Transcript Class_Review6

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
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 P  P' , E  E ' ,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 P  P' , E  E ' ,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
Chapter 15
Horizontal summation
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： PA  1.5  QA , PA  0.1  QA
 B国： PB  2.2  2QB , PB  0.6  2QB
 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





dQ
Arithmetical form:
P Q
Q
P 

dP
dP dQ
P
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
 1
 2
Chapter 15
Application of price elastic:
dR Analysis of revenue
 Q( P)(1   P )
dP
dR
1
 MR(Q)  P(Q)(1 
)
dQ
P
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）
AR(Q)  MR (Q)
 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.
P(Q)  a  bQ
Chapter 15
 4) The demand
function with the
constant price
elasticity:
 5) When   
P
 AR, P and MR are
the same horizontal
line.
 (6)Eg. Laffer curve
Q  AP

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