Economics Lesson 1

24
Economics
Lesson 1
By – Yashh Gupta
Welcome!
2nd Year BSc. Business Administration (Hons.)
Love meeting new people
Enjoy exploring new cities
Yashh Gupta
WhatsApp
Structure
Welcome to Lesson 1!
This lesson will begin the Economics Midterm training Course to prepare to for
the Midterm on Thursday 25TH November!
A few remarks:
 You will receive these slides after this lesson

 Message me on WhatsApp if you have any questions or need extra practice
Qs :))
 Please fill out the feedback form which will show up at the last session !!
 The whole training is divided into 3 sessions, the first session will focus on
chapters from week 1
GOALS FOR TODAY
Reviewing some important exam chapters + practice questions
Chapters we will review:

Chapter 5: Elasticity and its Applications
Chapter 6: Taxes and Subsidies
Chapter 8: price ceilings and Floors
Chapter 9: International Trade
Chapter 10: Externalities
Questions will be discussed after each chapter.
Tomorrow we will be working on the chapters from Week 2:))

Chapter 5: Elasticity and Its Applications
Price Elasticity of Demand
 Measures how responsive the

quantity demanded is to a
change in price.
 The more responsive the

quantity demanded is to a
change in price, the more
elastic the demand curve is.
Price Elasticity of Supply
 Measures how responsive the

quantity supplied is to changes
in price.
 The more responsive the

quantity supplied is to a change
in price, the more elastic the
supply curve.
Determinants Of Elasticity
LESS ELASTIC MORE LESS ELASTIC MORE ELASTIC

DEMAND ELASTIC DEMAND SUPPLY SUPPLY
Fewer substitutes More substitutes Difficult to increase Easy to increase
production at constant unit production at constant unit
cost (e.g. some raw cost (e.g. some
Short run (less time) Long run (more time)
materials) manufactures goods)
Categories of product Specific brands

( beer) (Heineken) Large share of market for Small share of market for
inputs inputs
Necessities Luxuries
Global supply Local supply
Small part of budget Large part of budget
Short run Long run
Calculation Of Elasticity
Elasticity Of Demand
Q: Suppose the Price of a product increases
from $10 to $20, causing a decrease in
quantity demanded from 80 units to 50 units,
what is the elasticity of demand?
%change in demand= (50-80)/80

= -37.5%
%change in Price= (20-10)/ 10
= 100%
So, Elasticity of Demand = -37.5%/

100%
= -0.375
Practice Time..
1. If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of
demand is:
A)–3. B) –1/3 C) –7.5. D) –0.75.
2. Refer to the figure. If price falls from $60 to $40, total revenue goes _____ , so demand is _____ .
A) down by $100; inelastic

B) down by $480; elastic
C) up by $360; inelastic
D) up by $120; elastic
3. A good with many substitutes will have a _____ curve that is relatively _____ elastic than a good with few substitutes.
A) supply; less
B) supply; more
C) demand; less
1. B, 2. D. 3. D
D) demand; more
Chapter 6: Taxes and Subsidies
Tax on Suppliers Tax on Buyers
A $1 tax on apple sellers shifts the supply curve A $1 tax on apple buyers shifts the demand
up by $1, changing the equilibrium from point curve down by $1, changing the equilibrium
a to point b. from point a to point d.
The Wedge Shortcut
Taxes Subsidies
Dependence of Payment of Tax on Elasticity
Situation A Situation B
When demand is more elastic than supply, buyers When supply is more elastic than demand,
pay less of the tax than sellers. suppliers pay less of the tax than buyers.
Taxes and Deadweight Loss
With no taxes
With taxes
The producers The producer and

and consumers consumer surplus
maximize their reduces and a
surplus and portion of it goes
there are no to government
Deadweight while one portion
losses.
is a Deadweight
loss
Practice time…
1. If buyers are required to pay a tax on top of the price, buyers' willingness to pay will:
A) decrease and the demand curve will shift down.
B) decrease and the demand curve will shift up.
C) increase and the demand curve will shift down.
D) increase and the demand curve will shift up.
2. In the accompanying pizza market, with a $2 tax imposed on the sellers, how much do buyers pay for a pizza?
A) $12 B) $11.50 C) $10 D) $9.50
3. Let the price elasticity of supply for a good be 2.0, and the absolute value of the price elasticity of demand be 1.5. Which of the
following is TRUE in this case?
A) Producers carry the majority of the tax burden.
B) Consumers carry the majority of the tax burden.
C) Producers and consumers carry an equal amount of the tax burden.
D) Consumers carry the entire tax burden.
1. A, 2. B, 3. B
Time for a Well Deserved Break..
See You Guys in 10 minutes

CHAPTER 8: PRICE CEILING AND FLOORS
Price Ceiling
5 Important Effects
1. Shortages
2. Reduction in product quality
3. Wasteful lines e.g. bribes
4. A loss of gains from trade
5. A misallocation of resources
Price Floors
4 Important Effects
1. Surpluses.
2. Lost gains from Trade
3. Wasteful increases in quality
4. A misallocation of resources
Practice Time…
1. Refer to the figure. The government enacts a price control causing a shortage of 15 units of the good. Therefore, the ___
is set at ______.
A) price floor; $31
B) price floor; $17
C) price ceiling; $10
D) price ceiling; $17
2. If there is a price floor set at $9, how much deadweight loss is created, if any?
A) $15 million
B) $30 million
C) $60 million
D) There is no deadweight loss.
1. C, 2. B
Chapter 9: International Trade
Trade with Supply and Demand
 At World Supply, Quantity

Demanded (Qd) is more than
Quantity Supplied (Qs)
 This difference is compensated by

Imports
 World Price is also lower than the

price if no trade would happen
International Trade and Tariff
 Domestic suppliers increase

production leading to an increase in
producer surplus.
 Domestic consumers buy less as the

world price increases
 Imports decrease as with tariff it is

costlier to import
 Government revenue = tariff times

imports
 It also causes a Deadweight Loss

Arguments Against International Trade
1. Trade reduces the number of domestic jobs.

As companies prefer shifting production to places with lower wages
2. It’s wrong to trade with countries that use child labor,

there have been instances where child labor has been used to produce goods at a low cost
3. There is a need to keep certain jobs at home for national security, like
producing unique weapons etc.
4. There is a need to keep certain “key” industries at home

As there can be beneficial spillovers onto other sectors of the economy, and they can
provide more revenue, if that spillover would have happened in another country it would
have benefitted them.
Practice Time..
1. A tariff ____ the amount of output produced by domestic firms and ____the amount of goods bought by domestic
consumers.
A) increases; increases B) increases; decreases
C) decreases; increases D) decreases; decreases
2. Which of the following is NOT an argument against international trade?

A) It is wrong to trade with nations that use child labor.
B) International trade reduces the number of jobs in the United States.
C) International trade leads to lower prices for domestic consumers.
D) Certain key industries should remain at “home” for the interest of national security.
3. $1 tariff generates government revenue of:

A) $100 million.
B) $140 million.
C) $180 million.
D) $200 million. 1. B, 2. C, 3. A
Chapter 10: Externalities
Some Key Terms :-
1. Externalities: external costs (negative externalities) or external benefits (positive externalities);
the costs or benefits, respectively, that fall on bystanders.
2. External Cost: costs paid by people other than the consumer or the producer trading in the
market.
3. Social cost: cost to everyone → the private costs + the external costs. The social cost curve
takes all costs into account. That’s why it’s used to figure out the efficient quantity.
4. Social surplus = consumer surplus + producer surplus + everyone else’s surplus
5. Efficient quantity: the quantity that maximizes social surplus.
6. Efficient equilibrium: the price and quantity that maximizes social surplus.
7. Pigouvian tax: tax on a product with external costs.
8. External Benefits: a benefit received by people other than the consumer’s or producer’s trading
in the market.
9. Pigouvian subsidy: a subsidy on a product with external benefits.

Impact of Externalities
Negative Externalities Positive Externalities
The efficient equilibrium is found where the social The efficient equilibrium is found where the social
cost and demand curves intersect. QEfficient is less than value and supply curves intersect. QEfficient is greater
QMarket so the market overproduces goods with than QMarket so the market underproduces goods with
significant external costs. significant external benefits
Practice Time…
1. The figure displays a market with external costs. The efficient level of output of ____ units would eliminate the
deadweight loss area of _____ .
A) Q1; ce
B) Q0; ce
C) Q0; gh
D) Q1; de
2. Social surplus is consumer surplus:

A) minus Producer surplus.
B) plus producer surplus.
C) plus producer surplus minus everyone else's surplus.
D) plus producer surplus plus everyone else's surplus
1. C, 2. D
What we accomplished..
 Went through the chapters of Week 1 Microeconomics.

 These 5 chapters are approximately 12 - 15 questions of the
exam so you are 40% ready.
 These chapters are the foundation of the other chapters as well
 Now we are left with only half of Microeconomics
This is the end of today’s Lesson
 Take good rest (you deserve it)

 Come back with your doubts
 Lecture slides will be provided on WhatsApp
 Tomorrow we meet at 11:00 Ams time, we work on
week 2

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24

2nd Year BSc. Business Administration (Hons.)

Love meeting new people

Enjoy exploring new cities

 You will receive these slides after this lesson

Reviewing some important exam chapters + practice questions

Chapters we will review:

Questions will be discussed after each chapter.

Tomorrow we will be working on the chapters from Week 2:))

Price Elasticity of Demand

 Measures how responsive the

 The more responsive the

 Measures how responsive the

 The more responsive the

LESS ELASTIC MORE LESS ELASTIC MORE ELASTIC

Categories of product Specific brands

%change in demand= (50-80)/80

So, Elasticity of Demand = -37.5%/

A) down by $100; inelastic

Tax on Suppliers Tax on Buyers

The producers The producer and

See You Guys in 10 minutes

2. Reduction in product quality

3. Wasteful lines e.g. bribes

4. A loss of gains from trade

2. Lost gains from Trade

3. Wasteful increases in quality

 At World Supply, Quantity

 This difference is compensated by

 World Price is also lower than the

 Domestic suppliers increase

 Domestic consumers buy less as the

 Imports decrease as with tariff it is

 Government revenue = tariff times

 It also causes a Deadweight Loss

1. Trade reduces the number of domestic jobs.

2. It’s wrong to trade with countries that use child labor,

4. There is a need to keep certain “key” industries at home

2. Which of the following is NOT an argument against international trade?

3. $1 tariff generates government revenue of:

4. Social surplus = consumer surplus + producer surplus + everyone else’s surplus

5. Efficient quantity: the quantity that maximizes social surplus.

7. Pigouvian tax: tax on a product with external costs.

9. Pigouvian subsidy: a subsidy on a product with external benefits.

2. Social surplus is consumer surplus:

 Went through the chapters of Week 1 Microeconomics.

 Take good rest (you deserve it)

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