Economics and Statistics

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...

Your city council voted to set a price ceiling on the market for good X. The price ceiling is set to be equal to 75% of the current equilibrium price.  The current market demand can be modeled by the equation:   The market supply curve corresponds to the following equation:   Using the given information, find: the new price and the new amount of quantity sold  the shortage a tax per unit of good sold that would result in the same quantity that is available at the price ceiling Derive an equation for the new market supply curve with the tax. First, let's derive the equilibrium price and quantity for this market. Set the demand curve equal to the supply curve. Now that we know the original price (i.e P e ), we can derive the price ceiling and the quantity sold at that price: From our notes, we know that the quantity sold at that price must be equal to the amount that can be supplied by the producers. Therefore, all we ne...

Since we now know what the demand and supply are in an economic model, we can combine both curves to determine the equilibrium price in the market. A market is in equilibrium at the point where the demand curve intersects the supply curve. In other words, where the supplied quantity is equal to the quantity demanded. The equilibrium price is the point in the market where there is no shortage or surplus. Markets do not automatically reach equilibrium. Instead, it is achieved after a number of trials and errors. The more information both the buyers and suppliers have, the faster the process. If a price is higher than the market equilibrium price, then the quantity supplied is higher than the quantity demanded, this results in a surplus. These excess units of goods produced incentives the producers to reduce the price and thereby reduces the quantity produced until the market reaches equilibrium. If a price is less than the market equilibrium price, then the quantity su...

I recently talked about demand, it is time to now explain and define what supply is in a basic economic model. Supply: producer's willingness and ability to sell a good or service at various prices that exist in the market at a given time. Law of Supply: producers want to offer higher quantities for sale at higher prices. Increasing marginal cost: The cost of production increases for each additional unit produced. This is caused by two factors: As production of a good increases, firms bring factors of production that are not optimized to make the good in question.  Firms experience diminishing return when they increase production. This is mainly due to the factors of production that are fixed in the short run (i.e: machines, land, the size of the factory, etc...). Thereby, each additional worker will increase the production by successively less and less. Supply can be displayed as an upward sloping curve which illustrates the law of supply. ...

In my most recent post, I quickly defined what demand is in economics. However, my readers might ask; How does someone build such demand curves? My answer is that one shall add the quantities at each price point for all the consumers in the market. This process is known as horizontal summation. Consider this problem: you are tasked with finding the demand for a market that only contains two  consumers; consumer A and consumer B. If their demand schedules can be respectively modeled by the following equations: Then, find a formula by summing the Q's, we get: The last step consists of re-arranging the equation in terms of P. This equation corresponds to the market demand when  . Now let's graph that: The market demand above P=3 (the dotted line) is just consumer A's demand curve since it is the only consumer buying products above the price of three in the market.

Demand: Consumers' willingness and ability to buy a good or service at the various prices that exist in a market in a given time Law of demand: consumers tend to buy higher quantities at lower prices than they do at higher prices. When the price of a good change, it is changing relative to the price of other goods. Consumers tend to substitute away from more expensive goods for cheaper goods. Diminishing utility: each additional unit of a good or service that a person consumes gives them less benefit (or utility ) than the previous unit. The only way a person will consume more of a good is if the marginal price is lower. Demand can be displayed as a downward sloping curve which illustrates the law of demand. Reference:  Mayer,David. AP Microeconomics Crash Course . Research & Education Association (2014). p 49-50.

Hello everybody,  The main objective of this blog is to review basic concepts  in both Macro and Micro economics. I will also try my best to incorporate empirical evidence in my posts as a way to give concrete example to the readers of this blog. I will try to post about once a week. Empiricx