Unit1 Basic Concepts

 Absolute advantage: with same resource, one can produce more output; Someone can produce one output using
fewer hours

校
 Comparative advantage: someone can produce with few opportunity costs
 OOO-Output varies Opportunity cost goes Over
 IOU-Input varies Opportunity cost goes Under

学
 Points on the curve represents efficiency
 Concave curve implies the law of increasing opportunity

京
cost
 A straight PPC curve implies constant opportunity cost.
The resources are perfectly adaptable to alternative use.

北
Economic growth occurs because of discovering new
resource, improving resource quality, and inventing new

校
育
technology.
Unit2 Demand and supply

学
 The law of demand:
教

 Demand is downward sloping？Substitution effect; diminishing marginal utility, income effect

 A change in price will cause change in quantity demanded. Move along the curve

京
际

 Change in demand: a shift in the demand curve caused by a non-price determinant

 Demand curve=MB curve
T-R-I-B-E
北
国

 T-consumer’s tastes and preference about the product. Like-Right, Dislike-Left

 R-related goods prices. Substitutes: Coke and Pepsi. Complementary: Bicycle and helmet.
育
方

 Income. Normal goods: Income↑Demand-Right. Inferior goods: Income↑, Demand-Left

 B-number of buyers
教
东

 E-expectation for future price

京
际

北
国

育
方

Utility maximization rule: MUa/Pa=MUb/Pb (记得看表格给的是 TU 还是 MU，TU 的话要求 MU，Pa 和 Pb 通常会给你，

教
东

收益最大化的时候一定要正好花完手上的钱）
 If Mua/Pa>Mub/Pb, buy more product A, fewer product B;
际
新

 If Mua/Pa<Mub/Pb, buy fewer product A, more product B;

The law of supply:
As the price goes down, quantity supplied offered decreases. A change in price will cause change in quantity
国


supplied. Move along the curve Supply curve=marginal cost curve
 Change in supply: a shift in the supply curve caused by a non-price determinant
方

R-O-T-T-E-N-S
 R: resource price, typical example, raw material price, labor wages
东

O:the price of other goods (competitive supply: grow corn or beans; joint supply: pigs↑- pork and leather products ↑
校


 T: taxes or subsidies. Taxes shift the curve to the left, subsidies shift the curve to the right.
 T: technology
新

 E:expectation for future prices

 N:number of suppliers
  S:sudden event, like natural disaster or harvest
Equilibrium: Allocative efficiency: MB=MC
Double shift: Demand 和 Supply 同时发生变化，新的均衡点只有一个因素可以确定

校
Change in Demand Change in Supply Effect on Pe Effect on Qe
Increase Increase ? Increase

学
Increase Decrease Increase ?
Decrease Increase Decrease ?
Decrease Decrease ? Decrease

京
Consumer surplus, producer surplus, deadweight loss


CS=WTP-Actual paid
WTP 的每一个点都是 demand 线上的点
北
PS=Actual received-WTS
WTS 的每一个点都是 supply 线上的点

校
育
 CS=demand 线，和成交的价格和成交的数量围成的面积 PS=supply 线，和成交的价格和成交的数量围城的面积
 当 MB=MC 的时候，allocative efficiency 的时候，无 DWL

学
 DWL 的形状是三角形
教

Tariff

京
际

北
国

育
方

教
东

京
Price ceiling: maximum price that a seller can charge to consumer
际

Price floor: minmium price that a seller can sell

price ceiling 想要起作用，一定要在均衡点下方；price floor 想起作用，一定要在均衡点的上方。否则，不起作用。

北
国

Unit3 Elasticity
育
elasticity=responsiveness 影响 PED 的因素：
方

PED=%ΔQd/%ΔP luxury or necessity

%ΔQd=Q2/Q1-1 number of subsitutes
教
东

%ΔP=P2/P1-1 large or small percentage of your income

PED 计算要带绝对值 wait long time (elastic) or short time (inelastic)
际
新

PED>=0

Total Revenue and elasticity

国

P*Q=TR,
PED>1, P↓TR↑；P↑TR↓
方

PED<1, P↑TR↑；P↓TR↓
PED=1, TR 不变
东
校

新
 PES=%ΔQs/%ΔP
PES 计算要带绝对值
PES>=0

校
影响 PES 的因素:time period
Long run-PES>1, short run-PES<1
XED Cross Price Elasticity YED income elasticity of demand

学
 XED=%ΔQa/%ΔPb  YED=%ΔQ/%Δincome
 XED 计算要分正负号  YED 计算要分正负号

京
 XED>0, a and b are substitutes  YED>0, product is normal good
 XED<0, a and b are complements  YED<0, product is inferior good
 XED=0, a and b are not related

校
育
 Tax incidence：弹性大的，对价格变化更敏感，承担的 incidence 就少

学
 PED>PES, sellers take more burden;
教

 PED<PES, buyers take more burden;

 PED=+正无穷, sellers take 100% burden;

京
际

 PED=0, buyers take 100% burden

北
国

育
方

Unit4 Production
 Total revenue-explicit cost=Accounting profit
教

Accounting profit-implicit cost(opportunity cost)=economic profit

东


 Economic profit=0 then accounting profit must be positive

京
 Short run: at least one factor is fixed Long run: all factors are variable
际

 MP=ΔTP/ΔQuantity of labors
 Law of diminishing returns: As successive units of a variable resource are added to a fixed resource, over some

北
国

point, MP will decrease

 MC=ΔTC/ΔQuantity of output=ΔTC/MP MP and MC are mirror images of each other
育
 FC 不影响 MC, VC 影响 MC。VC↑,MC↑；VC↓,MC↓
方

 When MC<ATC, ATC is falling; MC>ATC, ATC is rising. MC intersects with AVC and ATC at minimum points
 Constant/increasing/decreasing return to scale: If you double input, output will double/more than double/less than
教
东

double
际
新

国
方
东
校

新
 Perfect Competitive Market
 A firm is price taker/a firm's demand curve is perfect elastic P=MR=AR
 Profit maximization point: MR=MC

校
 Revenue maximization point: MR=0
 Shutdown point: P=AVC
 P<AVC, shut down; AVC<P<ATC, operating at a loss but do not shut down

学
 P=ATC, break even, P>ATC, making a profit in the short run
 A firm's SR supply curve: portion of the firm's MC curve which lies above the AVC curve

京
 Allocative efficiency: D=MC 的交点
 Productive efficiency: ATC 的最低点对应的 Q
 Short run: pc firm has allocative efficiency, but not productive efficiency


北
Long run: pc firm has both allocative and productive efficiency
Increasing cost industry: firms enter/exit the industry will bid up the vc, so MC and ATC go up

校
育
 Constant cost industry:firms enter/exit the industry will have no effect on LRS
 Decreasing cost industry: firms enter/exit the industry will lower the vc, so MC and ATC decrease

学
Short run
教

京
际

北
国

育
方

教
东

Long run

京
际

北
国

育
方

教
东

际
新

国
方
东
校

新
 Monopoly

Profit max: MC=MR

校
Revenue max: MR=0
Allocative efficient: D 和 MC 交点
Productive efficient: ATC 最低点对应的 Q

学
Break-even or fair return: P=ATC
Not efficient because it is under produced

京
Natural monopoly: demand 和 ATC 下降部分相交

校
育

学
教

京
际

Price discriminate

北
国

育
方

教
东

京
际

Perfect price discrimination, NO CS, NO DWL Demand 和 MR 重合

北
国

Monopolistic competition
育
方

教
东

际
新

国
方
东
校

新
 Long run

校
学
京
Long run no efficiency
Oligopology:
Game theory:
北

校
育
 Dominant strategy: 不管你的对手选哪个策略，如果你都可以选一个
 策略（它会使得你更好），你就有 dominant strategy。如果你的对手策略变化，

学
 你的策略也要跟着变化，你就没有 dominant strategy。
教

 Know all the information but do not cooperate: Nash equilibrium. （怎么找？有
 dominant strategy 的选 dominant strategy, 然后另一方跟进）

京
际

 Know all the information and cooperate: 选一组最大（针对两个企业都是最大的）的

 Redraw the matrix (在满足条件的方框里加上 subsidy 或减去 profit)即可

北
国

Factor Markets:
MRP=MP*P
育
方

MP: education, training, experience, techonology

P:demand for the product
教
东

Note: wage does not affect MP!!!!!

京
际

北
国

育
方

教
东

Least cost rule : MPlabor/Plabor=MPcapital/Pcapital

Profit-maximizing combination of Labor and Capital: MRPlabor/Plabor=MRPcapital/Pcapital
际
新

国
方
东
校

Wage=Wm
新

Unit 5 Market Failure and the Role of Government

 Market failure is a situation in which a market left on its own fails to allocate resources efficiently.
 Positive Externalities

校
学
京
 Positive externality exists when the production of a good creates utility (the spillover benefits or external benefit)
for third parties not directly involved in the consumption or production of the good.
 In the presence of a positive externality, the social value of the good exceeds the private value. The optimal

北
quantity, QOPTIMUM, is therefore larger than the equilibrium quantity, QMARKET.

校
育
Negative Externalities

学
教

京
际

北
国

 Negative externality exists when the production of a good imposes disutility (the spillover costs) upon third parties
育
not directly involved in the consumption or production of the good.
方

 In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost.
The optimal quantity, QOPTIMUM, is therefore smaller than the equilibrium quantity, QMARKET.
教
东

Public Goods and Private Goods

京
际

北
国

育
方

教
东

Inequality
际
新

国
方
东
校

 Lorenz Curve: A graphical device that shows how a nation’s income is distributed across the nation’s households.
新

 Gini Ratio:
Gini ratio = Area A/(Area A + Area B)
  Marginal Tax rate: the rate paid on the last dollar earned. This is found by taking the ratio of the change in taxes
divided by the change in income.
 Average tax rate: the proportion of total income paid to taxes. It is calculated by dividing. the total taxes owed by

校
the total taxable income.
 Progressive tax: the proportion of income paid in taxes rises as income rises. An example is the personal income
tax.

学
 Regressive tax: the proportion of income paid in taxes decreases as income rises. An example is a sales tax.
 Proportional tax: a constant proportion of income is paid in taxes no matter the level of income. An example is a

京
“flat tax” or the corporate income tax.

校
育

学
教

京
际

北
国

育
方

教
东

京
际

北
国

育
方

教
东

际
新

国
方
东
校