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Page 1: 170902 entrepreneurial economics1

Entrepreneurial Economics

A supplemental lecture on BMA5001

Organized by NUS MBA Entrepreneurship Club

2nd September, 2017

1

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About author

Ryosuke ISHII (RYO)

β€’ MIT Microeconomics graded 93%(on edX, 3 months online course)

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Agenda / Topics covered

- How to understand Elasticity

- Why on earth the S/D curves shift by taxation

- Welfare and Dead Weight Loss.

- The secret relation of MRS(Marginal Rate of Substitute) and indifference curve

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Quick questions

- Do you like mathematics?

- How about calculus (especially differential)

- if you are not good at calculus, might [advanced] sectionis difficult. But this is not today’s scope.

- I have one-day long calculus entrance course as well

https://www.slideshare.net/ryouen/mathphysicsmastersv1
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ElasticitySee also; Lecture notes 2 Part A

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Elasticity is Sensitivity.

Price Elasticity means how sensitive to price they are?

I change the price Market reacts.

Elasticity

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Elasticity

So, the dividend(denominator) should be Price

𝑒 =π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’

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Elasticity

𝑒 =π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’

𝑃

𝑄

𝑃

𝑄

Larger 𝑒 means Very sensitive

Smaller 𝑒 means Little sensitive

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ElasticityActually, it’s not just change, it’s % of Change.

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’, but how to measure β€œ% of Change”?

Mesuring 1: PointElasticity

% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑄

𝑄= |

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑄

𝑄|

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑃

𝑃= |

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃

𝑃|

So,

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’=

(Δ𝑄𝑄

)

(Δ𝑃𝑃

)= |

Δ𝑄

Δ𝑃

𝑃

𝑄|

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100 π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400Δ𝑄 = 300

𝐿𝑒𝑑′𝑠 π‘π‘Žπ‘™π‘π‘’π‘™π‘Žπ‘‘π‘’ 𝑒

←Elasticity of this point

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Elasticity

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100 π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400Δ𝑄 = 300

Actually, its not just change, its % of Change.

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’, but how to measure β€œ% of Change”?

Mesuring 1: Point Elasticity

% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑄

𝑄= |

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑄

𝑄| =

300

100

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑃

𝑃= |

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃

𝑃| = |

βˆ’20

100|

So,

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’= |

(3)

(βˆ’15

)| = 15 β‰₯ 1

(it can be done because the Curve is Linear Function)

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Elasticity

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100 π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400Δ𝑄 = 300

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’, how to measure β€œ% of Change”?

Mesuring 1: Point Elasticity [advanced]

Or, use 𝑒 =d𝑄

d𝑃

𝑃

𝑄(this is point elasticity, so make Ξ” β‡’ 𝑑)

First, make an equation Q = 𝑓(𝑃) form.So, Q = βˆ’15𝑃 + 1600

d𝑄

d𝑃= βˆ’15, 𝑃 = 100, 𝑄 = 100

|𝑒| =d𝑄

d𝑃

𝑃

𝑄= βˆ’15 = 15 > 1

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Elasticity

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’, how to measure β€œ% of Change”?

Mesuring 2: Arc ElasticityIf the price and value change from A to B.We would like to use average as dividend of % change.

% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑄

𝑄=

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑄

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑄)

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑃

𝑃=

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑃)So,

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’=

(π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑄

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ 𝑄)

(π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑃))

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100 π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400

Δ𝑄 = 300

π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑄)

π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑃)

𝐿𝑒𝑑′𝑠 π‘π‘Žπ‘™π‘π‘’π‘™π‘Žπ‘‘π‘’ 𝑒!

𝐴

𝐡

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ElasticityActually, its not just change, its % of Change.

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’, but how to measure β€œ% of Change”?

Mesuring 2: Arc Elasticity

% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑄

𝑄=

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑄

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑄)=

300

250

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’ =Δ𝑃

𝑃=

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑃)=

βˆ’20

90So,

𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’=

(π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑄

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ 𝑄)

(π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃

π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑃))

= |1.2 βˆ— 9

βˆ’2|

= 5.4

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100 π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400

Δ𝑄 = 300

π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑃)

π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’(𝑄)

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ElasticityWhy β€œ%” important? Think about the Case:

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 125

(𝑄, 𝑃) = 100,100

(π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ, π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ) = 125,80

(1)What is arc 𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’?

(2)What is the Revenue before and after?

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ElasticityWhy β€œ%” important? Think about the Case:

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 125

(𝑄, 𝑃) = 100,100

(π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ, π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ) = 125,80

(1)What is arc 𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’?

𝑒 =βˆ’20/90

25/112.5= | βˆ’ 1|

(2)What is the Revenue before and after?

π‘…π‘’π‘£π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 𝑃𝑄 = 10,000

π‘…π‘’π‘£π‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿπ‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 10,000

So, if we define 𝑒 such that,𝑒 = 1 means Revenue doesn’t change.

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Elasticity

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 125

(𝑄, 𝑃) = 100,100

(π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ, π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ) = 125,80

(1)What is arc 𝑒 =% π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ πΆβ„Žπ‘Žπ‘›π‘”π‘’

% π‘ƒπ‘Ÿπ‘–π‘π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’?

𝑒 =βˆ’20/90

25/112.5= | βˆ’ 1|

(2)What is the Revenue before and after?

π‘…π‘’π‘£π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 𝑃𝑄 = 10,000

π‘…π‘’π‘£π‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿπ‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 10,000

So, if we define 𝑒 such that,𝑒 = 1 means Revenue doesn’t change.

𝑃𝑄

Why β€œ%” important? Think about the Case:

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Elasticity

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100

(𝑄, 𝑃) = 100,100

(1)If we think 𝑒 = 5.4 ≫ 1 case.

(2)What is the Revenue before and after?

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400

Why β€œ%” important? Think about the Case:

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ElasticityWhy β€œ%” important? Think about the Case:

𝑃

𝑄

𝑃 = 100

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 80

Δ𝑃 = βˆ’20

𝑄 = 100

(𝑄, 𝑃) = 100,100

(1)If we think 𝑒 = 5.4 ≫ 1 case.

(2)What is the Revenue before and after?

π‘…π‘’π‘£π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 𝑃𝑄 = 10,000

π‘…π‘’π‘£π‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿπ‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 32,000

So, if e > 1, - Price down gain Revenue- Price Up lose Revenue

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 400

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ElasticitySummary and special case

𝑒 > 1

𝑒 = 1𝑒 < 1

𝑒 = ∞

𝑒 = 0

If you change price,Nothing happens.So, price sensitivity = 0

If you change priceBit higher than beforeEveryone run away.

Bit lower than beforeEveryone buy.

So, Infinitely sensitive.

Value Price down Price up

|𝑒| < 1 R decrease↓ R increase↑

|𝑒| = 1 R same R same

|𝑒| > 1 R increase↑ R decrease↓

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ElasticityFYI[advanced]𝑒 can be changed in Linear curve.

𝑃

𝑄

𝑒 =d𝑄

d𝑃

𝑃

𝑄

When we take a look at the equation:

This Part is constant.Because this is Linear function.

So, if 𝑄 β‡’ πΏπ‘Žπ‘Ÿπ‘”π‘’π‘Ÿ and 𝑃 β‡’ π‘ π‘šπ‘Žπ‘™π‘™π‘’π‘Ÿ

then, 𝑒 β‡’ π‘ π‘šπ‘Žπ‘™π‘™π‘’π‘Ÿ

|𝑒𝐷| = 1

|𝑒𝐷| < 1

|𝑒𝐷| > 1

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Surplus and Welfare

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Welfare can be calculate:

𝑃

𝑄

Consumer Surplus(CS) + Producer Surplus(PS)

CS

PS

But Why the CS / PS is the Area on the graph?

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𝑃

𝑄

CS

Why the CS can be calculated by the Area on the graph?

To make the things easy:

- Imagine this market has only 4 people.

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𝑃

𝑄

Imagine this β€œApple” market has only 4 people(buyer/consumer).And each of them have a budget to get an Apple.So, the Demand Curve will be:This budget means: maximum how much willing to pay to get an Apple.

$100

80

5040

Name Budget

Akira $100

Chieko $80

Rocky $50

Tomo $40

1 2 3 4

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𝑃

𝑄

If the price of an apple become $60 what will happen?

Name Budget

Akira $100

Chieko $80

Rocky $50

Tomo $40

$100

80

5040

60

1 2 3 4

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𝑃

𝑄

If the price of an apple become $60 what will happen?2 people can buy an apple each.And the consumer surplus each is below:Because the Budget means maximum how much willing to pay to get an Apple.

Name Budget

Akira $100

Chieko $80

Rocky $50

Tomo $40

$100

80

5040

60

1 2 3 4

$40$20

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𝑃

𝑄

CS

This is because the CS can be calculated by the Area on the graph.

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Producer Surplus(PS) can be calculated same way.

𝑃

𝑄

PS

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𝑃

𝑄

Imagine this Apple market has 4 sellers.The sellers differ their cost structure so,COST = MINIMUM How much they want to charge is below:That means if the price is equal to the Cost, it means they can get No profit.

$100

80

5040

Name Cost

Neha $40

Federico $50

Joe $80

David $100

1 2 3 4

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𝑃

𝑄

If the price set as $60,What will happen?

$100

80

5040

Name Cost

Neha $40

Federico $50

Joe $80

David $100

1 2 3 4

60

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𝑃

𝑄

Neha got $20 profit while Federico got $10So the profit = Producer Surplus is $30

$100

80

5040

Name Cost

Neha $40

Federico $50

Joe $80

David $100

1 2 3 4

60$20 $10

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𝑃

𝑄

Neha got $20 profit while Federico got $10So the profit = Producer Surplus is $30

$100

80

5040

1 2 3 4

60$20 $10

Revenue

60

20

COSTβˆ’ = π‘π‘Ÿπ‘œπ‘“π‘–π‘‘

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So, Welfare can be calculate:

𝑃

𝑄

Consumer Surplus(CS) + Producer Surplus(PS)

CS

PS

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How tax change D/S curvesand the Dead Weight LossSee also; Lecture notes 2 Part B

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Government can decide from which side (Demand/Supply)The Government collect tax.The curve affects depends of the decision.

𝑃

𝑄

Supply Curve

Demand Curve

Let’s us think aboutGovernment decides thatThey collect tax from Buyer(demand side)And the tax is $10 each goods.

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Demand Side Taxation: 3 steps thinking:

𝑃

𝑄

Supply Curve

Demand Curve Before

1.Demand Curve should be affected.

2.Demand must be lower than before, because they should pay +$10 each than market price.

3.So, taxation makes Demand curve shift inward.

Demand Curve After

We could understand if we take a look at

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’, π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = (0,100)

Should become

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ , π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = (0,90)

Because π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ + π‘‘π‘Žπ‘₯ = π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

100

90

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Who, how much, really bear?

𝑃

𝑄

Supply Curve

Demand Curve Before

After Taxation, we got new Equilibrium (π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ , π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ)

But, what consumers really pay is:π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ + π‘‘π‘Žπ‘₯ = 𝑃𝑅𝐸𝐴𝐿

𝑃𝑅𝐸𝐴𝐿 βˆ’ π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ βˆ’ π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ

π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ + π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯Demand Curve After

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝑅𝐸𝐴𝐿

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Let’s calculate for this example!

𝑃

𝑄

𝑃𝑆 = 5𝑄

Demand Curve Before

Demand curve before tax:𝑃𝐷𝑏 = 120 βˆ’ 3𝑄

Supply Curve before tax:𝑃𝑆 = 5𝑄

𝒕𝒂𝒙 = $πŸ– for Consumers

What is:𝑃𝑅𝐸𝐴𝐿 βˆ’ π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ βˆ’ π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝐷𝑏 = 120 βˆ’ 3𝑄

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Let’s calculate for this example!

𝑃

𝑄

𝑃𝑆 = 5𝑄

Demand Curve Before

Calculate before Equilibrium, π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75, π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 15

The new demand curve will beπ‘ƒπ·π‘Ž

= 112 βˆ’ 3𝑄

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 70, π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 14

But, what consumers really pay is:π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ + π‘‘π‘Žπ‘₯ = 𝑃𝑅𝐸𝐴𝐿 = 78

𝑃𝑅𝐸𝐴𝐿 βˆ’ π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ = 3

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ βˆ’ π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ = 5

π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ + π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯Demand Curve After

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝑅𝐸𝐴𝐿

𝑃𝐷𝑏 = 120 βˆ’ 3𝑄

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Next: supply side taxation:

𝑃

𝑄

Supply Curve

Demand Curve

Let’s us think aboutGovernment decides thatThey collect tax from Seller(Supply side)

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Supply Side Taxation: 3 steps thinking:

𝑃

𝑄

Supply Curve

Demand Curve

1.Supply Curve should be affected.

2.The price must be higher than before, because sellers should pay +$10 each after the deal made.

3.So, taxation makes supply curve shift upward.

We could understand if we take a look at

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’, π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = (0,10)

Should become

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ , π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = (0,20)

Because π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ π‘‘π‘Žπ‘₯ = π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

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Supply Side Taxation: 3 steps thinking:

𝑃

𝑄

Supply Curve

Demand Curve

After Taxation, we got new Equilibrium (π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ , π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ)

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ is what consumers pay.

But, what sellers really get:π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ π‘‘π‘Žπ‘₯ = 𝑃𝑅𝐸𝐴𝐿

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿβˆ’π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’= π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ βˆ’ 𝑃𝑅𝐸𝐴𝐿 = π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ

π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ + π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝑅𝐸𝐴𝐿

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Let’s calculate for this example!

𝑃

𝑄

𝑃𝑆 = 5𝑄

Demand Curve

Demand curve before tax:𝑃𝐷𝑏 = 120 βˆ’ 3𝑄

Supply Curve before tax:𝑃𝑆 = 5𝑄

π‘‘π‘Žπ‘₯ = $8 for Sellers.

What is:𝑃𝑅𝐸𝐴𝐿 βˆ’ π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ βˆ’ π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝐷𝑏 = 120 βˆ’ 3𝑄

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Supply Side Taxation: 3 steps thinking:

𝑃

𝑄

Supply Curve

Demand Curve

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝑅𝐸𝐴𝐿

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

𝑃𝑆𝐴= 5𝑄 + 8

Calculate before Equilibrium, π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75, π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 15

The new supply curve will be𝑃𝑆𝐴

= 5𝑄 + 8

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78, π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 14

But, what sellers really get is:π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ π‘‘π‘Žπ‘₯ = 𝑃𝑅𝐸𝐴𝐿 = 70

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿβˆ’π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’= π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ = 3

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ βˆ’ 𝑃𝑅𝐸𝐴𝐿 = π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ = 5

π‘‘π‘Žπ‘₯π‘π‘œπ‘›π‘ π‘’π‘šπ‘’π‘Ÿ + π‘‘π‘Žπ‘₯π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘Ÿ = π‘‘π‘Žπ‘₯

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Dead Weight Loss

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Let’s Calculate CS and PS before tax

𝑃

𝑄

Supply Curve

Demand Curve

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃𝑅𝐸𝐴𝐿

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

CS

PS

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Let’s Calculate CS and PS before tax

𝑃

𝑄

Supply Curve

Demand Curve

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

CS

PS

Calculate before Equilibrium, π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 15 , π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 15

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

120

0

𝐢𝑆 =(120 βˆ’ 75) Γ— 15

2= 337.5

𝑃𝑆 =(75 βˆ’ 0) Γ— 15

2= 562.5

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Let’s Calculate CS and PS after tax $8 (for producer)

𝑃

𝑄

Supply Curve

Demand Curve

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

= 15

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

120

0

𝑃𝑆𝐴= 5𝑄 + 8

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

𝑃𝑅𝐸𝐴𝐿 = 70

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

= 14

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Let’s Calculate CS and PS after tax $8 (for producer)

𝑃

𝑄

Supply Curve

Demand Curve

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

120

0

𝑃𝑆𝐴= 5𝑄 + 8

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

𝑃𝑅𝐸𝐴𝐿 = 70

CS

PS

The Welfare should be calculated based on- What consumer really pay- What producer really get

So, for consumers they really payπ‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

for producers they really get𝑃𝑅𝐸𝐴𝐿 = 70

Yes, taxation makes price differenceBetween consumers and producers.

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

= 15

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

= 14

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Let’s Calculate CS and PS after tax $8 (for producer)

𝑃

𝑄

Supply Curve

Demand Curve

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

120

0

𝑃𝑆𝐴= 5𝑄 + 8

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

𝑃𝑅𝐸𝐴𝐿 = 70

πΆπ‘†π‘Žπ‘“π‘‘π‘’π‘Ÿ

π‘ƒπ‘†π‘Žπ‘“π‘‘π‘’π‘Ÿ

πΆπ‘†π‘Žπ‘“π‘‘π‘’π‘Ÿ =(120 βˆ’ 78) Γ— 14

2= 294

π‘ƒπ‘†π‘Žπ‘“π‘‘π‘’π‘Ÿ =(70 βˆ’ 0) Γ— 14

2= 490

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

= 15

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

= 14

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Let’s Calculate Sum of Tax, collected from market.

𝑃

𝑄

Supply Curve

Demand Curve

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

120

0

𝑃𝑆𝐴= 5𝑄 + 8

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

𝑃𝑅𝐸𝐴𝐿 = 70

Where is tax and why?

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

= 15

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

= 14

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Let’s Calculate Sum of Tax, collected from market.

𝑃

𝑄

Supply Curve

Demand Curve

𝑃𝑆𝐡= 5𝑄

𝑃𝐷 = 120 βˆ’ 3𝑄

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’ = 75

120

0

𝑃𝑆𝐴= 5𝑄 + 8

π‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

𝑃𝑅𝐸𝐴𝐿 = 70

consumers really payπ‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ = 78

producers really get𝑃𝑅𝐸𝐴𝐿 = 70

The difference is a tax soπ‘ƒπ‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ 𝑃𝑅𝐸𝐴𝐿 = π‘‘π‘Žπ‘₯ each consumption.

And the quantity is π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ = 14.

So Sum of Tax = 78 βˆ’ 70 Γ— 14 = 112π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

= 15

π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

= 14

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Compare before and after

𝑃

𝑄

Demand Curve

0

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃

𝑄

CS

PS

0

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

before after

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

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Dead Weight Loss

𝑃

𝑄

Demand Curve

0

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’π‘„π‘Žπ‘“π‘‘π‘’π‘Ÿ

𝑃

𝑄

CS

PS

0

π‘ƒπ‘π‘’π‘“π‘œπ‘Ÿπ‘’

before after

π‘„π‘π‘’π‘“π‘œπ‘Ÿπ‘’

This is Dead Weight Loss

This is a Social Welfare Loss that caused by tax

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Before After Ξ” = π΄π‘“π‘‘π‘’π‘Ÿ βˆ’ π΅π‘’π‘“π‘œπ‘Ÿπ‘’

ConsumerSurplus

-43.5

ProducerSurplus

-72.5

Tax+112

Social Welfare 900 896-4

Dead Weight Loss

Summary

𝐢𝑆 = 337.5

𝑃𝑆 = 562.5

πΆπ‘†π‘Žπ‘“π‘‘π‘’π‘Ÿ = 294

π‘ƒπ‘†π‘Žπ‘“π‘‘π‘’π‘Ÿ = 490

π‘‡π‘Žπ‘₯ = 112

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Consumer Theory

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We all are facing trade-offs

- Because fundamental assumption economist have is β€œpeople are facing trade-off”

The management of society’s resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. -Nicholas Gregory Mankiw

See also https://en.wikiquote.org/wiki/Greg_Mankiw#Ch._1._Ten_Principles_of_Economics

https://en.wikiquote.org/wiki/Greg_Mankiw#Ch._1._Ten_Principles_of_Economics
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Budget constrain.

β€’ You have a budget. Say $96/week.

β€’ You will allocate this money to maximize your utility.

β€’ Imagine you are living in hell, which has only 2 goods: Pizza and Movie.

β€’ And you should allocate all the money.

β€’ Pizza = $16, Movie=$8

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Budget Constrain (make sure both axis is Q)

- Pizza($16 each) and Movie($8 each)- Your weekly budget is $96- Let’s draw a line and equation

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

6

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Budget Constrain (make sure both axis is Q)

- Pizza($16 each) and Movie($8 each)- Your weekly budget is $96

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

6

12

But this curve is nothing to do With your Utility.(imagine, if you hate movie)

16π‘„π‘π‘–π‘§π‘§π‘Ž + 8π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

Don’t think this equation by looking curve.Just think π‘ƒπ‘Ÿπ‘–π‘π‘’ Γ— π‘„π‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘–π‘¦ = 𝐡𝑒𝑑𝑔𝑒𝑑, πΆπ‘œπ‘ π‘‘

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Consumer’s preference and Utility

If you are rational consumer,(Lecture note 3)

β€’ Complete binary orderingβ€’ Between any two bundles of goods, a consumer

can tell whether she prefers one to another or indifferent.β€’ Reflectivity

β€’ Any bundle is just as good as any other identical bundle.β€’ Transitivity

β€’ If a consumer prefers bundle 1 to bundle 2 and prefers bundle 2 to bundle 3, then she must prefer bundle 1 to bundle 3.

β€’ Non-satiationβ€’ Consumers prefer more units of a good than less.

Page 62: 170902 entrepreneurial economics1

Consumer’s preference and Utility

- Holding a pizza makes you happy- but it’s non- linear.

- in this case, for example, π‘ˆ = π‘„π‘ƒπ‘–π‘§π‘§π‘Ž

π‘π‘–π‘§π‘§π‘Ž

𝑄

π‘ˆπ‘‘π‘–π‘™π‘–π‘‘π‘¦

12

2

4

5

5

Page 63: 170902 entrepreneurial economics1

Marginal Utility

When we have 0 Pizza and get +1 pizza,Our utility increase 0 to 1

If we already have 4 pizza and get +1.How much our utility change?

π‘π‘–π‘§π‘§π‘Ž

𝑄

π‘ˆπ‘‘π‘–π‘™π‘–π‘‘π‘¦

12

2

4

5

5

Page 64: 170902 entrepreneurial economics1

Marginal UtilityIf we already have 4 pizza and get 1.How much our utility change?

π‘ˆ4 = 4 = 2

π‘ˆ5 = 5

π‘ˆ5 βˆ’ π‘ˆ4 = 5 βˆ’ 2 = 0.236. .While the 1st pizza increase U=1

If we imagine real situation,The utility change of 5th pizza Might nearly zero.π‘π‘–π‘§π‘§π‘Ž

𝑄

π‘ˆπ‘‘π‘–π‘™π‘–π‘‘π‘¦

12

2

4

5

5

Page 65: 170902 entrepreneurial economics1

Marginal Utility [advance]

is a the additional satisfaction a consumer gains from consuming one more unit of a good or service.*

π‘€π‘ˆπ‘π‘–π‘§π‘§π‘Ž =πœ•π‘ˆ

πœ•π‘„π‘π‘–π‘§π‘§π‘Ž=

1

2 π‘„π‘π‘–π‘§π‘§π‘Ž

*http://www.investopedia.com/terms/m/marginalutility.asp

π‘π‘–π‘§π‘§π‘Ž

𝑄

π‘ˆπ‘‘π‘–π‘™π‘–π‘‘π‘¦

12

2

4

5

5

Page 66: 170902 entrepreneurial economics1

Indifference curve

Imagine your utility function, not only Pizza, but a combination

Of Pizza and Movie π‘ˆ = 𝑄𝑀𝑄𝑃.

And indifference means π‘ˆ = π‘π‘œπ‘›π‘ π‘‘π‘Žπ‘›π‘‘. π‘ π‘Žπ‘¦, π‘ˆ = 2

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

6

Page 67: 170902 entrepreneurial economics1

Indifference curve

Imagine your utility function, not only Pizza, but a combination

Of Pizza and Movie π‘ˆ = 𝑄𝑀𝑄𝑃.

And indifference means π‘ˆ = π‘π‘œπ‘›π‘ π‘‘π‘Žπ‘›π‘‘. π‘ π‘Žπ‘¦, π‘ˆ = 2 π‘Žπ‘›π‘‘ 3

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃 = 2

Page 68: 170902 entrepreneurial economics1

Indifference curve

Imagine your utility function, not only Pizza, but a combination

Of Pizza and Movie π‘ˆ = 𝑄𝑀𝑄𝑃.

And indifference means π‘ˆ = π‘π‘œπ‘›π‘ π‘‘π‘Žπ‘›π‘‘. π‘ π‘Žπ‘¦, π‘ˆ = 2 π‘Žπ‘›π‘‘ 3

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃 = 3

Page 69: 170902 entrepreneurial economics1

MRS(Marginal Rates of Substitute) on Indifference curve

Think about π‘ˆ = 2 = 𝑄𝑀𝑄𝑃.

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃 = 2

𝐴

𝐡

𝐢

When you are point AYou have Movie, Pizza = (1,4)And this is indifferent with point BWhich is Movie, Pizza = (2,2)That means you can give up2 pizza to get 1 more movie.

In mathematical form,

MRSPointA =Ξ”π‘Œ

Δ𝑋=

2βˆ’4

2βˆ’1= βˆ’2

Page 70: 170902 entrepreneurial economics1

MRS(Marginal Rates of Substitute) and Marginal Utility

[advance]

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃 = 2

𝐴

𝐡

𝐢

𝑀𝑅𝑆 =π›₯π‘Œ

π›₯𝑋=

π‘€π‘ˆπ‘‹

π‘€π‘ˆπ‘ŒBecause MU is a the additional satisfaction a consumer gains from consuming one more unit of a good or service.If π‘€π‘ˆπ‘ƒπΌπ‘π‘π΄ = 1, which means if you got 1 more,pizza your utility change +1.

So, if you got 1 Pizza, get +π‘€π‘ˆπ‘ƒπΌπ‘π‘π΄ as an additional UtilityAnd, you got 1 Movie, get +π‘€π‘ˆπ‘€π‘œπ‘£π‘–π‘’ as an additional Utility.How to determine MRS from MU?

π‘π‘–π‘§π‘§π‘Ž

𝑄

π‘ˆπ‘‘π‘–π‘™π‘–π‘‘π‘¦

12

2

4

5

5

Page 71: 170902 entrepreneurial economics1

MRS(Marginal Rates of Substitute) and Marginal Utility

[advance] So, if you got 1 Pizza, get +π‘€π‘ˆπ‘ƒπΌπ‘π‘π΄ = 1And, at a same point,

you got 1 Movie, get +π‘€π‘ˆπ‘€π‘œπ‘£π‘–π‘’ = 2

They can get rid of 2 pizza and get 1 movie.This means your Trade-ratio Pizza and Movie is+1 Movie is 2 times better off than +1 Pizza.

So, 𝑀𝑅𝑆 =π›₯π‘Œ

π›₯𝑋=

π‘€π‘ˆπ‘‹

π‘€π‘ˆπ‘Œ

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃 = 2

𝐴

𝐡

𝐢

π‘π‘–π‘§π‘§π‘Ž

𝑄

π‘ˆπ‘‘π‘–π‘™π‘–π‘‘π‘¦

12

2

4

5

5

Page 72: 170902 entrepreneurial economics1

Budget constrain and MRS

Return back to Indifference curve and Budget constrain.

When the tangent of budget constrainEquals to MRS, the utility within the budget constrain become maximum.

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃 = 2

16π‘„π‘π‘–π‘§π‘§π‘Ž + 8π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

Page 73: 170902 entrepreneurial economics1

Budget constrain and MRS1. How to calculate tangent of Budget constrain?

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘šπ‘œπ‘£π‘–π‘’

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

16π‘„π‘π‘–π‘§π‘§π‘Ž + 8π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

6

According to the graph, Y axis = Qpizza and X axis = Qmovie

So, let’s make the equation π‘Œ = π‘Žπ‘‹ + 𝑏 format that is

Qpizza = π‘ŽQmovie + 𝑏 format.

16Qpizza + 8Qmovie = $96 ↔

Qpizza = βˆ’1

2Qmovie + $6

And it is known βˆ’Pπ‘€π‘œπ‘£π‘–π‘’

Ppizza= βˆ’

P𝑋

PY

Page 74: 170902 entrepreneurial economics1

Budget constrain and MRS[advance]

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃

16π‘„π‘π‘–π‘§π‘§π‘Ž + 8π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

2. How to calculate MRS

𝑀𝑅𝑆 = βˆ’π›₯π‘Œ

π›₯𝑋= βˆ’

π‘€π‘ˆπ‘‹

π‘€π‘ˆπ‘Œ= βˆ’

πœ•π‘ˆπœ•π‘„π‘‹

πœ•π‘ˆπœ•π‘„π‘Œ

= βˆ’(

πœ•π‘ˆπœ•π‘„π‘€π‘‚π‘‰πΌπΈ

)

(πœ•π‘ˆ

πœ•π‘„π‘ƒπ‘–π‘§π‘§π‘Ž)

If we calculate it…

Page 75: 170902 entrepreneurial economics1

Budget constrain and MRS[advance]

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃

16π‘„π‘π‘–π‘§π‘§π‘Ž + 8π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

2. How to calculate MRS

𝑀𝑅𝑆 = βˆ’π›₯π‘Œ

π›₯𝑋= βˆ’

π‘€π‘ˆπ‘‹

π‘€π‘ˆπ‘Œ= βˆ’

πœ•π‘ˆπœ•π‘„π‘‹

πœ•π‘ˆπœ•π‘„π‘Œ

= βˆ’(

πœ•π‘ˆπœ•π‘„π‘€π‘‚π‘‰πΌπΈ

)

(πœ•π‘ˆ

πœ•π‘„π‘ƒπ‘–π‘§π‘§π‘Ž)

π‘Žπ‘›π‘‘πœ•π‘ˆ

πœ•π‘„π‘ƒ=

𝑄𝑀

2 𝑄𝑀𝑄𝑃

,πœ•π‘ˆ

πœ•π‘„π‘€=

𝑄𝑃

2 𝑄𝑀𝑄𝑃

So, 𝑀𝑅𝑆 = βˆ’π‘„π‘ƒ

𝑄𝑀

Page 76: 170902 entrepreneurial economics1

So, where is the optimal? (Max U under the badget)

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

𝑄

𝑄

12

4

2

2 4 93

π‘ˆ = 𝑄𝑀𝑄𝑃

2. How to calculate MRS𝑀𝑅𝑆 = tangent

So, 𝑀𝑅𝑆 = βˆ’π‘„π‘ƒ

𝑄𝑀, π‘Žπ‘›π‘‘ π‘‘π‘Žπ‘›π‘”π‘’π‘›π‘‘ = βˆ’

Pπ‘€π‘œπ‘£π‘–π‘’

Ppizza= βˆ’

P𝑋

PY

therefore, βˆ’π‘„π‘ƒ

𝑄𝑀= βˆ’

P𝑀

𝑃𝑃= βˆ’

1

2↔ 2𝑄𝑃 = 𝑄𝑀

Using above, the equation (π‘Ž) should be16π‘„π‘π‘–π‘§π‘§π‘Ž + 16π‘„π‘π‘–π‘§π‘§π‘Ž = $96

π‘†π‘œπ‘™π‘£π‘’ 𝑖𝑑 π‘Žπ‘›π‘‘ 𝑄𝑝 = 3, 𝑄𝑀 = 6

π‘ˆ = 𝑄𝑀𝑄𝑃 = 18

Page 77: 170902 entrepreneurial economics1

http://www.wolframalpha.com/input/?i=3Dplot+Z%3Dsqrt(XY),+X%3D0+to+10,+Y%3D0+to+10

Indifference curve in the 3D format

[advance]

π‘ˆ = 𝑄𝑀𝑄𝑃 = 4

Page 78: 170902 entrepreneurial economics1

Income effect and Substitution effect

Page 79: 170902 entrepreneurial economics1

Let us think in Qualitative first.

You like Cake very much.But cake cost you $5 each and Sweet pastry cost you $2 each.

So, everyday you eat(morning) 1 pastry $2(lunch) 2 pastry $4(dinner) 1 cake $5

In total, you spend $11 every day.

Cakes$5

Pastry$2

Page 80: 170902 entrepreneurial economics1

Let us think in Qualitative first.

One day, you thought you are theLuckiest girl in the world!Cakes are sold just $1 today!

So, decide(morning) 1 cake $1(lunch) 2 cake $2(dinner) 1 cake $1

This is substitution effect.You like more cake than Pastry.

Cakes$5↓

$1

Pastry$2

Page 81: 170902 entrepreneurial economics1

Let us think in Qualitative first.

In the end of the day,You calculate.

(morning) 1 cake $1(lunch) 2 cake $2(dinner) 1 cake $1

In total just $4 you use.While everyday spend $11

So, you decide to buy more cakeBefore you sleep.The demand increase.This is Income Effect.

Cakes$5↓

$1

Pastry$2

Page 82: 170902 entrepreneurial economics1

Remember Budget constrain

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘šπ‘œπ‘£π‘–π‘’

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

16π‘„π‘π‘–π‘§π‘§π‘Ž + 8π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

6

- Pizza($16 each) and Movie($8 each)- imagine, the Movie become cheaper ($6 each)

1 How your budget constrain change?2 What is your newequation?

16

Page 83: 170902 entrepreneurial economics1

Remember Budget constrain

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

It become like this. So what?

16π‘„π‘šπ‘œπ‘£π‘–π‘’

16π‘„π‘π‘–π‘§π‘§π‘Ž + 6π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

Page 84: 170902 entrepreneurial economics1

Remember Budget constrain

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

It become like this.

This difference is Total Effect.The demand of Movie increase.And the demand of Pizza also increase.Let’s break down in into income/substitution.

16π‘„π‘šπ‘œπ‘£π‘–π‘’

16π‘„π‘π‘–π‘§π‘§π‘Ž + 6π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96𝐴

𝐡

Page 85: 170902 entrepreneurial economics1

Move the new Budget constrain to tangent of

Indifference curve.

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

16π‘„π‘šπ‘œπ‘£π‘–π‘’

16π‘„π‘π‘–π‘§π‘§π‘Ž + 6π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

We would like to parallel translate thisRed Line, a new budget constrain, to aTangent of indifferent curve before.

If we do so, we got point 𝐢on indifferent curve before.The change point A to 𝐢 implies the effect caused byβ€œthe change of price ratio : from ($16,$8) to ($16, $6)”

𝐴

𝐡

𝐢

Page 86: 170902 entrepreneurial economics1

Move the new Budget constrain to tangent of

Indifference curve.

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

16π‘„π‘šπ‘œπ‘£π‘–π‘’

16π‘„π‘π‘–π‘§π‘§π‘Ž + 6π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

This is called π‘†π‘’π‘π‘ π‘‘π‘–π‘‘π‘’π‘‘π‘–π‘œπ‘› 𝐸𝑓𝑓𝑒𝑐𝑑Because, the change of movie price cause theChange of ratio of Pizza and Movie.And the new tangent on the same indifference curveas before, represent the effect of change ratio only.

Page 87: 170902 entrepreneurial economics1

Move the new Budget constrain to tangent of

Indifference curve.

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

16π‘„π‘šπ‘œπ‘£π‘–π‘’

16π‘„π‘π‘–π‘§π‘§π‘Ž + 6π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

Remember this π‘†π‘’π‘π‘ π‘‘π‘–π‘‘π‘’π‘‘π‘–π‘œπ‘› 𝐸𝑓𝑓𝑒𝑐𝑑 works negative for Pizza.

Decreasing the cost of movie means Pizza became relatively expensive.So, the effect works negative in general.

Page 88: 170902 entrepreneurial economics1

Remember Budget constrain

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

This is called πΌπ‘›π‘π‘œπ‘šπ‘’ 𝐸𝑓𝑓𝑒𝑐𝑑

The change (cheaper) of movie priceMakes you richer (you can buy more goodsby same budget).This is also change your demand.

16π‘„π‘šπ‘œπ‘£π‘–π‘’

16π‘„π‘π‘–π‘§π‘§π‘Ž + 6π‘„π‘šπ‘œπ‘£π‘–π‘’ = $96

Page 89: 170902 entrepreneurial economics1

Summary of Income Effect and substitution effect

π‘€π‘œπ‘£π‘–π‘’

π‘ƒπ‘–π‘§π‘§π‘Ž

π‘„π‘π‘–π‘§π‘§π‘Ž

12

4

2

2 4 93

6

SubstitutionEffect

IncomeEffect

Total Effect

Pizza

Pizza became Relatively expensive.

So decrease.

Consumers become Richer

So the amount of consumption

increase

Depends onSub/income

effect.

Movie(Cheaper)

Movie became Relatively

cheap.So increase.

DemandIncrease.

Page 90: 170902 entrepreneurial economics1

Want to learn more?

β€’ See Entrepreneurial Economics #2!

β€’ https://www.slideshare.net/ryouen/170925-entrepreneurial-economics2

https://www.slideshare.net/ryouen/170925-entrepreneurial-economics2
Page 91: 170902 entrepreneurial economics1

ReferenceNUS MBA BMA5001 Lecture Note 2, 3

Principles of Microeconomics (Mankiw's Principles of Economics)

MITx: 14.100x Microeconomics

https://en.wikiquote.org/wiki/Greg_Mankiw#Ch._1._Ten_Principles_of_Economics

https://courses.edx.org/courses/course-v1:MITx+14.100x+3T2016/course/
https://en.wikiquote.org/wiki/Greg_Mankiw#Ch._1._Ten_Principles_of_Economics

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Entrepreneurial Human Capital and Entrepreneurial Dynamicsconference.iza.org/conference_files/EntreRes2012/toth_r7741.pdfΒ Β· Entrepreneurial Human Capital and Entrepreneurial Dynamics: Documents
Entrepreneurial interest and entrepreneurial competence
Entrepreneurial interest and entrepreneurial competence Documents
PDF MTM1 - UPVM IngenierΓ­a Industrial 170902 Β· PDF file˘ Λ‡Λ† Λ™ ˝˛ ˚ ˜˜ ˜ ˜ ˜ !Λ‡Λœ ˜" # $ % Λ‡ " ˘ Λ‡ ... ˘ Λ‡ Λ† Λ™ ˝ Λ‡Λ›Λ† Λ› ΛšΛ›
PDF MTM1 - UPVM IngenierΓ­a Industrial 170902 Β· PDF file˘ Λ‡Λ† Λ™ ˝˛ ˚ ˜˜ ˜ ˜ ˜ !Λ‡Λœ ˜" # $ % Λ‡ " ˘ Λ‡ ... ˘ Λ‡ Λ† Λ™ ˝ Λ‡Λ›Λ† Λ› ΛšΛ› Documents
Entrepreneurial Motivation linking Entrepreneurial Motivation, …hrmars.com/admin/pics/664.pdfΒ Β· 2015-06-13Β Β· Entrepreneurial Motivation linking Entrepreneurial Motivation, related
Entrepreneurial Motivation linking Entrepreneurial Motivation, …hrmars.com/admin/pics/664.pdfΒ Β· 2015-06-13Β Β· Entrepreneurial Motivation linking Entrepreneurial Motivation, related Documents
Entrepreneurial networks, entrepreneurial orientation, and
Entrepreneurial networks, entrepreneurial orientation, and Documents
Entrepreneurial behavior at people with visual ...reaser.eu/.../12_Rev3_Gimbuta_EntrepreneurialBehav.pdfΒ Β· entrepreneurial behaviour at ... entrepreneurial behavior, ... generated
Entrepreneurial behavior at people with visual ...reaser.eu/.../12_Rev3_Gimbuta_EntrepreneurialBehav.pdfΒ Β· entrepreneurial behaviour at ... entrepreneurial behavior, ... generated Documents
Entrepreneurial Strategies for the Emerging VentureΒ Β· Entrepreneurial Strategies for the Emerging Venture ... Table 1.1 Entrepreneurial Stages: ... which sees the entrepreneurial
Entrepreneurial Strategies for the Emerging VentureΒ Β· Entrepreneurial Strategies for the Emerging Venture ... Table 1.1 Entrepreneurial Stages: ... which sees the entrepreneurial Documents
ECON 101 Introduction to Economics1 - WordPress.comΒ Β· ECON 101 Introduction to Economics1 ... –Understand short and long run profitability of the competitive firm. ... β€’Exit
ECON 101 Introduction to Economics1 - WordPress.comΒ Β· ECON 101 Introduction to Economics1 ... –Understand short and long run profitability of the competitive firm. ... β€’Exit Documents
Entrepreneurial intention: antecedents to entrepreneurial behavior … · RESEARCH Open Access Entrepreneurial intention: antecedents to entrepreneurial behavior in the U.S.A. and
Entrepreneurial intention: antecedents to entrepreneurial behavior … · RESEARCH Open Access Entrepreneurial intention: antecedents to entrepreneurial behavior in the U.S.A. and Documents
H200910 - Entrepreneurial exit and entrepreneurial engagementondernemerschap.panteia.nl/pdf-ez/h200910.pdfΒ Β· 3 Entrepreneurial exit and entrepreneurial engagement Jolanda Hessels
H200910 - Entrepreneurial exit and entrepreneurial engagementondernemerschap.panteia.nl/pdf-ez/h200910.pdfΒ Β· 3 Entrepreneurial exit and entrepreneurial engagement Jolanda Hessels Documents
Entrepreneurial Progress: Climbing the Entrepreneurial
Entrepreneurial Progress: Climbing the Entrepreneurial Documents
Law and Economics1-6-050501 -
Law and Economics1-6-050501 - Documents