Chapter 3: Microeconomic Foundations

Demand

• Marginal benefit
• Willingness to pay
• Consumer surplus (CS)
• Changes in CS
  
  1. Price decrease: ΔCS = ΔP * X + .5 * ΔP * ΔX
  2. Price increase: ΔCS = ΔP * X - .5 * ΔP * ΔX

Supply

• Marginal cost
• Willingness to accept
• Producer surplus (PS)
• Changes in PS
  
  1. Price decrease: ΔPS = ΔP * X - .5 * ΔP * ΔX
  2. Price increase: ΔPS = ΔP * X + .5 * ΔP * ΔX

Allocative efficiency

• Social surplus = CS + PS

Elasticity

• Own-price: e_d = (ΔX/ΔP) * (P/X)
• Supply: e_s = (ΔX/ΔP) * (P/X)
• Cross-price
• Income

Elasticity and Surplus

• ΔX = ΔP/P * X * e
• ΔP = (ΔX * P/X ) / e
• DWL = (X * ΔP * e_d)/2P