Microeconomics – Formulas and Expressions

Basics

x ≿ y means x is weakly preferred ¿ y

x ∽ y means x has the same preferance as y
x ≻ y means x is strongly preferred ¿ y

a−c
Equillibrium ⇒Q ¿=
b+d

Budget Constraint : M =Px X + P y Y

−P x
Slopeof Budget Constraint : m=
Py

M Px
Equation of Budget Line : X= − Y
Px P y

∂U
'
∂ x U x(x, y)
Marginal Rate of Substitution : ∨
∂ U U 'y ( x , y)
∂y

Applied Tax

Buyers Sellers
Pd =( a−t )−bQ Ps =( c+ t ) + dQ
c +dQ=( a−t ) −bQ a−bQ= ( c+ t ) +dQ
a−c−t a−c−t
Q¿ = Q¿ =
b+d b+d

Share of Tax

Buyers Sellers
Pt −P¿ P ¿−(Pt−t)
t t

Subsidy

Buyers Sellers
P D=( a+s )−bQ PS =( c−2 ) + dQ

The Utility Function

Perfect Substitutes mean that the slope of the function is:

a
U ( x , y )=ax+ by ⟹−
b
The Optimum Condition per Grossen’s law, at:

∂U ∂U
∂ x¿ ∂ y¿
=
Px Py

Ideal Lagrangian to isolate x and y as such:

∂L ∂L
∂ x aλ ∂x a
= ⟹ =
∂ L bλ ∂L b
∂y ∂y

Differentiating Cobb Douglas’ Functions:

Given U ( x , y )=x α y β ,
Convert ¿ ln : ln (U ( x , y ))=α ln x + β ln y

PED & YED

Horizontal Summation:Q=n Q i ⟹ n ( ab − 1b P )⟹ nab − bn P

P 1 ΔQ P
PED : ε= (
Q slope
∨ )
ΔP Q ( )
PED Values’ Meanings:

|ε|=1 , Unit Elastic

|ε|>1 , Elastic
|ε|<1 , Inelastic
|ε|=∞ , Perfectly Elastic
ε =0 , Perfectly Inelastic

PED’s Impact on Total Expenditure:

|ε|>1 , Price Reduction IncreasesTotal Expenditure

|ε|>1 , Price Increase Reduces Total Expenditure

|ε|=1 , Total Expenditure is at Maximum

|ε|<1 , Price Reduction Reduces Total Expenditure

|ε|>1 , Price Increase IncreasesTotal Expenditure

dR
Given R=P ×Q , max R(Q)= =0
dQ
 YED Values

Y 1 ΔQ Y
η= (
Q slope)∨ −
ΔY Q

η<1 , Necessities that lie between 0< η<1

η>1 , Luxury Goods
η< 0 , Inferior Goods
η=1 ,Changes ¿ Income Changes Demand Proportionally

Cross-Price PED:

ΔQx
Qx ΔQx P
ε XY = ∨ × y
Δ Py Qx ΔPy
Py
If ε XY <0 , Goodsare Complements
If ε XY >0 , Goodsare Substitutes

k
Constant PED= 1
ε
Q

Consumer Surplus

1
A S= ( Δ p× ΔQ)
2

Intertemporality

C2 Y2
Intertemporal Budget Constraint C 1+ =Y 1 +
1+r 1+ r

M2
IBC Extrema are ( 0 ,C 1 )=M 1 + ∧( C2 , 0 ) =M 1 ( 1+r ) + M 2
1+ r
'
1 −U C 1
Slope of IBC is m= ∧MRTP= '
1+ r UC2

Consumer is patient at ( M 1 , M 2 ) if , MRTP< 1+ r

Consumer is impatient at ( M 1 , M 2 ) if , MRTP>1+r

Consumer is Risk Neutralis , EU ❑G =U (M 0 )

Consumer is Risk Averse is , EU ❑G <U ( M 0 )
Consumer is Risk Seeker is , EU ❑G > U (M 0)

Income Compensated Demand Curve

 ΔQ D P ΔQ S P
Constant Elasticity :Q D= ⋅ , QS = ⋅
Δ PD Q Δ PS Q

Production & Costs

Marginal Product intersects Average Product at the maximum of Average Product, such that

∂ F (K , L) F (K , L)
MPL= APL⟹ =
∂L L

Increasing Returns ¿ Scale ( IRS ) : F ( cK ,cL )> cF ( K , L )

Constant Returns ¿ Scale ( CRS ) : F ( cK , cL )=cF (K , L)
Decreasing Returns¿ Scale ( DRS ) : F ( cK , cL ) <cF ( K , L)

FC r K 0
Average ¿ Cost s : =
Q Q
VC w L0
Average Variable Costs: =
Q Q
r K 0 w L0
Average Total Costs : =
Q Q

Maximal Points of Production is same as Grossen’s Second Law:

∂F
∂L w
max F ( K , L)= =
∂F r
∂K

Monopolies

Total Profit :π ( Q )=TR−TC ⟹ π ( Q ) =P D ( Q ) ⋅Q−C (Q)

Maximal Profit is achieved at MR=MC

Total Revenue :TR ( Q )=P ( Q ) ⋅Q⟹ aQ−b Q 2

P−MC 1
M arkup : =
P ¿ ε∨¿ ¿

Oligopolies & Perfect Competition

The order of profitability is as such:

π ( Monopoly ) > π (Cournot ) >π (Bertrand)

Profit max for Perfect Competition is where MR=P

The shutdown condition for Perfect Competition is P< AVC

General Equilibrium
Contract Curve : MRS a= MRSb

L1=α ln x11 + (1−α ) ln x 21−λ( p 1 x 11 + p2 x 21− p1−2 p2 )

Marginal Rate of transformation is

MC L
M RT =
MC ❑F