1 Microeconomics – Nguyễn Yến Linh

CHAPTER 1
TEN PRINCIPLES OF ECONOMICS
• Scarcity: the limited nature of society’s resources. (water in a city,…)
• Economics: the study of how society manages its scarce resources.

Ten principles of economics

*How People Make Decisions

1. Principle 1: People Face Trade-offs

• To get something that we like, we usually have to give up something else that we also
like

For example,

• Efficiency (hiệu quả): the property of society getting the most it can from its scarce
resources
• Equality (bình đẳng): the property of distributing economic prosperity uniformly among
the members of society

For example,

➔ Society faces an important trade-off between efficiency and equity

2. Principle 2: The Cost of Something Is What You Give Up to Get It

• Opportunity cost (whatever you give up to get it (not just dollars), your next best
alternatives)

For example,

•There is no such thing as a free lunch, there is nothing that is truly free, everything has a
cost.
3. Principle 3: Rational People Think at the Margin
• Rational people: people who systematically and purposefully do the best they can to
achieve their objectives
• Marginal change: a small incremental adjustment to a plan of action
o Marginal benefits: the additional satisfaction or utility that a consumer receives
when the additional unit is purchased (sự hài lòng hoặc tiện ích bổ sung mà người
tiêu dùng nhận được khi mua thêm 1 đơn vị bổ sung)
o Marginal costs: the change in total production cost that comes from making or
producing one additional unit (sự thay đổi trong tổng chi phí sản xuất do sản xuất
hoặc sản xuất thêm một đơn vị)

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• Rational people often make decisions by comparing marginal benefits and marginal costs.
(MB>MC)
4. Principle 4: People Respond to Incentives ưu đãi
- Incentive is something that induces a person to act (reward or punishment)
thúc đẩy
For example,

*How People Interact

5. Principle 5: Trade Can Make Everyone Better Off

- For the country that specialized in that good, they can export that product with higher
price than other countries.
- One country can also import the product that is produced in another country with lower
price

For example,

6. Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

• Market: a group of buyers and sellers (need not be in a single location)
“Organize economic activity”:
- What goods to produce?
- How to produce them?
- How much of each to produce?
- Who gets them?
• Households and firms interacting in markets act as if they are guided by an “invisible
hand” that leads them to desirable market outcomes.
• The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
• Interaction of buyer and sellers determines prices:
o Each price reflects the good’s value to buyers and the cost producing the good.
o Prices guide self-interested household and firms to make decision that, in many
cases, maximize society’s economic well-being as a whole.
7. Principle 7: Governments Can Sometimes Improve Market Outcomes (Chính phủ đôi
khi có thể cải thiện kết quả thị trường)
Government’s role:
• Enforces the rules and maintains the institutions that are key to a market economy
• Enforces property rights
• Promote efficiency, avoid market failure
- Market failure: a situation in which the market on its own fails to allocate resources

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efficiently.
- Market failure cause:
• Externalities: the impact of one person’s actions on the well-being of a bystander (The
impact of pollution from a factory on the health of people in the vicinity of the factory)
• Market power: monopoly (where there is just one firm in the market and it control all the
price and the goods in the market)
Ex: Example of a monopoly would be
a. a sole provider of electrical power in a city.
b. a gasoline service station in Los Angeles.
c. a grocery store in Chicago.
d. a hospital in Missouri.
- The two best reasons for a government to intervene in a market are to:
• Promote equality: to reduce income inequality by imposing a progressive tax system, where
the rich pay a higher tax rate than the poor. This policy may increase equity by redistributing
income from the rich to the poor, but it may also reduce efficiency by creating a disincentive for
the rich to work hard and invest.
• Promote efficiency: By eliminating or reducing these policies, such as taxes, subsidies, price
controls, quotas, or tariffs, governments can increase the total surplus and the welfare of society.
*How the Economy as a Whole Works
8. Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods
and Services
- Productivity is the main determinant of income and welfare. Productivity measures how
efficiently a country can use its resources, such as labor, capital, land, and technology, to
produce output.
Productivity: the quantity of goods and services produced by each unit of labor input.
Living standards are different for each country
For example, The US will have higher living standards than countries in Africa
(Higher productivity → Higher living standards and higher average income.)

Ex: If the average income of an American is higher than the average income of an Italian, it is
most likely because

a. labor unions are more aggressive in the United States than in Italy.

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b. the United States has a more industrial economy than Italy.

c. there is more competition in the United States than in Italy.
d. productivity is higher in the United States than in Italy.
9. Principle 9: Prices Rise When the Government Prints Too Much Money
- Inflation: an increase in the overall level of prices in the economy
For Example: The price of a bowl of Phở used to be 20.000VND and now it becomes 50.000
VNĐ)
- In the long run, inflation is almost always caused by excessive growth in the quantity
of money, which causes the value of money to fall.
- The faster the government creates money, the greater the inflation rate.
10. Principle 10: Society Faces a Short-Run Trade-off between Inflation and
Unemployment
This means that, in the short run, when inflation is high, unemployment is low, and vice versa.
For example,
CHAPTER QuickQuiz
1. Economics is best defined as the study of
a. how society manages its scarce resources.
b. how to run a business most profitably.
c. how to predict inflation, unemployment, and stock prices.
d. how the government can stop the harm from unchecked self-interest.
2. Your opportunity cost of going to a movie is
a. the price of the ticket.
b. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.
c. the total cash expenditure needed to go to the movie plus the value of your
time.
d. zero, as long as you enjoy the movie and consider it a worthwhile use of time and
money.
3. Governments may intervene in a market economy in order to
a. protect property rights.
b. correct a market failure due to externalities.
c. achieve a more equal distribution of income.
d. All of the above.

CHAPTER 2
THINKING LIKE AN ECONOMISTS
Economists play two roles:

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• Scientists: try to explain the world.

• Policy advisors: try to improve it.

As scientists, emply the scientific method and economic models

The scientific method

Making assumptions to simplify the problem.

(Assumption simplifies the complex world, make it easier to understand.)

For example,

The use of economic models

Economists also use models to learn about the world, their models mostly consist of diagrams
and equations.

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The circular flow diagram: Visual model of the economy that shows how dollars flow

through markets among households and firms

• Two decision makers: Firms and Households

• Two markets: For goods and services/ For factors of production (inputs)

• Factors of production: the resources the economy uses to produce goods & services, including
labor, land, capital (buildings & machines used in production)

• Firms: Produce goods and services/ Use factors of production (inputs)

• Households: Own factors of production/ Consume goods and services

• Markets for goods and services: Firms are sellers/ Households are buyers.

• Markets for factors of production: Firms are buyers/ Households are sellers.

• Two flows: the flow of goods and services and the flow of dollars.

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This a simple way to understand how economy works, it ignores several things ( không đề cập
tới chính phủ, tiền thuế ,… )

The production possibilities frontier (PPF): a graph that shows the combinations of two goods
the economy can possibly produce given the available resources and the available technology.

• Points which are on the PPF, we call them efficient (produce more 1 then reduce the
other), possible, use up all resources (like F,A,B,E)
• Point is lining inside the PPF (like D) => inefficient, possible but not efficient, could get
more not exhaust resources, some resources underutilized (e.g., workers unemployed,
factories idle)
• The point above the PPF not possible (like C) (We don’t have enough resources to
produce at that point)

The slope of PPF is opportunity cost indicates: The opportunity cost of one goods in terms of
other one.
𝑦2−𝑦1
Slope =
𝑥2−𝑥1

In such a case, more of one good can be produced by taking resources away from the production
of another good.Thus, the slope indicates the inverse relationship between the change in
quantity of one commodity to the change in quantity of another commodity.

The PPF could be a straight line or bow-shaped: Depends on what happens to opportunity
cost as economy shifts resources from one industry to the other.

✓ Straight line: If opportunity cost remains constant

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✓ Bow-shaped: If opportunity cost of a good rises as the economy produces more of the
good -> Different workers have different skills, different opportunity costs of producing
one good in terms of the other. The PPF would also be bow-shaped when there is some
other resource or mix of resources with varying opportunity costs (E.g., different types of
land suited for different uses).

When society moves from point A to point B, it gives up 200 computers to get 100 additional
cars. That is, at point A, the opportunity cost of 100 cars is 200 computers.

-> the opportunity cost of each car is two computers.

Technological advance:
Tiến bộ công nghệ trong ngành công nghiệp
máy tính cho phép nền kinh tế sản xuất nhiều
máy tính hơn. Kết quả là đường giới hạn
khả năng sản xuất dịch chuyển ra phía ngoài.
Nếu nền kinh tế chuyển từ điểm A đến điểm
G thì sản lượng ô tô và máy tính đều tăng.

Microeconomics: The study of how households and firms make decisions and how they interact
in markets
Macroeconomics: The study of economy-wide phenomena, including inflation, unemployment,
and economic growth

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CHAPTER 3
Interdependence And The Gains From Trade
- Exports: goods produced domestically and sold abroad.
- Imports: goods produced abroad and sold domestically.
- Trade makes everyone better off because it allows people to specialize in those activities
in which they have a comparative advantage.
• Absolute advantage: the ability to produce a good using fewer inputs than another
producer. If each country has an absolute advantage in one good and specializes in
that good, then both countries can gain from trade.
• Comparative advantage: the ability to produce a good at a lower opportunity cost
than another producer.
- Trade depends on comparative advantage, not absolute advantage.
How to determine comparative advantage?
Step 1. Calculate each person's opportunity cost, then compare.
Step 2. If someone's opportunity cost is lower → comparative advantage belongs
to that person
Ex: Suppose that the farmer and the rancher each work 8 hours per day and can devote
this time to growing potatoes, raising cattle, or a combination of the two. The farmer can
produce an ounce of potatoes in 15 minutes and an ounce of meat in 60 minutes. The
rancher, who is more productive in both activities, can produce an ounce of potatoes in 10
minutes and an ounce of meat in 20 minutes. The last two columns in the table show the
amounts of meat or potatoes the farmer and rancher can produce if they work an 8-hour
day producing only that good.

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nguyenyenlinh Minutes needed to make 1 Minutes needed to make 1

ounce of meat ounce of potatoes
Frank the farmer 60 minutes per ounce 15 minutes per ounce
Ruby the rancher 20 minutes per ounce 10 minutes per ounce
Absolute advantage Ruby Ruby

nguyenyenlinh Opportunity cost of 1 ounce Opportunity cost of 1 ounce

of meat of potatoes
Frank the farmer 4 ounces of potatoes ¼ ounce of meat
Ruby the rancher 2 ounces of potatoes ½ ounce of meat
Comparative advantage Ruby Frank

One person/ one country:

- Can have absolute advantage in both goods
- Cannot have comparative advantage in both goods
I. Without trade
Frank’s production possibilities frontier and Ruby’s production possibilities frontier

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II. With trade

Trade: 5 ounces of meat for 15 ounces of potatoes
-> 1 ounce of meat for 3 ounces of potatoes
Frank’s meat Frank’s potatoes Ruby’s meat Ruby’s potatoes
Production and 4 ounces 16 ounces 12 ounces 24 ounces
consump tion
without trade
Production with 0 ounce 32 ounces 18 ounces 12 ounces
trade
Trade Gets 5 ounces Gives 15 ounces Gives 5 ounces Gets 15 ounces
Consumption 5 ounces 17 ounces 13 ounces 27 ounces
with trade
Increase in Increase of 1 Increase of 1 Increase of 1 Increase of 3
consumption ounce ounce ounce ounces
with gains from
trade

- Without trade a country’s production possibilities frontier is also its consumption

possibilities frontier.
- A country’s consumption possibilities frontier can be outside its production possibilities
frontier with trade.

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Example:
George and Martha face these production possibilities frontiers for brownies and cupcakes.

Assume that George and Martha decide to specialize in the good in which they have a
comparative advantage and then trade. Who would trade brownies and who would trade
cupcakes?

CHAPTER 4
The Market Forces Of Supply And Demand
A market is a group of buyers and sellers of a particular product.
A competitive market a market in which there are many buyers and many sellers so that each
has a negligible impact on the market price
In a perfectly competitive market:
• All goods exactly the same (goods are identical)
• Buyers & sellers so numerous that no one can affect market price
=> Each is a “price taker” (lots of buyers and sellers, each is “small” )
I. Demand
- The quantity demanded of any good is the amount of the good that buyers are willing and able
to purchase.
- Price is the primary determinant of demand.
- Law of demand: the claim that the quantity demanded of a good falls when the price of the
good rises, other things equal (inverse relationship).

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The Demand Schedule & Curve

• Demand schedule: a table that shows the relationship between the price of a good and the
quantity demanded.
• Demand curve: a graph of the relationship between the price of a good and the quantity
demanded

Example: Helen’s demand for lattes. ( Individual Demand )

Notice that Helen’s preferences obey the Law of Demand.

Demand Curve Shifters (Determinants of demand)

1. Income
o Normal goods (most of goods are normal goods):
▪ Increase in income causes increase in demand (shifts D curve to the right)
▪ Decrease in income causes decrease in demand
o Inferior goods (hàng hóa thứ cấp):
▪ Increase in income causes decrease in demand (shifts D curves for inferior
goods to the left)
▪ Decrease in income causes increase in demand

For example: inferior goods like used clothes, public transportation

2. Prices of related goods

• Two goods are substitutes (hàng hóa thay thế) if an increase in the price of one causes an
increase in demand for the other.

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o Increase in the price of one good increases demand for the other
o Decrease in the price of one good decreases demand for the other

For example: Coke and Pepsi, both cost $1. If you normally drink Coke for $1, but suddenly
today Coke costs $2, of course you will switch to drinking Pepsi.

• Two goods are complements (hàng hóa bổ sung) if an increase in the price of one causes
a fall in demand for the other.
o Increase in the price of one good decreases demand for the other
o Decrease in the price of one good increases demand for the other

Ví dụ: Bạn ăn bánh mì kẹp xúc xích (nó phải đi chung với nhau), giả sử giá bánh mì
giảm(decrease in the price), thì bạn sẽ mua nhiều bánh mì, nhưng cùng lúc đó thì bạn cũng phải
mua thêm nhiều xúc xích (increase in the demand for the other)

3. Tastes ( Thị hiếu )

Anything that causes a shift in tastes toward a good will increase demand for that good and shift
its D curve to the right.

For example: When a scientific study says eating chocolate is good for your health, then you
have a demand to eat chocolate.

4. Expectations

Expectations affect consumers’ buying decisions.

Examples:

- If people expect their income to rise, their demand for meals at expensive restaurants may
increase now.

- If the economy sours and people worry about their future job security, demand for new autos
may fall now.

- You expect the stock price to increase in the future, so now your demand for the stock may
increase

5. Number of buyers ( # of buyers )

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D curve shift right (increases quantity demanded at each price, shifts D curve to the right.)

💭 Summary: Variables That Influence Buyers

II. Supply

• The quantity supplied of any good is the amount that sellers are willing and able to sell.
• Law of supply: the claim that the quantity supplied of a good rises when the price of the
good rises, other things equal

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The Supply Schedule & Curve

The Supply Schedule: a table that shows the relationship between the price of a good and the
quantity supplied

The Supply Curve: An upward sloping supply curve ( đường cung dốc lên ) (because as price
goes up the quantity supplied is going to rise)

*Individual Supply

Price goes up, quantity supplied rises

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*Market Supply

It’s like the market demand curve

→ The market supply curve is simply the horizontal summation of individual firm supply curves.

Supply Curve Shifters (Determinants of supply)

1. Input prices

• Increase in input prices reduces supply

Examples of input prices: wages, prices of raw materials.

A fall in input prices makes production more profitable at each output price, so firms supply a
larger quantity at each price, and the S curve shifts to the right.

2. Technology

• Technology determines how much inputs are required to produce a unit of output.

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• A cost-saving technological improvement has the same effect as a fall in input prices,
shifts S curve to the right.

3. Expectations of sellers

• Seller expect the input prices decrease in the future, so they may decrease supply now so
that they can sell more in the future.
• Seller expect the output prices increase in the future, so they may decrease supply now so
that they can sell more in the future.

4. Number of sellers ( # of sellers )

• An increase in the number of sellers increases the quantity supplied at each price, shifts S
curve to the right.

💭 Summary: Variables that Influence Sellers

III. Supply and Demand Together

Equilibrium: a situation in which the market price has reached the level at which quantity
supplied equals quantity demanded

• Equilibrium price: the price that balances quantity supplied and quantity demanded
• Equilibrium quantity: the quantity supplied and the quantity demanded at the
equilibrium price

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Equilibrium point (điểm cân bằng): Quantity supplied = Quantity demanded

Shortage: a situation in which quantity demanded is greater

than quantity supplied

- Occurs when: P1 < P*, Qd > Qs ⇒ Shortage

- Khi có shortage → động cơ cho sellers tăng giá, (áp lực lên giá),

và nó sẽ tiếp tục cho đến đi không còn shortage ( P1 = P* )

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Suplurs: a situation in which quantity supplied is greater

than quantity demanded

Occurs when: P1 > P*, Qd < Qs → Surplus

Khi có surplus → động cơ cho sellers giảm giá,

giảm áp lực lên giá, và nó sẽ tiếp tục cho đến khi

không còn surplus ( P1 = P* )

Law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity
demanded for that good into balance

Three Steps to Analyzing Changes in Equilibrium

Step 1: Xem đường nào di chuyển

Demand curve, tăng thì dịch sang phải,

giảm thì dịch sang trái

Supply curve, tăng thì dịch dang phải,

giảm thì dịch sang trái

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Step 2 and Step 3: Xem hướng di chuyển của đường đó và xem biểu đồ xem điểm cân bằng
mới.

Khi giá hotdogs buns giảm, thì sẽ tăng nhu cầu mua hotdogs ( do đây là hàng hóa bổ sung ). Vậy
thì lúc này nhu cầu mua hotdogs tăng, demand curve shifts to the right. Ta có điểm cân bằng mới
B.
*Always be careful to distinguish b/w a shift in a curve and a movement along the curve

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CHAPTER QuickQuiz
Diagram for question 1 and 2

1. The movement from point A to point B on the graph would be caused by

a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.
2. The movement from point A to point B on the graph shows
a. a decrease in demand.
b. an increase in demand.
c. an increase in quantity demanded.
d. a decrease in quantity demanded.
3. Suppose that John receives a pay increase. We would expect
a. John’s demand for normal goods to remain unchanged.
b. John’s demand for inferior goods to decrease.
c. John’s demand for luxury goods to decrease.
d. John’s demand for normal goods to decrease.
Diagram for question 4,5 and 6

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4. On the graph, the movement from D to D1 is called

a. a decrease in demand.
b. an increase in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
5. On the graph, the movement from D to D1 could be caused by
a. an increase in price.
b. a decrease in the price of a complement.
c. an increase in technology.
d. a decrease in the price of a substitute.
6. If the demand curve shifts from D1 to D on the graph, this means that
a. firms would be willing to supply less than before.
b. people are less willing to buy the product at any price than before.
c. people are now more willing to buy the product at any price than before.
d. the price of the product has decreased, causing consumers to buy more of the product.

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CHAPTER 5
Elasticity And Its Application
Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.
I. Price Elasticity of Demand & Its Determinants
*Price elasticity of demand:

Price elasticity of demand measures how much Qd responds to a change in P.

Closely speaking, it measures the price sensitivity of buyers’ demand.
Ex: You design websites for local businesses. You charge $200 per website, and currently sell 12
websites per month. Your costs are rising (including the opportunity cost of your time), so you consider
raising the price to $250. The law of demand says that you won’t sell as many websites if you raise your
price. How many fewer websites? How much will your revenue fall, or might it increase?

*Calculating Percentage Changes:

𝐸𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 − 𝑆𝑡𝑎𝑟𝑡 𝑣𝑎𝑙𝑢𝑒
∗ 100 = % 𝑐ℎ𝑎𝑛𝑔𝑒
𝑆𝑡𝑎𝑟𝑡 𝑣𝑎𝑙𝑢𝑒

-> Problem: The standard method gives different answers depending on where you start.

From A to B,

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P rises 25%, Q falls 33%, elasticity = 33/25 = 1.33

From B to A, P falls 20%, Q rises 50%, elasticity = 50/20 = 2.50

*So, we instead use the midpoint method:

𝐸𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 − 𝑆𝑡𝑎𝑟𝑡 𝑣𝑎𝑙𝑢𝑒

∗ 100 = % 𝑐ℎ𝑎𝑛𝑔𝑒
𝑀𝑖𝑑𝑝𝑜𝑖𝑛𝑡
𝑄𝑒𝑛𝑑−𝑄𝑠𝑡𝑎𝑟𝑡
%∆𝑄 = 𝑄𝑒𝑛𝑑+𝑄𝑠𝑡𝑎𝑟𝑡 ∗ 100
2

𝑃𝑒𝑛𝑑−𝑃𝑠𝑡𝑎𝑟𝑡
%∆𝑃 = 𝑃𝑒𝑛𝑑+𝑃𝑠𝑡𝑎𝑟𝑡 ∗ 100
2

𝑄𝑒𝑛𝑑−𝑄𝑠𝑡𝑎𝑟𝑡
𝑄𝑒𝑛𝑑+𝑄𝑠𝑡𝑎𝑟𝑡
2
Ed= 𝑃𝑒𝑛𝑑−𝑃𝑠𝑡𝑎𝑟𝑡 *100
𝑃𝑒𝑛𝑑+𝑃𝑠𝑡𝑎𝑟𝑡
2

Ex: Use the following information to calculate the price elasticity of demand for hotel rooms:

If P = $70, Qd = 5000

If P = $90, Qd = 3000

Solution:

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*Price elasticity of demand determinants:

1. Availability of Close Substitutes

Price elasticity is higher when close substitutes are available.

Độ co giãn về giá cao hơn khi có sẵn các sản phẩm thay thế gần gũi.

2. Necessities versus Luxuries

Necessities tend to have inelastic demands, whereas luxuries have elastic demands.

Độ co giãn của giá đối với hàng xa xỉ cao hơn hàng thiết yếu.

3. Definition of the Market

Narrowly defined markets tend to have more elastic demand than broadly defined markets

- Độ co giãn của giá đối với hàng hóa được định nghĩa hẹp cao hơn so với hàng hóa được định
nghĩa rộng

4. Time Horizon

Goods tend to have more elastic demand over longer time horizons.

Độ co giãn của giá trong dài hạn cao hơn trong ngắn hạn.

The Determinants of Price Elasticity:

Summary

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27 Microeconomics – Nguyễn Yến Linh

Rule of thumb:

The flatter the curve, the bigger the elasticity.

The steeper the curve, the smaller the elasticity.

- Five different classifications of D curves.…

D curve: vertical (song song với trục P)

Elasticity = 0

D curve: relatively steep

Elasticity < 1

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D curve: intermediate slope

Elasticity = 1

D curve: relatively flat

Elasticity > 1

Total Revenue:

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A price increase has two effects on revenue:

Higher P means more revenue on each unit you sell. But you sell fewer units (lower Q), due to
Law of Demand.

Which of these two effects is bigger?

It depends on the price elasticity of demand.

- When D is elastic, a price increase causes revenue to fall.

- When D is inelastic, a price increase causes revenue to rise.

CHAPTER QuickQuiz
1. Suppose the price of product X is reduced from $1.45 to $1.25 and, as a result, the quantity of
X demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of
demand for X in the given price range is

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30 Microeconomics – Nguyễn Yến Linh

a. 2.00.

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31 Microeconomics – Nguyễn Yến Linh

b. 1.55.
c. 1.00.
d. 0.64.

2. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would
result in a
a. 4.0 percent decrease in the quantity demanded.
b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.

3. Demand is elastic if
a. elasticity is less than 1.
b. elasticity is equal to 1.
c. elasticity is greater than 1.
d. elasticity is equal to 0.

4. Demand is inelastic if
a. elasticity is less than 1.
b. elasticity is equal to 1.
c. elasticity is greater than 1.
d. elasticity is equal to 0.

5. Demand is unit elastic if

a. elasticity is less than 1.
b. elasticity is equal to 1.
c. elasticity is greater than 1.
d. elasticity is equal to 0.

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32 Microeconomics – Nguyễn Yến Linh

II. Price elasticity of supply & its determinants

- Price elasticity of supply measures how much Qs responds to a change in P.

- Loosely speaking, it measures sellers’ price-sensitivity.

- Again, use the midpoint method to compute the percentage changes.

- Rule of thumb:

The flatter the curve, the bigger the elasticity.

The steeper the curve, the smaller the elasticity.

Five different classifications:

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Supply often becomes less elastic as Q rises, due to capacity limits.

* The Determinants Of Supply Elasticity:

The price elasticity of supply depends on the flexibility of sellers to change the amount of the
good they produce.

For example, beachfront land has an inelastic supply because it is almost impossible to produce
more of it. Manufactured goods, such as books, cars, and televisions, have elastic supplies
because firms that produce them can run their factories longer in response to a higher price.

Supply is usually more elastic in the long run than in the short run.

Over short periods of time, firms cannot easily change the size of their factories to make more or
less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price.
Over longer periods of time, firms can build new factories or close old ones. In addition, new
firms can enter a market, and old firms can exit. Thus, in the long run, the quantity supplied can
respond substantially to price changes.

III. OTHER ELASTICITY

1. Income elasticity of demand

Income elasticity of demand: measures the response of Qd to a change in consumer income

An increase in income causes an increase in demand for a normal good.

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Hence,

For normal goods, income elasticity > 0.

For inferior goods, income elasticity < 0.

2. Cross-price elasticity of demand

Cross-price elasticity of demand: measures the response of demand for one good to changes in
the price of another good

For substitutes, cross-price elasticity > 0

(e.g., an increase in price of beef causes an increase in demand for chicken)

(positive relationship)

For complements, cross-price elasticity < 0

(e.g., an increase in price of computers causes decrease in demand for software)

(negative relationship)

CHAPTER QuickQuiz

1. If the elasticity of supply of a product is greater than 1, then

a. supply is elastic.
b. supply is inelastic.
c. supply is unit elastic.
d. supply is not very sensitive to change in price.
2. Suppose there is a baseball park with 10,000 seats and a demand for seats in the park as
follow:

Price per Ticket Quantity Demanded

$20 2,000
16 4,000
12 6,000
8 8,000

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35 Microeconomics – Nguyễn Yến Linh

6 10,000
4 12,000
2 14,000
Referring to the given information, if the management of the baseball park charges $8
per ticket
a. there will be a shortage of tickets.
b. there will be 2,000 empty seats.
c. there will be 4,000 empty seats.
d. revenue will be maximized.
3. Last year, Sheila bought 10 DVD movies when her income was $40,000. This year, her
income is $50,000 and she purchased 20 DVD movies. All else constant, it is obvious
that
a. Sheila prefers DVD movies to VHS videos.
b. Sheila considers DVD movies to be a normal good.
c. Sheila considers DVD movies to be an inferior good.
d. Sheila has a price elastic demand for DVD movies.

4.

Refer to the table. Using the midpoint method, what is the income elasticity of good Y?
a. -0.75
b. 0.75
c. -1.33
d. 0
5. Refer to the table. Good X is
a. a normal good.
b. an inferior good.
c. underpriced.
d. very price elastic.
Chapter 6
Supply, Demand, and Government Policies
I. Price ceiling:
• Price ceiling: a legal maximum on the price of a good or service
Example: rent control
+ Price ceiling is not binding: Price ceiling has no effect on the price or quantity sold. A price
ceiling above the equilibrium price is not binding (Price ceiling above the equilibrium price is
not binding).
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36 Microeconomics – Nguyễn Yến Linh

+ Price ceiling is binding: Ceiling price artificially lowers the market price. The ceiling is a
binding constraint on the price, causes excess demand or shortage (Excess demand implies a
shortage of the goods in the market) (Price ceiling under the equilibrium price).

When the government imposes a binding price ceiling on a competitive market, a short of the
good arises, and sellers must ration the scare goods among the large number of potential buyers
- Methods for rationing:
• Long lines: : Buyers who are willing to arrive early and wait in line get the goods
• Discriminatory selling
• Parallel markets (black markets)
II. Price Floor
• Price floor: a legal minimum on the price of a good or service
Example: minimum wage
- Price floor is not binding: Floor has no effect on the price or quantity sold. The price floor
below the equilibrium price is not binding.

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- Price floor is binding: Price floor above the equilibrium point, Results in an excess supply
or surplus

Ex: A minimum wage law does not affect highly skilled workers. They do affect teen
workers or low-skilled labors.

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38 Microeconomics – Nguyễn Yến Linh

➢ Price are signals that guide the allocation of society’s resources. This allocation is
altered when policy maker restricts prices.
➢ Price controls often intended to help the poor but often hurt more than help.
➢ Rent controls create long-run shortages in quality housing and provide disincentives
for building maintenance.
➢ Minimum wage laws create higher rates of unemployment for teenage and low-
skilled workers.
III. Tax
Taxes: The government can make buyers or sellers pay a specific amount on each unit
bought/sold.
Taxes: The government levies taxes on many goods and services to raise the revenue to pay
for national defense, public school.
Tax can be % of the good’s price: A specific amount for each unit sold.
Tax incidence refers to the division of the tax burden between buyers and sellers.

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- In both supply and demand, the side that is less elastic will pay more taxes.
➢ Case 1: Supply is more elastic than demand -> It’s easier for sellers than buyers to
leave the market. So buyers bear most of the burden of the tax.
➢ Case 2: Demand is more elastic than supply -> It’s easier for buyers than sellers to
leave the market. Sellers bear most of the burden of the tax
Practice:

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1. According to the graph shown, the equilibrium price in the market before the tax is imposed is

a. $8.00.

b. $6.00.

c. $5.00.

d. $3.50.

2. According to the graph, the price buyers will pay after the tax is imposed is

a. $8.00.

b. $6.00.

c. $5.00.

d. $3.50.

3. According to the graph, the price sellers receive after the tax is imposed is

a. $8.00.

b. $6.00.

c. $5.00.

d. $3.50.

4. According to the graph, the amount of the tax imposed in this market is

a. $1.00.

b. $1.50.

c. $2.50.

d. $3.00.

5. According to the graph, the amount of the tax that buyers would pay would be

a. $1.00.

b. $1.50.

c. $2.00.

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41 Microeconomics – Nguyễn Yến Linh

d. $3.00.

6. According to the graph, the amount of the tax that sellers would pay would be

a. $1.00.

b. $1.50.

c. $2.00.

d. $3.00.

7. In the figure shown, which of the panels represents a binding price floor?
a. panel (a)
b. panel (b)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)

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42 Microeconomics – Nguyễn Yến Linh

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43 Microeconomics – Nguyễn Yến Linh

8. Refer to the graphs given. In which market will the majority of a tax be paid by the buyer?

a. market (a)

b. market (b)

c. market (c)

d. all of the above

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44 Microeconomics – Nguyễn Yến Linh

9. According to the graph shown, if the government imposes a binding price floor of $6.00 in this
market, the result would be
a. a surplus of 15.
b. a surplus of 35.
c. a shortage of 30.
d. a shortage of 50.

10. According to the graph shown, a binding price floor would exist at a price of
a. $6.00.
b. $5.00.
c. $2.00.
d. none of the above.

11. If a tax is imposed on a market with elastic demand and inelastic supply,
a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally between buyers and sellers.
d. it is impossible to determine how the burden of the tax will be shared.

CHAPTER 7
Consumers, Producers, And The Efficiency Of Markets
Willingness To Pay: the maximum amount that a buyer will pay for a good.

WTP measures how much the buyer values the good.

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WTP and the Demand Curve

Q: If price of iPod is $200, who will buy an iPod, and what is quantity demanded?

A: Anthony & Flea will buy an iPod, Chad & John will not.

Hence, Qd=2

When P=$200

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Consumer Surplus

Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually
pays.

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𝟏
CS=WTP-P= * (Pmax-Pactual)*Q
𝟐

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48 Microeconomics – Nguyễn Yến Linh

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49 Microeconomics – Nguyễn Yến Linh

CS with Lots of Buyers & a Smooth D Curve

At Q = 5(thousand),the marginal buyer is willing to pay $50 for pair of shoes. Suppose P =
$30.Then his consumer surplus = $20.

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How Price Affects Consumer Surplus

- Lower price

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- Higher Price

1. Find marginal buyer’s WTP at Q = 10.

2. Find CS for P = $30.
Suppose P falls to $20. How much will CS
increase due to…
3. buyers entering the market
4. existing buyers paying lower price

Cost and the Supply Curve

• Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost).
• Includes cost of all resources used to produce good, including value of the seller’s time.

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• Example: Costs of 3 sellers in the lawn-cutting business

Derive the supply schedule from the cost data:

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Producer Surplus
Producer surplus (PS): the amount a seller is paid for a good minus the seller’s cost.
PS = P – cost

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Producer Surplus and the S Curve

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PS with Lots of Sellers & a Smooth S Curve

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How Price Affects PS?

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57 Microeconomics – Nguyễn Yến Linh

A. Find marginal seller’s cost at Q = 10.

B. Find PS for P = $20.
Suppose P rises to $30. Find the increase in PS
due to…
C. selling 5 additional units
D. getting a higher price on the initial 10 units

Total surplus—the sum of consumer and producer surplus—is the area between the supply and
demand curves up to the equilibrium quantity.

CS, PS, and Total Surplus

• CS = (value to buyers) – (amount paid by buyers) = buyers’ gains from participating in

the market (CS measures the benefit buyers receive from participating in the market.)
• PS = (amount received by sellers) – (cost to sellers) = sellers’ gains from participating in
the market (PS measures the benefit sellers receive from participating in the market.)
• Total surplus = CS + PS = total gains from trade in a market = (value to buyers) – (cost to
sellers) (TS measures the total gains from trade in a market.)

Efficiency

Total surplus = (value to buyers) – (cost to sellers)

An allocation of resources is efficient if it maximizes total surplus. Efficiency means:
- The goods are consumed by the buyers who value them most highly.
- The goods are produced by the producers with the lowest costs.
- Raising or lowering the quantity of a good would not increase total surplus.

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58 Microeconomics – Nguyễn Yến Linh

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59 Microeconomics – Nguyễn Yến Linh

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60 Microeconomics – Nguyễn Yến Linh

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61 Microeconomics – Nguyễn Yến Linh

CHAPTER QuickQuiz
1. Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage.
Colleen was willing to pay as much at $300 for the massage, but they negotiate a price
of $200. In this transaction,
a. consumer surplus is $20 larger than producer surplus.
b. consumer surplus is $40 larger than producer surplus.
c. producer surplus is $20 larger than consumer surplus.
d. producer surplus is $40 larger than consumer surplus
2. The demand curve for cookies is downward-sloping. When the price of cookies is $2,
the quantity demanded is 100. If the price rises to $3, what happens to consumer
surplus?
a. It falls by less than $100.
b. It falls by more than $100.
c. It rises by less than $100.
d. It rises by more than $100.
3. John has been working as a tutor for $300 a semester. When the university raises the
price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How
much does producer surplus rise as a result of this price increase?
a. by less than $100
b. between $100 and $200
c. between $200 and $300
d. by more than $300
4. An efficient allocation of resources maximizes
a. consumer surplus.
b. producer surplus.
c. consumer surplus plus producer surplus.
d. consumer surplus minus producer surplus.
5. When a market is in equilibrium, the buyers are those with the ________ willingness

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62 Microeconomics – Nguyễn Yến Linh

to pay and the sellers are those with the ________ costs.
a. highest, highest
b. highest, lowest
c. lowest, highest
d. lowest, lowest

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