Economics and Statistics

If you know that the market demand for good X corresponds to the following equation: and the supply curve can be model by the equation: Calculate the price elasticity for each curve at the equilibrium point. Furthermore explain which curve is relatively more elastic. The first step consists of solving for the equilibrium price and quantity: Remember the formula for the price elasticity is Therefore pick the two closest points and calculate the price elasticity, in this case let's pick a point that is one quantity less than the equilibrium point on both curves. Since we are dealing with linear equations we can use another formula which is specific for these types of curves and is more precise than the method we used so far. The formula is the fraction of the price over the quantity multiplied by the inverse of the slope. Since Ed>Es, the demand curve at the equilibrium point is relatively more elastic than the supply curve...

In economics, the term elasticity is used to refer to the ratio of the change of an economic variable to the change in another . In our context, elasticity will mainly be used to describe the relationship between a change in quantity to the change in price. If the change in quantity is equal to the change in price, then this change can be described as unit elastic . Another way to think about this concept is that the change in price will create a proportional change in quantity. If the quantity change is larger than the change in price then the change is  elastic . If the quantity change is smaller than the price change then the change is inelastic . Price elasticity of demand: it describes the relative change of quantity demanded to a change in price.  Price elasticity is calculated by simply dividing the rate of change in quantity by the rate of change in price. An alternative method that is equivalent is: where M is the slope of a linear demand cu...

You are tasked by your city council to find the economic surplus the market for good X creates. Furthermore, the council members want to know how the economic value is divided between the producers and the consumers. Lastly, calculate the tax burden for each party ,the dead weight loss, and the revenue that would go to the city's budget if a per unit tax of $15 is imposed on the producers. You know that the demand schedule is, and the supply curve can be modeled by the following equation; In order to find the consumer and producer surpluses, one need to first solve for the equilibrium price and quantity : Now that we know the equilibrium price and quantity we can find the consumer surplus and the producer surplus. In this problem I will demonstrate two ways to solve this exercise. The first method uses algebra, which is well suited for this type of question, since the demand and supply curves are linear. The second method is more general and involve...

Now that we know the basic principals that affect the market supply and demand curves, we can turn our attention to the welfare analysis of the market and see how the economic value  is divided between the producers and the consumers. Consumer surplus is the difference between the price a consumer is willing to pay and the current market price. The consumer surplus is equal to the area bounded from above by the demand curve and bounded from below by the equilibrium price. Producer Surplus is the difference between the price a producer is willing to sell and the current market price. This is equal to the area bounded from above by the equilibrium market price and bounded from below by the supply curve. Total economic surplus is the sum of consumer and producer surpluses. It is maximized at the equilibrium price and quantity point. Dead-weight loss is the sum producer and consumer surplus that could have been achieved had the equilibrium price and quantity prevailed...

After exploring the concept of a price ceiling in a previous post. It is time define the term "price floor". A price floor can be thought as the opposite definition of a price ceiling, where the latter can be described as setting a maximum price that must be smaller than the current equilibrium price. The former is a minimum price that must be greater than the equilibrium price. If a government finds the that the market equilibrium price for a good to be too low, it may impose a minimum price that is greater than the current market price. The quantity demanded is lower than the quantity supplied. The market produces more than the consumers are willing to buy at that price. This results in a surplus which can be represented by the distance between the quantity consumed and the quantity supplied at the new imposed price in the market. Real life examples of price floors can be found in the agriculture and energy industries, or in the labor market (minimum wage). Recent...