Formula Sheet that you can use for quizzes and exams.

Slope Slope m = Y Y2 Y1 = X X2 X1

Relative price when money prices are given RPx/y = Px . Py

Relative price when you get X giving up Y RPx/y = Y . X

Relative price along a PPF: gain X and give up Y RPx/y = |Y | . X

Absolute advantage using the same resources for both A and B XA > XB A has an absolute advantage in X over B. Same resources use, Comparative advantage CA YA = A X YB B RPx/y = B X A If RPx/y < RPx/y B, A has CA in X
A RPx/y

The country or person has lower relative price has CA

Dierent resources use, Comparative advantage CA Country A: It requires

La =units of labor to produce one unit of good X x La =units of labor to produce one unit of good Y y La =total unit of labor it has XLa + Y La =La PPF equation of country A x y La RPx/y = x La y Take an example, La = 4, La = 2, La = 100 x y 4X + 2Y =100 PPF equation of country A

If it produces all X, it can produce 25 units of X If it produces all Y, it can produce 50 units of Y PPF runs from (0, 50) to (25,0) Absolute slope of PPF is 2 = RPx/y = 50 La = x. 25 La y

Country B: It requires

Lb =units of labor to produce one unit of good X x Lb =units of labor to produce one unit of good Y y Lb =total unit of labor it has XLb + Y Lb =Lb x y RPx/y = Lb x Lb y Take an example, Lb = 3, Lb = 2.5, La = 120 x y 3X + 2.5Y =120 PPF equation of country A If it produces all X, it can produce 40 units of X If it produces all Y, it can produce 48 units of Y PPF runs from (0, 48) to (40,0) Absolute slope of PPF is 1.2 = RPx/y = 2 48 Lb = x. 40 Lb y PPF equation of country A

The bottom line formula in this case, if

La Lb x < x La Lb y y

then country A has a comparative advantage in X. There all you need are La , La , Lb x y x and Lb . y Individual ordinary demand and Inverse demand

Demand Q = f (P, {I, p, A, n}) Generalized Demand Q = 0 + 1 I + 2 p + 3 A + 4 n M P Ordinary Demand Q = D MP

D = 0 + 1 I + 2 p + 3 A + 4 n All factors but P aect D, the reason P is outside { } D goes up demand goes up, P does not change D, therefore does not demand When A and n goes up D , demand goes up For normal goods 1 positive, I goes up, D demand goes up Inferior goods 1 negative, I goes up D , demand goes down Substitute goods, 2 positive, p goes up, D , demand goes up Complement goods, 2 negative, p goes up, D , demand goes down 1 D Q = a md Q Inverse Demand P = M M D 1 Where a = M and md = M absolute slope of inverse demand for given M, D = a , demand increases. 3

Supply Supply Q = f (P, {T, p, w, ta , su , n}) Generalized Supply Q = 0 + 1 T + 2 p + 3 w + 4 ta + 5 su + 6 n + N P Supply Q = S + N P S = 0 + 1 T + 2 p + 3 w + 4 ta + 5 su + 6 n all factors but P aect S, the reason P is outside { } S increases, supply increases, P does not aect S, P does not change supply T, n, and su all increase S, supply increases 3 and 4 are always negative, their increase, decreases S, supply goes down 2 is negative for substitute, p goes up supply goes down 2 is positive for complement, p goes up supply goes up 1 S Inverse Supply P = + Q = b + ms Q N N 1 Where b = S and ms = N the slope of inverse supply N When S increases, b decreases, b goes down supply goes up Equilibrium from Inverse demand and supply ab md + ms bmd + ams P = = b + ms Q = a md Q md + ms Q = Change in equilibrium price and quantity Change in demand DD when xed factors change Variable Action Results P P Q DDU p p DD SG DD CG I I DD NG DD IG A A DD n n DD

Change in equilibrium P and Q when DD and SS change DD Q P Q P? Q? P 4 DD Q P Q? P Q P?

DDU SSU SS SS Q P Q P

a = D What causes a to go up? a is positively related with A, n, p of substitute, I for normal a is negatively related with p of complement, I for inferior b = S What causes b to go up? b is positively related with w, ta , and p substitute b is negatively related with T , su ,n, and p complement

Change in equilibrium quantity and price:

a b md + ms ms a + md b P = md + ms Change in demand only Q = With b = 0, a > 0 = DD , Q and P both positive With b = 0, a < 0 = DD , Q and P both negative Change in supply only With a = 0, b > 0 = SS , Q < 0 and P > 0 With a = 0, b < 0 = SS , Q > 0 and P < 0 Simultaneous change in demand and supply When a and b both non-zero, play Q and P games When a and b both positive, DD and SS = P > 0, Q ? When a and b both negative, DD and SS = P < 0, Q ? When a and b are of opposite signs, price is unclear When a > 0 and b < 0 = DD SS , Q > 0 and P ? When a < 0 and b > 0 = DD SS , Q < 0 and P ? When price is clear, quantity is unclear, opposite when price is unclear.

Price elasticity of demand in absolute term:

Q = D MP D 1 Inverse demand P = Q = a md Q M M 1 Note that M = md absolute slope of inverse demand and a = Demand formula for PED in absolute terms Percentage change in QD from Q0 PED(P0 ) = Percentage change in price from P0 When no demand, P0 , Q0 , P1 , and Q1 are given Q1 Q0 P0 PED(P0 ) = Q0 P0 P1 When inverse demand P = a md Q is given P0 PED(P0 ) = a P0 PED(P0 = a = denominator=0 = PED(P0 = a) = PEDP0 = a/2 = denominator = a/2 0 < PED < PED(P0 = a/2) = 1

D M

PED(P0 = 0 = numerator = 0, PED(P0 = 0) = 0

If PED greater than oneDemand is price elasticupper half of demand line If PED less than oneDemand is price inelasticlower half If PED=1 Demand is unitary elasticmid-point of the demand line P0 = Q0 = PED Horizontal demand P = a, PED=, demand is perfectly elastic Vertical demand Q = D, PED=0, demand is perfectly inelastic Hyperbolic demand P Q = K is unitary elastic

TR or Total Expenditure (te) PED relationship

T R Q Horizontal Demand P = a, T R = aQ, with Q, TR increases in a straight line T R = P Q, MR = For horizontal demand MR=AR=P For vertical demand MR is undened For downward sloping demand, as P goes down Q goes up With Q, TR initially increases at decreasing rate, reaches a maximum and then decreases at an increasing rate ( ) 1 MR = P 1 P ED For downward sloping demand MR is always less than PWHY? For downward sloping demand, with Q, MR decreases twice as fast as P does So long MR is positive, selling more Q, increases TR When MR is negative, selling more Q, decreases TRFUNNY MR formula above, so long, PED is greater than one, MR is positive MR=0 when PED=1, and is negative when PED is less than one If you lower the price, sell more Q in the upper half of demand, TR goes up If you lower the price, sell more Q in the lower half of demand, TR goes downpink segment of demand Summary PED > 1, P Q = T R negative relation between P and TR and positive between TR and Q PED < 1, P Q T R positive relation between P and TR and negative between TR and Q TR is maximum when PED=1

P =a md Q T R =aQ md Q2 M R =a 2md Q a TR maximizing Q = 2md a2 Maximum TR = 4md

Average or arc price elasticity of demand

When no demand, P1 , Q1 , P2 , and Q2 are given P1 + P2 Q2 Q1 APED(P1 , P2 ) = Q1 + Q2 P1 P2 P1 + P2 APED(P1 , P2 ) = inverse demand given 2a P1 P2

Cross-price and Income elasticity of Demand

percentage change in QD of good x percentage in price of good y p0 Q1 Q0 CPED(p0 ) = Q0 p1 p0 CPED is positive for a pair of substitute goods x and y CPED = CPED is negative for a pair of complement goods x and y Unlike PPED, do change the order of subscripts of p0 and p1 percentage change in QD IED = percentage in income I0 Q1 Q0 IED(I0 ) = Q0 I1 I0 IED is positive for a normal good IED is negative for an inferior good Unlike PPED, do change the order of subscripts of I0 and I1

Total revenue TR = P Q P Q TR = =P Average revenue AR = Q Q Another name of demand price is AR 8

Welfare analysis in dierent cases Inverse demand Inverse supply P = a md Q P = b + ms Q

1 md Q2 2 (a P )2 Consumers surplus CS when P is known = 2md 1 Producer Surplus PS when Q is known = ms Q2 2 (P b)2 Producer Surplus PS when P is known = 2ms 1 NSB = CS + P S = (md + ms )Q 2 when Q is known 2 2 (a b) NSB = inverse demand and supply are given 2(md + ms ) This welfare is the maximum in free market allocation mechanism 1 m2 (a b)2 d Monopoly DWL = (md + ms )(Q Qm )2 = 2 2(md + ms )(2md + ms )2 Consumers surplus CS when Q is known = Control Prices Without Subsidy

Quantity trade at ceiling price Pc (md + ms )(P Pc )2 2m2 s ms a + md b Where P = . md + ms DWL = DWL with subsidy.

Qt =

Pc b ms

Quantity trade demanded at ceiling price Pc (md + ms )(P Pc )2 2m2 d ms a + md b . Where P = md + ms DWL = Total Subsidy that govt. pays 9

Qd =

a Pc md

Total subsidy =

(md + ms )(a Pc )(P Pc ) . m2 d

Comparison of DWLs under these two policies ( )2 .

DWL with no subsidy = DWL with subsidy Floor Price

md ms

DWL when govt. does nothing but imposes oor price (md + ms )(Pf P )2 DWL = . 2m2 d DWL under either price-support or price-subsidy policy (md + ms )(Pf P )2 . 2m2 s

DWL =

Govt. payouts under price-support and price-subsidy. Total pay under price-support Tp = Pf (Pf P )(md + ms ) . md ms

Total pay under price-subsidy (Pf b)(Pf P )(md + ms ) Ts = . m2 s Comparison of Tp and Ts : Tp Pf ms = Ts Pf b md Tp ms = SEP(Pf ) Ts md SEP(Pf ) supply price elasticity at Pf and greater than one Now if ms md , price-support is more expensive than price-subsidy If ms < md , answer is not clear 10

Sales taxes and dierent formulae:

Afer-tax quantity Q Qat =

Qat =

abt t = Q md + ms md + ms

t md + ms Where t is the per unit sales tax bmd + ams + tmd tmd ms a + md (b + t) Buyers pay Pb = = P + = md + ms md + ms md + ms bmd + ams tms ms (a t) + md b tms Sellers e receive Ps = = P = md + ms md + ms ms + md md BTB = md + ms ms STB = md + ms t(a b t) Govt. tax revenue = t Qat = md + ms t2 1 Sales tax DWL = (md + ms )(Q Qat )2 = 2 2(md + ms ) The party who has horizontal curve, bears no tax burden The party who has vertical curve, bears all tax burden Both parties bear tax burden for downward ID and upward IS.

TU from consumption of one good x, ceteris paribus.

M Ux =

T U (x) x T U (x) = x M Ux When x = 1 T U (x) =

M Ux

Note that when we talk about of M Ux , we need to keep the consumption of all other goods xed.

11

TU and MUs from joint consumption of x and y:

Maximizing condition OR if if

M Ux Px = M Uy Py

M Ux M Uy = Px Py M Ux M Uy > = x y Px Py M Uy M Ux < = x y Px Py

Short-run analysis, K is xed, variable factor L:

Q L K=xed at maximum output M P L = 0 Q= L P M L Q= P M L when L = 1 Q MPL AP L = = L L APL is the average of MPLs. MPL =

12

Dierent cost concepts

T F C = rK T V C(Q) = wL T C(Q) = T F C + T V C(Q) = rK + wL note that eventually cost should be a function of Q TFC AF C(Q) = Q T V C(Q) AV C(Q) = Q T C(Q) AT C(Q) = = AF C(Q) + AV C(Q) Q T V C(Q) =w L T C(Q) T V C(Q) M C(Q) = = Q Q T V C(Q) MCs another form M C(Q) = = Q
T V C(Q) L Q L wL L Q L

w MPL w AP L

at the end of IRS, MPL is maximum, MC is a minimum at that output AVCs another form T V C(Q) wL AV C(Q) = = = Q Q =

at the beginning of Stage II, APL is maximum, AVC is minimum there From the end of IRS to the beginning of Stage II, MPL is decreasing but APL is still increasing at the end of Stage I, APL is maximum, and starts falling

13

Explicit and Implicit costs:

EC = EXC + IM C Economic Prot = T R EC Economic Prot = T R EXC IM C Economic Prot = Accounting prot IM C

General Prot maximizing condition:

Prot PR P R(Q) = T R(Q) T C(Q) usually the prot function is a polynomial of degree 3 at the maximum prot marginal prot equals zero M R(Q) M C(Q) = 0 Prot maximizing condition M R(Q) = M C(Q)

14

General formula for prot and shut-down rule for PC:

P R(Q) = T R(Q) T C(Q) P R = P Q Q AT C(Q) P R = [P AT C(Q)]Q P AT C(Q) = average prot per unit AT C(Q) = AV C(Q) + AF C(Q) P R(Q) = [P AV C(Q) AF C(Q)]Q P R(Q) = [P AV C(Q)]Q Q AF C(Q) P R(Q) = [P AV C(Q)]Q T F C Operating protOP = [P AV C(Q)]Q OP should be no less than zero OP = [P AV C]Q 0 P AV C 0 P AV C(Q) If P < AV C(Q) shutting down is a better option Operation needs two conditions: (1) MC=MR and (2) P AV C P = AV C(Q) occurs at min AVC(Q) which is the beginning of Stage II

15

Monopoly market structure

now let us not write Q within the parenthesis for a good look These formulas are only good for linear inverse demand and supply AR = P = a md Q M C = P = b + ms Q M R = a 2md Q Competitive solutions equate MC=AR Competitive equilibrium quantity Qc = ab md + ms ams + bmd Competitive equilibrium price Pc = md + ms Note that Qc = Q and Pc = P that we found in equilibrium Monopoly equates MC=MR Monopoly prot maximizing quantity Qm = Get the monopoly price by putting Qm in AR I have a formula, I recommend not to use it and it is md (a + b) + ms a m2 (a b) d Pm = = Pc + 2md + ms (md + ms )(2md + ms ) ( ) 1 MC = P 1 P ED 1 P = P MC P ED 1 P MC = < 1 = monopoly pricing power P ED P now carefully see if P ED < 1 monopoly power less one is violated therefore, a monopoly never produces in inelastic part of the demand note that here I take absolute value of PED Monopoly operating prot: (a b)2 . 2(2md + ms ) ab 2md + ms

Monopoly operating prot =

16

My song about Cost and Output structures

Typical production function, rst IRS and then DRS in IRS part, MPL is increasing at the end of IRSpoint of inection, MPL is maximum Stage IAPL is increasing All IRS part plus some DRS part belong to Stage I At the end of Stage I, APL is maximum At the end of Stage I, APL=MPL MPL and APL curves are concave and MPL cuts APL at maximum APL from above therefore maximum MPL is greater than maximum APL In Stage II, both APL and MPL are falling, and AP L > M P L Cost comes from typical output function In IRS production zone, TVC increases at a decreasing rate In DRS production part TVC increases at an increasing rate PI of Total product curve corresponds the PI of TVC curve w MC = In IRS production zone, MC is falling MPL In DRS production zone, MC is rising MC is minimum at PI if cost curvethe end of IRS zone w Entire stage I,e AVC is falling AV C = AP L AVC attains minimum at the end of stage I In the entire falling part of AVC is also Stage I MC is falling in the IRS zone and rising there after In stage II, both AVC and MC are rising and MC is greater than AVC AVC and MC are convex, MC cuts the AVC curve from below at minimum AVC minimum MC is less than minimum AVC at minimum AVC, AVC=MC

17

My song about prot maximization:

Prot equals P R = T R T C Marginal prot = M R(Q) M C(Q) Total prot is concave, at maximum prot, marginal prot=0 M R(Q) = M C(Q) Bible of all prot maximization

For a PC rm, demand is horizontal, MR equals P at all Q The bible reduces to M C(Q) = P At prot max quantity, P greater than ATCpositive economic prot At prot max quantity, P equals ATCzero economic prot At prot max quantity, P less than ATC but greater than AVCnegative economic prot but positive operating prot, continue with prot max quantity Market price less than AVC, SHUT-DOWN Firms eective supply is the MC stretching out from AVC LONG-RUN Long-run economic prot equals ZERO Plr = Minimum AC which also equals MC If output function is given not TC W Plr = maxAP L

Long-run analysis of PC rms:

In the long-run no TFC, TVC=TC Long-run prot of each rm zero Prot zero means P=AC Plr =LRMC=min LRAC 18

Macroeconomics part

AD : Y = f (P, {G, T, G T, M, N X(e), I(r)}) SAS : Y = f (P, {Te , W, Tc , I(r)} GDP = Pc Qc RGDP = Pb Qc GN P = GDP + net foreign income GDP GDP P = , RGDP = RGDP P ) ( RGDPt RGDPt1 EGR = 100 RGDPt1 RGDP LP = # of labor hour required to produce it

real cost of producing RGDP ECI = RGDP ( ) Pt Pt1 INt = 100 Pt1 LABOR MARKET ( ) Nu Nt = Ne + Nu UR = 100 Nt ( ) Ne ER = 100 U R + ER = 100 Nt ER Ne UR Nu = , = UR Nu ER Ne ER = UR = 1 1
ER UR + ER UR UR ER UR + ER

LF P R =

Nt Npt

) 100

U Ra = U RN + U Rc 19

GDP Measures

current value P IN = base period value ( ) GDP = 100 RGDP real GDP-GAP = Y n Y a

) 100

RGDP = C + I + G + N X, N I = W + R + i + P R, Spub = T G, I + N X = S,

r = R IN,

T = T RC F

N X = EX IM S = Spub + Sp at the equilibrium only

Sp = P I T C = Y T C, S I = N X,

Gross investment It = Kt Kt1 Net investment N P I = Gross private investment Total capital depreciation N P I = Kt (1 + )Kt1 Planned investment = Fixed gross business investment+ Inventory investment + Residential investment C C mpc = = DI Y S mps = mpc + mps = 1 Y N DP = GDP capital depreciation N I = N DP indirect business tax P I = N I + income received not earned income earned not received DI = P I personal income taxes 20

Multiplier formulae: C = a + mpc.DI = a + mpc(Y T ), Y Y 1 = = AE G mps Y mpc Y Y = + =1 T mps G T Iu = Y a PAE = Ia Ip AE + Iu mps AE Ye = . mps Y = DI = PAE = AE + mpc.Y

a+S mps

I LOVE YOU ALL

21