Exam-AID

Review Package

Exam-AID Tutors:

SPONSORS:

1!

!Rajesh.Soni
!
!
Chapter(1:(Introduction(to(Economics(
!
1.!Economics:!A!particular!way!of!thinking!about!human!behaviour.!People!do!the!best!they!can!
with!the!circumstances!theyre!given.!
!
2.!Economic!Model:!A!set!of!assumptions,!principals!and!constraints,!which!lead!to!conclusions.!
!!
3.!Assumes!that!people!do!the!best!they!can!under!the!circumstances!they!face.!Encompasses!
all!types!of!human!behaviour:!
C!Business!Behaviour!
C!Legal!Behaviour!
C!Family!Behaviour!
!
*The!two!main!issues!in!Economics:!
1.!Issues!related!to!volume!of!trade!and!terms!of!price.!
2.!Issues!related!to!how!we!trade.!

(
Chapter(2:(Maximization(

Principle!#1!Maximization:!All!individuals!are!motivated!by!greed,!or!self!interest.!
Characteristics:!!
- Fundamental!incentive!behind!Economics!
- Why!People!Do!what!they!do!
- Impartial,!affects!everyone.!
- Does!not!mean!nonCsatiation!(never!being!satisfied).!
- People!simply!do!whatever!is!in!their!best!interests.!
!
Scarcity:!Less!of!a!good!is!available!than!what!is!desired!when!the!good!is!free.!
Leads!to:!
1. TradeCoffs!
2. Competition!
3. People!attempting!to!satisfy!want.!
!
Scarcity!does!not!mean!rarity.!E.g.!Sexually!transmitted!diseases!may!be!rare,!but!they!
are!not!scarce!since!no!one!wants!them.!

2!

(
Equilibrium:!The!answer!provided!by!the!economic!model:!
!
Driven!by!maximization!
A!state!or!situation!where!no!party!has!incentive!to!change!their!behaviour!
All!gains!exploited,!everyone!has!acted!in!their!best!interests.!
No!$50!Bills!left!on!the!street.!
!
Implications:!
1. No!economic!profit.!All!economic!profit!in!Equilibrium!is!equal!to!zero.!(DNE!accounting!
profits)!
However,!many!people!believe!profits!are!found!everywhere.!E.g.!get!rich!quick!
schemes,!etc.!
To!get!an!above!average!return,!a!person!needs!an!inside&edge.!
!
2. No!Economic!Policy!
- Economics!cannot!make!you!rich,!predict!the!future!or!save!the!world.!
- It!CAN!explain!why!things!work!the!way!they!do.!
!
The!goal!of!Maximization!is!to!explain!behaviour!and!drive!the!economic!model.!Just!assume!
that!individuals!and!firms!will!always!take!any!action!that!maximizes!their!utility!or!makes!them!
better!off!in!any!way.!

!
Chapter(3:(Substitution(

!
Principle!#!2!Substitution:!Everyone!is!willing!to!trade!some!amount!of!a!good,!for!some!
amount!of!another.!
- Everyone!has!their!price!
- Universal,!applies!to!everyone.!
!!
*!People!will!substitute!anything!for!a!certain!price.!
*!It!is!possible!to!bind!oneself!NOT!to!substitute.!E.g.!marriage!vows,!commitments,!contracts,!
etc.!
!
Important!Points!
!
1. Not!everyone!is!willing!to!make!the!same!substitutions,!and!they!do!not!have!to.!
2. People!WILL!substitute!necessities!in!some!cases.!E.g.!driving!a!fast!car!is!substituting!
personal!safety!for!convenience.!
3. If!you!cannot!distinguish!between!two!alternatives,!or!you!dont!care!to!make!a!choice,!
this!is!called!indifference.!
4. In!the!ECON103!model,!substitutions!are!consistent!and!transitive.!
E.g.!If!A!>!B,!and!B!>!C,!then!A!>!C!by!default.!

3!

!
Priority!of!Consumption:!
Insists!that!people!take!care!of!their!most!important!needs!first.!Not!consistent!with!
Economics.!
!
In!Economics,!decisions!are!made!at!the!margin.!Marginal(value(is!therefore!what!an!individual!
is!willing!to!give!up!for!one!additional!unit!of!a!good.!
- People!have!different!marginal!values!
- On!a!demand!curve,!marginal!value!is!given!by!the!price!
- When!people!have!different!marginal!values,!they!will!trade!until!their!MVs!are!equal,!
which!will!exhaust!all!gains!from!trade!and!make!both!parties!better&off.!
!
Important!Doug!Allen!side!point:!Given!substitution,!need!is!not!an!economic!concept.!
Everything!is!about!what!you!want,!and!how!much!you!are!willing!to!give!up!for!something.!
!
NOTE:!All!economic!principles!are!independent!of!each!other.!Maximization!works!WITH!
Substitution!in!the!model,!one!does!not!hinder!or!enhance!the!other.!
!
Therefore,!the!willingness!to!sacrifice!or!substitute!one!good!for!another!is!the!only!viable!way!
to!measure!true!value.(
(

Chapter(4:(The(Law(of(Demand(
(

Law!of!Demand:!The!inverse!relationship!between!price!and!quantity.!More!of!a!good!is!always!
demanded!when!its!price!is!lower,!and!vice!versa!
!
*!Recall!Marginal(Value,(the!maximum!one!is!willing!to!give!up!for!an!additional!unit!of!a!good.!
This!principle!is!also!referred!to!as!Marginal(Utility.(!
*!The!more!one!has!of!a!good,!the!less!they!are!willing!to!give!up!for!another!unit!of!that!good.!
This!is!true!for!all!goods,!and!this!principle!(#3)!is!referred!to!as!the!principle!of(Diminishing(
Marginal(Value/Utility.(
(
Value!is(measured!in!terms!of!real!goods.!
!
Relative!Prices:!Prices!are!always!relative!in!economics.!
!!!!!I.e.!compared!to!other!prices!for!other!goods.!
!
To!simplify,!relative!prices,!Py,!are!often!simplified!as!1!(holding!other!goods!constant)!
Similarly,!real(income!is!in!terms!of!goods!one!is!able!to!purchase.!E.g.!if!your!income!
was!$100,000,!but!a!big!Mac!cost!$50,000,!it!wouldnt!be!worth!that!much.!
!
Budget!Constraint:!Resources!are!limited,!which!prevents!us!from!consuming!whatever!we!
want.!

4!

!
Formula:!M(=(Px*X(+(Py*Y(
Where!X!denotes!the!quantity!demanded!of!X,!Y!of!Y,!and!Px!and!Py!represent!the!prices!of!X!
and!Y!respectively.!

Changes!in!prices:!A!change!in!the!price!of!a!good!(very!common)!leads!to!a!change!in!the!
quantity&demanded.&
&
Demand!curves!also!involve!aspects!like!price,!quantity!demanded,!a!demand!function!curve,!
marginal!value,!total!value,!consumer!surplus,!total!expenditure!and!the!slope!of!the!demand!
curve.!Use!the!space!below!to!draw!a!large!demand!curve,!as!we!go!over!the!mechanics!of!
demand!curves.!

What!you!really(need!to!know!
!
1. Marginal!Value!Diminishes!over!consumption!of!additional!units.!
2. The!Law!of!Demand!is!always!true.!Higher!price!=!Less!purchased.!
3. Marginal!value!=!Price,!the!height!underneath!the!demand!curve!
4. Total!Value/Expenditure!=!the!area!underneath!the!demand!curve.!Price!x!Quantity.!

!
Chapter(5:(Techy(issues(in(Demand(
!

Changes!in!Demand!vs.!Changes!in!Quantity!Demanded:!
Demand!is!a!function.!Parameters!that!change!the!demand!function!are!called!demand&
shifters.&These!include!income,!the!price!of!other!goods,!advertising,!preferences,!etc.!
When!one!of!these!parameters!changes,!it!shifts!the!demand!curve!causing!a!change(in(
demand.(
When!the!relative!price!of!a!good!changes,!it!leads!to!a!change!in!the!quantity(
demanded!of!that!good,!as!per!the!Law!Of!Demand.(
(
Elasticity:!A!measure!of!responsiveness!that!measures!the!change!in!quantity!demanded!with!
respect!to!another!parameter!(commonly!own!price,!income!and!the!price!of!a!substitute.)!
!
Types!of!Elasticity,!and!formulas:!
!
1. Own(price(elasticity:(
*Use!the!space!below!to!copy!down!the!formula.!
!
!
This!elasticity!measure!is!always&negative,!but!economists!often!take!the!absolute!value.!
!

5!

If!Elasticity!is:!
Greater!than!C1,!demand!is!elastic.&For!elastic!demands,!price!and!revenue!move!in!
opposite!directions.!E.g.!If!demand!is!elastic,!decreasing&the&price!of!a!good!will!increase&
revenue.!Many!substitutes.!
Less!than!C1,!demand!is!inelastic.&For!inelastic!demands,!price!and!revenue!move!in!
opposite!directions.!E.g.!If!demand!is!inelastic,!increasing&the!price!of!a!good!will!
increase&revenue.!Few!substitutes.!
Equal!to!C1,!demand!is&unitary&elastic.&No!relationship!between!price!and!revenue,!
revenue!is!maximized.!
!
Point!Elasticities!vs.!Arc!Elasticities:!
Point:!At!a!specific!point!along!the!demand!curve!
Arc:!Along!an!arc!or!stretch!along!a!demand!curve!(use!an!average!P!and!Q!always)!
!
2. Cross(Price(Elasticity:((
*Use!the!space!below!to!copy!down!the!formula.!
!
!
!
!
!
!
!
Can!be!positive!or!negative.!
A!positive!(E>0)!cross!price!elasticity!means!the!two!goods!X!and!Y!are!substitutes.!
A!negative!(E<0)!CPE!means!the!two!goods!X!and!Y!are!complements.!
If!elasticity!=!0,!the!two!goods!are!unrelated.!
!
3.(Income(Elasticity(
*Use!the!space!below!to!copy!down!the!formula.!

!
!
!
!
!

!
Can!be!positive!or!negative.!
If!Elasticity!is!greater!than!zero,!the!good!is!a!normal!good.!More!of!the!good!is!
demanded!when!your!income!increases.!
If!Elasticity!is!less!than!zero,!the!good!is!an!inferior!good.!Less!of!the!good!is!demanded!
when!your!income!increases.!

6!

!
!
You(must(know!
1. Change!in!demand!vs.!Change!in!QD!
2. Elasticity!formulas!(I!mean!it.!Verbatim.)!
3. Revenue!relationship!to!elasticity!
4. How!to!derive!elasticity!from!a!demand!function!
5. What!elasticity!results!MEAN!!
!

Chapter(6:(Exchange(Without(Production(
!
*!Keep!in!mind!the!importance!of!Marginal!Value/utility.!If!individuals!have!a!fixed!amount!of!a!
good!(no!production),!they!will!trade!until!their!marginal!values!are!equal.!
*!This!will!maximize!the!consumer!surplus!for!both!individuals,!and!will!leave!both!individuals!
better!off.!
!
Market!Demand!Curves:!
1.!Individual!Demand!curves!show!a!demand!schedule!for!an!individual.!
2.!Market!Demand!is!just!the!horizontal!summation!of!all!the!individual!demand!curves!in!a!
market!!!also!downward!sloping.!
3.!Depending!on!the!total!amount!of!individuals!in!the!market,!demand!curve!at!P!=!0!has!a!
higher!or!lower!possible!value.!
!
*!In!Chapter!6,!supply!is!fixed,!therefore,!the!individual!and!market!supply!curves!are!vertical!
lines!(for!now.)!
*!Wherever!the!supply!curve!intersects!the!market!demand!curve!is!the!market!equilibrium.!
This!price!is!called!the!market!clearing!price,!or!equilibrium!price.!It!has!a!corresponding!
quantity.!
!
*!Again,!CHANGES!in!demand!and!supply!are!a!result!of!determinants.!
*!A!shift!in!market!supply!will!lead!to!a!movement!along!the!demand!curve,!but!not!a!change&in&
demand.&
&
&
What(you(Really(need(to(know:(
1. Market!Demand!and!Supply!curves!are!derived!from!individual!demand!and!supply!
curves.!
2. Market!Demand!curves!are!MORE!elastic!than!individual!demand!curves.!
3. Everything!about!equilibriums,!equilibrium!prices,!quantities,!shifts!in!demand,!and!the!
effects!of!a!supply!shift!on!Qd.!
!

Chapter(7:(Costs!

7!

!
Most!people!think!of!costs!as!the!amount!of!money!you!spend!on!something!
This!is!referred!to!the!Historical!Cost!!!
Principle!Number!4!COpportunity!Costs:!!When!Economists!refer!to!Costs!they!think!of!
Opportunity!Costs,!which!is!the!cost!of!the!next!best!alternative.!
Most!people!think!of!Costs!as!bad!but!from!and!economists!point!of!view!a!cost!is!only!
bad!if!it!effects!the!value!of!the!next!best!alternative!

!
Types!of!Costs:!
!
Sunk!Costs!C!!Costs!that!cant!be!recovered.!So!if!you!broke!your!laptop!that!cost!is!now!
sunk.!It!shouldnt!effect!your!decision!whether!to!buy!a!new!laptop!or!not.!
Avoidable!costs!C!!Costs!that!are!not!sunk!but!can!actually!be!recovered.!So!if!you!buy!a!
laptop!and!realize!when!you!get!home!you!bought!the!wrong!one.!Its!not!sunk!yet!as!
you!can!return!it.!
Fixed!Cost!is!a!lump!sum!cost!that!doesnt!change!with!output.!E.g.!Most!Capital!Costs!
are!fixed!
Variable!Cost!is!a!cost!that!changes!when!Output!changes.!E.g.!Cost!of!Raw!Materials!
when!producing!Goods!
!
Comparable!advantage!vs.!absolute!advantage:!
Individuals!with!different!marginal!costs!gain!from!trade!even!when!marginal!values!are!
the!same!!!
Absolute!Advantage!means!you!the!most!productive!in!all!activities!!
Comparative!Advantage!means!you!are!the!least!cost!producer!for!a!particular!activity.!
This!means!you!sacrifice!the!least!in!terms!of!goods!to!produce!another!good.!!Everyone!
has!a!completive!advantage!in!something!!
!
Marginal!Cost!curve:!
In!Comparative!Advantage!the!people!who!have!to!sacrifice!the!least!in!terms!of!other!
goods!produces!the!good!first.!!
The!marginal!cost!curve!illustrates!the!effect!of!comparative!advantage!as!the!least!cost!
individual!produces!the!good!first!and!the!second!least!cost!person!is!after!and!so!on!
this!causes!the!marginal!cost!curve!to!slope!upward!
The!marginal!cost!of!a!good!is!the!change!in!cost!over!the!change!in!quantity!
!
!
(Marginal!Cost!curve!below)!

8!

(
Chapter(8:(Production(with(diminishing(marginal(product.(
(

Production(Function:!the!maximum!amount!of!an!output!for!a!given!amount!of!input.!
Assume!there!are!only!two!inputs,!labor!and!capital.!!
Q!=!f!(L,!K)!
The!production!function!is!a!mechanical!function!that!calculates!a!given!amount!of!
output.!!!
If!you!double!the!inputs!(labor!and!capital),!the!output!also!doubles!which!is!called!
constant(returns(to(scale.!

(
A(few(useful(definitions:(
!
Marginal(Product:(Defines!the!change!in!output!when!labor!or!capital!is!changed.!There!
are!two!Marginal!products,!MP!of!labor!and!MP!of!capital.!Equal!to!the!derivative!of!the!
production!function!with!respect!to!either!L!or!K.!
Average(Product:(Simply!tells!us!the!output!per!unit!of!input.!Again,!there!are!two!
average!products:!AP!of!labor!and!AP!of!capital.!Equal!to!the!production!function!
divided!by!L!or!K.!
Diminishing(Marginal(Products:(Principal!Number!6!tells!us!that,!if!you!increase!one!
output!(e.g.!Labor)!while!holding!all!other!inputs!(e.g.!Capital)!fixed,!you!will!see!
increases!in!output!at!a!diminishing!rate.!!
The!three!stages!of!production!correspond!to!the!3!stages!of!Marginal!Product!behavior.!
In!stage!1,!MP!is!increasing!at!an!increasing!rate.!In!stage!2,!MP!is!diminishing,!while!in!
stage!3,!MP!is!negative.!For!obvious!reasons,!every!firm!will!operate!only!in!stage!2,!
where!diminishing!Marginal!returns!are!present.!
Value(of(the(marginal(product:(Simply!tells!you!how!much!the!change!in!output!is!
worth.!
VMP!=!Price*MP!
A!key!point:!Firms!that!maximize!profits!equalize!the!marginal!product!per!dollar!across!
all!inputs.!

9!

MPL/w!=!MPk/v,!when!firms!maximize!profit.!

!
Marginal!Cost!and!Product:!
Now,!it!is!important!to!note!that!the!Marginal!Cost!curve!is!inversely!related!to!the!
marginal!product!curve.!!
Therefore!marginal!costs!are!upward!sloping!for!the!following!reasons:!
Low!cost!producers!are!eventually!replaced!by!higher!cost!ones,!as!output!
increases.!
Diminishing!marginal!product!leads!to!each!value!of!input!becoming!less!
productive!individually.!
!
Cost!definitions:!
Average(cost(curves:(Tell!us!the!cost!per!unit.!
!!
TOTAL!COST!=!TC!=!VC!+!FC!
AVERAGE!TOTAL!COST!(AC)!!=!TC/Q!
AVERAGE!VARIABLE!COST!(AVC)!=!TVC/Q!!!correspond!to!your!avoidable!costs.!
AVERAGE!FIXED!COST!(AFC)!=!TFC/Q!!!sunk!costs.!
!
!

Chapter(9:(

Meaning(of(Competitive(firm(
Several!features!characterize!a!competitive!firm!
Each!firm!is!price!taking!(takes!the!market!price!as!given)!
Ignores!rival!decisions!(therefore!only!price!effects!decisions!on!level!of!output)!
Doesnt!engage!in!strategic!behavior!!
Price!taking!means!that!your!demand!curve!is!flat!and!equal!to!price!
This!means!that!if!you!charged!a!price!greater!then!market!price!no!one!would!buy!from!
you!
If!you!charged!less!than!the!market!price!than!everyone!would!buy!from!you!
Since!your!demand!curve!is!flat,!your!demand!curve!is!equal!to!your!marginal!revenue!
and!average!revenue!

(
Profit(maximizing(level(of(output(

Rent!is!basically!your!TRCTVC!
o Your!rent!is!basically!equal!to!your!fixed!costs!(which!are!sunk!as!can!be!shown!
by!the!following!equation:!Profit=Total!revenueC!total!costs.!!

10!

o Total!Costs!equals!total!variable!costs+!total!fixed!costs!so!Profit=!Total!revenueC!
total!variable!costsCtotal!fixed!costs.!!!
o Now,!Total!revenue!Total!variable!costs!equals!rent!so!Profit!could!be!said!to!be!
equal!to!rentCtotal!fixed!costs.!Now!lets!say!Profit!equals!zero!so!0=RentCtotal!
fixed!costs!or,!using!algebra,!rent=total!fixed!costs.!Thats!why!in!equilibrium!the!
book!says!rent!is!equal!to!the!sunk!costs!of!the!firm!
Now!the!profit!maximizing!level!of!output!is!when!Marginal!Cost=Marginal!revenue!
because!as!long!as!marginal!cost!is!less!then!marginal!revenue!the!company!will!
continue!to!produce.!

Marginal(Cost(Curve,(AFC,(AVC(

Lets!analyze!the!following!
graph!!
First!thing!you!see!is!that!the!
average!variable!cost!is!less!
than!the!ATC.!The!difference!
is!the!AFC.!!The!AFC!if!you!
remember!gets!smaller!and!
smaller!which!is!why!we!can!
see!the!gap!narrowing!
somewhat!as!quantity!
increases.!
!!

The!Key!point!to!remember!is!
that!
that!the!shut!down!point!is!the!
minimum!point!of!the!AVC.!This!is!because!assuming!that!the!fixed!costs!are!sunk,!
as!long!as!the!variable!costs!can!be!paid!by!the!firm,!the!company!will!still!
continue!to!operate!
This!is!why!you!see!companies!operating!even!if!they!have!been!losing!money!for!
what!feels!like!forever!(think!companies!like!Tesla!motors!who!never!made!a!
profit!for!5!years).!For!them,!as!long!as!they!are!able!to!cover!their!variable!costs!
and!continue!to!operate!they!will.!Eventually!companies!like!Tesla!hope!that!their!
product!will!catch!on!and!become!popular!
Since!the!minimum!point!of!the!AVC!is!the!shutdown!point!this!is!also!why!the!
Supply!Curve!is!upward!sloping.!The!supply!curve!is!basically!the!marginal!cost!
curve!and!if!you!look!back!at!the!graph!you!can!see!that!the!marginal!cost!curve!
when!it!touches!the!minimum!AVC!is!upward!sloping.!!!
This!makes!sense!as!if!you!think!about!the!supply!curve,!if!it!was!downward!
sloping!that!would!mean!that!as!the!price!for!a!firms!good!increases,!it!would!

11!
produce!less!of!it.!This!doesnt!make!sense!as!a!price!increase!is!good!for!a!firm!
who!is!selling!that!good!and!they!probably!would!want!to!make!more!of!it!

Shifts(in(Cost(Curves(

The!marginal!cost!curve!depends!on!!
o The!level!of!output!
" Because!a!movement!along!the!marginal!cost!curve!(no!shift)!
o Price!of!inputs(like!for!example!prices!drop!due!to!technology!becoming!more!
advanced)!
" Shifts!marginal!cost!curve!
o Production!function(change!in!marginal!product!per!labourer!for!example!
increases)!
" If!this!happens!we!see!a!shift!down!in!marginal!cost!curve!as!a!more!
productive!worker!lowers!costs!!
Two!types!of!taxes!can!shift!the!cost!curves!up!or!down!
o A!lump!sum!tax!on!a!good!will!in!general!move!the!AC!curve!up!but!not!move!
any!other!cost!curves.!This!is!because!a!lump!sum!tax!is!fixed!and!you!should!
remember!that!fixed!costs!do!not!move!the!AVC!Curve!or!the!Marginal!Cost!
curve.!
o A!per!unit!tax!(think!for!example!the!GST)!shifts!the!marginal!cost!curve!and!the!
AVC!Curve!as!well!as!the!AC!curve.!This!is!because!with!a!new!tax!on!a!good!it!
becomes!more!costly!for!the!firm!to!produce!the!good!due!to!the!fact!along!with!
the!materials!you!pay!for!making!the!good,!you!have!to!now!pay!a!per!unit!tax!
on!that!good.!!

Market(Supply(Curve(

((

This!is!an!easy!section!and!honestly!all!that!you!need!to!know!is!that!in!equilibrium!each!
firms!earns!zero!economic!profits(not!accounting)!!
This!is!because!if!there!is!a!positive!economic!profit!for!a!firm,!then!another!person!try!
will!try!to!enter!that!industry!(MAXIMIZATION)!and!if!the!more!entrants!there!are!in!an!
industry,!the!smaller!the!equilibrium!price.!This!can!be!seen!in!a!demand!supply!graph!
where!if!you!shift!the!supply!curve!left!(when!more!entrants!enter!a!industry,!supply!
increases!in!that!industry),!that!the!price!drops!

Summary(
1. Competitive!firms!are!price(takers((take!price!as!given!to!them).!
2. A!competitive!firm!will!choose!to!produce!where!the!price!(which!is!given)!equals!their!
marginal!cost.!

12!
3. In!equilibrium,!there!is!no!economic!profit.!
4. A!firm!will!not!operate!at!any!price!BELOW!the!minimum!of!the!AVC!curve.!
5. When!the!price!equals!the!minimum!of!the!Average!Total!Cost!curve,!then!we!have!0!
profits!and!an!equilibrium!condition.!
6. If!you!sum!up!these!individual!supply!curves!in!a!market,!you!end!up!with!the!market!
supply!curve.!

Chapter(10:(Applications(of(the(neoclassical(model:(

!
!

To!maximize!their!value!Consumers!equate!Marginal!Value!to!Price.!!

Firms!set!MC!to!Price!

Therefore!maximize!value!for!the!consumer!and!the!firm!Marginal!Value!must!equal!MC!or!in!
other!words!the!Demand!Curve!must!intersect!the!Supply!Curve.!

Reminder:!Demand!Curves!can!shift!for!reasons!such!as:!Change!of!Tastes!and!Price!of!a!
substitute!changes!

If!demand!shifts!up!price!and!quantity!increase!

If!demand!Shifts!Down!Price!and!Quantity!decrease!

13!

!
!

Supply!Curves!shift!because!of!Technological!change!(more!efficient!processes)!,!
changes!in!price!of!input!,!!

If!the!supply!curve!has!shifted!up!to!the!left!then!equilibrium!price!quantity!decreases!
and!price!increases!

If!the!supply!curve!had!shifted!to!the!right!then!equilibrium!prices!decreases!and!
equilibrium!quantity!increases!

TAXES:(

In!Chapter!9!we!saw!the!effect!of!taxes!of!the!marginal!cost!curve!but!now!we!must!look!
at!in!the!context!of!the!supply!and!demand!model!

!If!we!for!example!taxed!a!group!of!firms!a!two!dollar!per!unit!tax!on!Cars!for!example.!
We!would!see!the!supply!curve!shift!up!by!two!dollars.!However!the!equilibrium!price!
does!not!rise!by!two!dollars!unless!the!demand!curve!is!inelastic.!

!!!!Therefore!the!consumers!wont!
!!!!Pay!the!full!tax!but!part!of!it!!

14!

Like!we!said!earlier!if!a!demand!curve!is!inelastic!then!most!of!the!tax!is!passed!on!to!
the!consumer!

!There!also!is!a!very!little!reduction!in!amount!of!goods!traded!as!inelastic!means!an!
increase!price!(tax)!means!a!smaller!decrease!in!quantity!

The!opposite!is!true!if!the!good!is!elastic!as!this!means!that!a!large!amount!of!consumers!will!
stop!using!the!product!if!there!is!a!tax!
TAXES(ON(CONSUMERS(

Up!to!this!point!talked!about!taxing!Firms!however!you!can!tax!consumers!as!well!!

Taxing!consumers!is!generally!the!same!as!taxing!firms!in!that!the!equilibrium!price!and!
quantity!are!the!same!

However!taxing!the!consumer!will!shift!the!demand!curve!to!the!amount!of!the!tax!but!
like!before!for!firms!consumers!will!not!pay!a!the!tax!!

Students Offering Support

Simon Fraser University Chapter

Students Offering Support (SOS) is an international network of student volunteers

on various university campuses across North America. Volunteers tutor their peers
in exam prep sessions when they need it most right before exams. A minimal
donation made by each participant is used to fund education-oriented
development projects in Latin America. Since 2004, SOS chapters across the globe
have supported over 25,000 students through Exam-AID sessions to raise more
than $1 million for rural Latin American communities to assist in funding building
projects that create greater access to education.
Did you know?
30,000 students have been helped by Exam-AIDs on 26 University
campuses?
Since 2004, SOS has raised $1,600,000 for education development projects!
With more than 2,000 active volunteers, SOS is one of the largest student
organizations in Canada.
We not just fund education projects, but students build them on two-week
trips open for YOU to attend?
Stay in the Loop:
Facebook.com/SimonFraserSOS
Twitter.com/SimonFraserSOS

Raising Marks, Raising Money, Raising Roofs

simonfrasersos.com