Essential Microeconomics Principles and Elasticity

1. Shifters of Supply and Demand

• Supply Shifters: Price of related goods, input prices, technology, expectations, and number of producers.
• Demand Shifters: Price of related goods, income (normal vs. inferior), tastes/preferences, expectations, and number of customers.
• Distinction: Change in quantity supplied/demanded (movement along the curve, caused by the price of the good) vs. Change in supply/demand (shift of the curve, caused by external factors).

2. Comparative vs. Absolute Advantage

• Absolute advantage: Producing more output with the same resources.
• Comparative advantage: Lower opportunity cost per unit produced.
• Formula for opportunity cost: "Other thing / something".

3. Production Possibility Frontier (PPF)

• Shifters:
  • Factors of production (land, labor, physical capital, human capital).
  • Technology changes.

4. Positive vs. Normative Economics

• Positive: Objective, "what is".
• Normative: Subjective, "what ought to be".

5. Consumer and Producer Surplus

• Consumer surplus: Willingness to pay – actual price paid.
• Producer surplus: Actual price received – minimum acceptable price.
• With price controls and quotas:
  • Price ceilings and floors (binding vs. non-binding).
  • Quota and quota rent (difference between demand at the top and supply at the bottom).
  • Total surplus, shortage/surplus explained.
  • Deadweight loss: Where and why it occurs.

6. Elasticity Concepts

• Price Elasticity of Demand (PED):
  • Midpoint formula: E_d = (%ΔQ / %ΔP).
  • Interpretation: Elastic, inelastic, unit elastic, perfectly elastic/inelastic.
• Elasticity and Total Revenue Relationship:
  • Elastic demand: Price rise decreases TR, price fall increases TR.
  • Inelastic demand: Price rise increases TR, price fall decreases TR.
  • Unit elastic: TR remains constant.
• Graphical interpretation: Steeper vs. flatter slope.

7. Cross-Price Elasticity (XED)

• Formula: E_xy = (%ΔQ_x / %ΔP_y).
• Relationships: Substitutes (E_xy > 0), Complements (E_xy < 0), Unrelated (≈0).
• Includes examples with percentage changes.

8. Income Elasticity of Demand (YED)

• Formula: E_y = (%ΔQ / %ΔY).
• Goods classification: Normal goods (E_y > 0), Inferior goods (E_y < 0).
• Distinction:
  • Necessity (E_y < 1).
  • Luxury (E_y > 1).

9. Elasticity Problem Types

• Forward PED: Given E_d and %ΔP, find %ΔQ.
• Reverse PED: Given E_d and %ΔQ, find %ΔP.
• Includes step-by-step methods and worked examples.