (%ΔQd) / (%ΔIncome)
Interpretation:
- IED > 0 → Normal good
- IED < 0 → Inferior good
Example:
IED = 2.6, income ↑ 6% → Qd ↑ 15.6%
C. Cross-Price Elasticity of Demand (XED)
XED = (%ΔQd_A) / (%ΔP_B)
- XED > 0 → Substitutes
- XED < 0 → Complements
- XED = 0 → Unrelated
4. SURPLUS, TAXES, DEADWEIGHT LOSS
Consumer Surplus (CS)
Area between demand curve and price paid.
Producer Surplus (PS)
Area between supply curve and price received.
Tax Effects
Tax per unit = Pc − Pp
Quantity decreases.
Tax Revenue
Tax per unit × Q_after
Example:
Tax = 100, Q = 75 → Revenue = 7500
Deadweight Loss
Lost total surplus due to reduced quantity exchanged.
5. BUDGET LINE
(Source: Week 6)
Budget equation:
PxQx + PyQy = Income
Interpretation
- On line → exact affordability
- Inside → affordable
- Outside → not affordable
Slope of Budget Line
Slope = − (Px / Py)
Represents opportunity cost of X in terms of Y.
Example
Income = 100
Px = 1, Py = 5
Max Qx = 100
Max Qy = 20
When Px increases to 5 → Max Qx = 20 (budget line rotates inward)
6. UTILITY & MARGINAL UTILITY
(Source: Week 6)
Total Utility (TU)
Total satisfaction from consumption.
Marginal Utility (MU)
MU = ΔTU / ΔQ
Law of Diminishing Marginal Utility
As Q consumed increases, MU decreases.
Example TU: 10, 18, 23, 26, 27, 27
MU: 10, 8, 5, 3, 1, 0
7. PROFIT MAXIMIZATION (MR = MC)
Key Formulas
TR = P × Q
MR = ΔTR / ΔQ
MC = ΔTC / ΔQ
Profit = TR − TC
Profit-Maximizing Rule
MR = MC
If MR > MC → increase output
If MC > MR → decrease output
Example Table
Q | P | TC | TR | Profit
0 | 10 | 5 | 0 | -5
1 | 10 | 9 | 10 | 1
2 | 10 | 15 | 20 | 5
3 | 10 | 23 | 30 | 7
4 | 10 | 33 | 40 | 7
5 | 10 | 45 | 50 | 5
MC = 4, 6, 8, 10, 12
MR = 10 (constant)
MR = MC at Q = 4 → profit maximized.
8. COST CONCEPTS
TC = FC + VC
AFC = FC / Q
AVC = VC / Q
ATC = TC / Q
MC = ΔTC / ΔQ
Short run: FC > 0
Long run: FC = 0
9. REQUIRED EXAM GRAPHS
- Demand & supply
- Equilibrium
- Surplus and shortage
- Budget line
- Total utility and marginal utility
- Consumer + producer surplus
- Tax wedge
- MC, ATC, AVC curves
- MR = MC profit-maximization