Study guide: Demand, Supply and Markets

📋 Course Outline

1. Valuations Costs and Gains from Trade
2. Demand Supply and Marginal Values
3. Market Equilibrium and Efficiency
4. Consumer and Producer Surplus
5. Sales Taxes and Deadweight Loss
6. Price Controls and Market Shocks

📖 1. Valuations Costs and Gains from Trade

🔑 Key Concepts & Definitions

• Buyer valuation: The cutoff below which she wants to trade.
• Seller cost: The cutoff above which he wants to trade.

📝 Essential Points

• A buyer’s gain from trade is V − P, a seller’s gain is P − C, and their total gain is V − C.

💡 Memory Hook

Buyer valuation V supports buying below V; seller cost C supports selling above C.

📖 2. Demand Supply and Marginal Values

🔑 Key Concepts & Definitions

• Total valuation: The area under the valuation graph up to Q for the first Q buyers.
• Total cost: The area under the cost graph up to Q for the first Q sellers.

★ Must-know

• The demand curve slopes downward and the supply curve slopes upward.

Further detail

📐 Formula - The marginal valuation of the Qth unit is $mv(Q)=v(Q)-v(Q-1)=\frac{dv(Q)}{dQ}$.

📐 Formula - The marginal cost of the Qth unit is $mc(Q)=c(Q)-c(Q-1)=\frac{dc(Q)}{dQ}$.

💡 Memory Hook

Demand slopes down; supply slopes up.

📖 3. Market Equilibrium and Efficiency

🔑 Key Concepts & Definitions

• Market equilibrium: The price at which quantity supplied equals quantity demanded.

★ Must-know

• The market equilibrium maximizes total surplus and is described as an efficient way to organize economic activity.

Further detail

• The forces of supply and demand drive the market toward the equilibrium price.

💡 Memory Hook

Supply and demand forces drive the market toward equilibrium, where total surplus is maximized.

📖 4. Consumer and Producer Surplus

🔑 Key Concepts & Definitions

• Consumer surplus: The area under the demand curve and above the price line, equal to total valuation minus price times quantity.
• Producer surplus: The area above the supply curve and below the price line, equal to price times quantity minus total cost.

📝 Essential Points

📐 Formula - Consumer surplus is $CS=v(Q)-P Q$.

📐 Formula - Producer surplus is $PS=P Q-c(Q)$.

💡 Memory Hook

Picture consumer surplus above the price line under demand, and producer surplus below the price line above supply.

📖 5. Sales Taxes and Deadweight Loss

★ Must-know

• A per-unit tax on sellers shifts the supply curve upward by the amount of the tax.

• A per-unit tax on buyers shifts the demand curve downward by the amount of the tax.

• A per-unit sales tax leaves some gains from trade unrealized and reduces total welfare through deadweight loss.

Further detail

• In a sales-tax surplus diagram, consumer surplus is region A, producer surplus is regions H and I, revenue is regions B, C, E, and F, and deadweight loss is regions D and G.

💡 Memory Hook

A per-unit tax reduces trades, leaving gains from trade unrealized and creating deadweight loss.

📖 6. Price Controls and Market Shocks

📝 Essential Points

• A price floor of $42 is posed for a market with demand $Q_d=50-P$ and supply $Q_s=0.5P-10$, with quantity demanded, quantity supplied, and surplus requested.

• A price ceiling of $30 is posed for a market with demand $Q_d=50-P$ and supply $Q_s=0.5P-10$, with quantity demanded, quantity supplied, and shortage requested.

• The course asks how a $0.50-per-pound tariff on imported raw sugar and planned advertising by Coca-Cola and Pepsi affect the equilibrium price and quantity of generic soft drinks.