Microeconomics Study Guide Cornell Notes

Comparative Statics?

Movement vs Shift?

→ Demand Shift Causes?

Rightward Shift =?

Elasticity Definition?

Comparative statics: Comparison of economic outcomes before and after changing model parameters

Movement along curve: "Change in quantity demanded" (price changes)

Shift of curve: "Change in demand" (non-price factors change)

Demand shift causes: Consumer preferences, income, related goods prices, expectations

Example: Coffee health study → demand curve shifts right

Rightward shift = Outward shift = Increase in demand (all equivalent)

Interpretation 1: More quantity at each price
Q_D = 100-10P → Q_D = 130-10P

Interpretation 2: Higher WTP at each quantity
P = 10-Q/10 → P = 13-Q/10

Elasticity: Measure of responsiveness of quantity to price changes

Key Takeaway:
Comparative statics analyzes parameter changes. Distinguish movement along curve (price change) vs shift (non-price factors). Elasticity measures responsiveness.

Consumer Surplus?

CS Formula?

CS Calculation?

Producer Surplus?

PS Formula?

Total Surplus?

⚠ Market Optimal?

Externality?

Consumer Surplus: Difference between WTP and actual price paid

CS_i = w_i - p (w_i = WTP, p = market price)

Graphical: Triangle area above price, below demand curve

Calculation: CS = (1/2) × (P_choke - P*) × Q* = (1/2) × 4 × 40 = $80

Producer Surplus: Difference between price received and production cost

PS_j = p - c_j (c_j = marginal cost)

Graphical: Triangle area below price, above supply curve

Calculation: PS = (1/2) × (P* - P_choke) × Q* = $80

Total Surplus = CS + PS = difference between gross benefits and total costs

Market produces surplus-maximizing quantity (optimal)

Underproduction: Lost surplus (benefit > cost not captured)

Overproduction: Wasteful (cost > benefit)

Externality: Cost/benefit affecting party not in transaction

Negative externality: Cost to third party (pollution, smoking)

Key Formula:
CS = WTP - Price
PS = Price - Cost
Total Surplus = CS + PS
Market optimal when no externalities. Calculate as triangle areas.

Good Tax Design?

→ Tax on Sellers?

Tax Effect?

Statutory vs Economic?

Which Side Taxed?

Tax Math?

Elasticity & Incidence?

Deadweight Loss?

Three principles: (1) Enforceable, (2) Fair, (3) Minimal excess burden

Tax on sellers: Shifts supply curve UP by tax amount

Tax effects: Quantity ↓, Price for buyers ↑, Price for sellers ↓

Statutory incidence: Who sends money to government

Economic incidence: Real effect on resources (price changes + tax payments)

CRITICAL: Side taxed is IRRELEVANT! $1 tax on buyers = $1 tax on sellers

Math: 4 equations, 4 unknowns (Q_s, Q_D, P_s, P_D)

Supply: Q_s = f(P_s)
Demand: Q_D = f(P_D)
Tax: P_D = P_s + t
Equilibrium: Q_s = Q_D

Tax incidence: More INELASTIC party pays MORE of tax

Deadweight loss: Lost surplus from discouraged transactions (not captured by anyone)

Critical Point:
Tax side irrelevant! Both sides affected. More inelastic party bears more burden. Always causes deadweight loss from reduced transactions.

Subsidy Definition?

→ Subsidy Effect?

Which Side Matters?

Subsidy Incidence?

Elasticity Role?

Price Wedge?

Subsidy DWL?

Positive Externality?

Pigouvian Subsidy?

Subsidy: Government payment to buyer/seller (opposite of tax)

Price relationship: P_D = P_S - s (buyer pays less than seller receives)

Subsidy on buyers: Shifts demand curve UP by subsidy amount

Effects: Quantity ↑, Price for buyers ↓, Price for sellers ↑

CRITICAL: Side subsidized is IRRELEVANT! Both sides benefit

Subsidy incidence: Who benefits from subsidy

Consumer benefit: s_d = P* - P_D
Producer benefit: s_s = P_S - P*

More INELASTIC party receives MORE subsidy benefit

Price wedge: Gap between P_D and P_S

Tax: t = P_D - P_S
Subsidy: s = P_S - P_D

Subsidy causes deadweight loss! Benefits don't offset cost

Surplus analysis: CS ↑, PS ↑, but Govt Cost = s × Q'

Positive externality: Benefit to third party (education, vaccination, R&D)

Pigouvian subsidy: Corrects positive externality to socially optimal level

Key Insight:
Subsidies mirror taxes but opposite direction. Side irrelevant. More inelastic gets more benefit. Also causes DWL! Use Pigouvian subsidies for positive externalities.