Zerbe and Bellas, Chapter 4

Demand

• Marginal benefit
• Willingness to pay
• Consumer surplus (CS)
• Changes in CS: ΔPS = ΔP×Q

Supply

• Marginal cost
• Willingness to accept
• Producer surplus (PS)
• Changes in PS: ΔPS = ΔP×Q
• Change in profits is a good approximation

Allocative efficiency

• Social surplus = CS + PS

Elasticity

• Own-price: e_d = (ΔX/ΔP) * (P/X)
• Supply: e_s = (ΔX/ΔP) * (P/X)
• Cross-price
• Income

Elasticity and Surplus

• ΔX = ΔP/P * X * e
• %ΔX = ΔP/P * e
• ΔP = (ΔX * P/X ) / e
• %ΔP = (ΔX/X ) / e
• DWL = (X * ΔP * e_d)/2P