Review Class Six

Chapter 14  Here we have discussed the two-good model, and we have learned how to use this model to solve the optimal problem facing a typical agent.  But why does a typical consumer come into a market, or say, take part in the transaction?  Because a consumer will earn the transaction benefits from it.

Chapter 14  The transaction benefits a typical consumer will earn in the market is considered as consumer’s surplus.  Def. of (net) consumer’s surplus: a buyer’s willingness to pay minus the amount the buyer actually pays.  Figures  Arithmetical way （这是定积分的运用，一 定会考核的内容）

Chapter 14

Chapter 14 Change in the price

Chapter 14 Change in the transaction benefits  As we said above, we can use the change in the consumer’s surplus to measure the change in the transaction benefits facing to the typical consumer in response to the change in the price roughly.  When we assume the preference of the typical consumer is quasilinear, CS is an accurate measure to evaluate the transaction benefit change facing to him.  In order to measure the change in the transaction benefit facing to a typical consumer in response to the price precisely, we impose the definitions of EV and CV. （不列作考试要求）

Chapter 14 Change in the transaction benefits  Def. of EV: when,EV measures how much income needed to make the consumer reach the same utility as the final state with the price of P.  Def. of CV: when,CV measures how much income needed to make the consumer reach the same utility as the original state with the price of P’.  Warning: we have not restricted how the price changes.

Here we set the price increases

Chapter 14 Producer’s surplus  Def. of producer’s surplus: the amount a seller is paid for a good minus the seller’s variable cost.  Figures  Arithmetical way

Chapter 14 Producer’s surplus

Chapter 14 Market surplus  Market (total) surplus=Consumer’s surplus + Producer’s surplus  Market surplus can reflect the transaction benefits earned by the consumer and the producer.  Why will the transaction happen?  The answer is transaction benefits.

Chapter 14 Market surplus

Chapter 15 Outlines  Horizontal summation  Two important elasticity:  Income elasticity of demand  Price elasticity of demand

Chapter 15 Horizontal summation  The market is made up of many agents, so in order to obtain the market demand or supply we can use the method of Horizontal summation.  Method: You should draw the rough figure and find the kinky point, and then you can calculate the functional form with some different domains. At last you should make “price” the independent variable.  ( 这是一定要考核的内容）

Chapter 15 Horizontal summation

 Eg. 假设现在只有两个国家，它们国内大米市场 的需求曲线和供给曲线如下：  A 国：  B 国：  问：自由贸易时国际市场上大米的均衡价格？请 画出图示。

Chapter 15 Price elasticity of demand  Def. of Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants  Def. of Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.

Chapter 15 Price elasticity of demand  Arithmetical form:  Geometrical meaning: the slope of the ray over the slope of the tangent line of one point on the demand curve.  Warning:  Price elastic is usually negative.  Price or income elasticity is the point elasticity.

Chapter 15 Price elasticity of demand

Chapter 15 Application of price elastic: Analysis of revenue  Suppose the producer is a monopoly, and then he can control the price or quantity in order to affect the revenue. (Can he control the price and quantity at the same time?)  1 He controls the price  2 He controls the quantity

Chapter 15 Application of price elastic: Analysis of revenue 11 22

Chapter 15  Some more details:  1)P(Q)=AR(Q), 注意，反需求函数和平均收益函数 有着相同的函数形式，图形上，两条曲线也是重合 的，但是经济含义不同。 2）2）  3) For the linear inverse demand function, MR(Q) is also linear. And think about the slopes of two functions and when the marginal revenue is 0.

Chapter 15  4) The demand function with the constant price elasticity:  5) When  AR, P and MR are the same horizontal line.  (6)Eg. Laffer curve

Laffer curve

Labor market

Comments on homework  Time value of money: 1)One dollar today is worth more than one dollar tomorrow. 2)How to compare the cash flows on different time points?

Comments on homework