Key Formulas in A Level 9708 Micro Economics and Macro Economics

These are the are the Formulas for A Level Economics 9708. Go through them to be fully prepared.!

Key Formulas in Micro-Economics

1. The demand function captures the effect of all these factors on demand for a good.
   Demand function: QDx=f(Px,I,Py,…) … (Equation 1)
   Equation 1 is read as “the quantity demanded of Good X (QDX) depends on the price of
   Good X (PX), consumers’ incomes (I) and the price of Good Y (PY), etc.”Supply Function
2. The supply function can be expressed as: Supply function: QSx=f(Px,W,…)

   
   
   

Own price elasticity of demand

3. The own-price elasticity of demand is calculated as: EDPx=%ΔQDx%ΔPx
   If we express the percentage change in X as the change in X divided by the value of X,
   the equation can be expanded to the following form: EDPx=%ΔQDx%ΔPx=ΔQDx⁄ΔQDxΔPx⁄Px=(ΔQDxΔPx)(PxQDx)Arc Elasticity
4. Ep=% change in quantity demanded% change in price=%ΔQd%ΔP =(Q0−Q1)(Q0+Q1)∕2×100P0−P1)(P0+P1)∕2×100

Income Elasticity

3. Income elasticity of demand measures the responsiveness of demand for a particular good to a change in income, holding all other things constant. ED1=%ΔQDx%ΔI=ΔQDx⁄QDxΔII=(ΔQDxΔI)(IQDx) EI=% change in quantity demanded% change in income $

Cross Elasticity of Demand

6. Cross elasticity of demand measures the responsiveness of demand for a particular good to a change in price of another good, holding all other things constant. EDPy=%ΔQDx%ΔPy=ΔQDx⁄QDxΔPy⁄Py=(ΔQDxΔPy)(PYQDx)
   EC=% change in quantity demanded%change in price of substitute or complementUtility Function
7. In general a utility function can be represented as: U=f(Qx1,Qx2,…,Qxn)

Accounting Profit

8. Accounting profit (loss) = Total revenue – Total accounting

Economic Profit

9. Economic profit (also known as abnormal profit or supernormal profit) is calculated as:

Economic profit = Total revenue – Total economic costs Economic profit = Total revenue – (Explicit costs + Implicit costs)



Economic profit = Accounting profit – Total implicit opportunity costs

10. Average Total Cost (ATC) = Total Cost / Q (Output is quantity produced or ‘Q’)
11. Average Variable Cost (AVC) = Total Variable Cost / QAverage Fixed Cost (AFC) = ATC – AVC
12. Total Cost (TC) = (AVC + AFC) X Output (Which is Q)
13. Total Variable Cost (TVC) = AVC X Output
14. Total Fixed Cost (TFC) = TC – TVC
15. Marginal Cost (MC) = Change in Total Costs / Change in Output
16. Marginal Product (MP) = Change in Total Product / Change in Variable Factor
17. Marginal Revenue (MR) = Change in Total Revenue / Change in Q
18. Average Product (AP) = TP / Variable Factor
19. Total Revenue (TR) = Price X Quantity
20. Average Revenue (AR) = TR / Output
21. Total Product (TP) = AP X Variable Factor
22. Economic Profit = TR – TC > 0
23. A Loss = TR – TC < 0
24. Break Even Point = AR = ATC
25. Profit Maximizing Condition = MR = MC
26. Explicit Costs = Payments to non-owners of the firm for the resources they supply.
27. Normal profit = Accounting profit – Economic profit Total, Average & Marginal Revenue

28.  Revenue 29.  Calculation 30.   Total revenue (TR) 31. Price times quantity (P × Q), or the sum of individual units sold times their respective prices; ∑(Pi × Qi) 32. Average revenue (AR) 33.   Total revenue divided by quantity; (TR / Q) 34. Marginal revenue (MR) 35. Change in total revenue divided by change in quantity; (ΔTR / ΔQ)

 

Total, Average, Marginal, Fixed & Variable Cost

Costs	Calculation
36.  Total fixed cost (TFC)	Sum of all fixed expenses; here defined to include all opportunity costs
37.   Total variable cost (TVC)	Sum of all variable expenses, or per unit variable cost

 

	times quantity; (per unit VC × Q)
38.   Total costs (TC)	Total fixed cost plus total variable cost; (TFC + TVC)
39.   Average fixed cost (AFC )	Total fixed cost divided by quantity; (TFC / Q)
40. Average variable cost (AVC)	Total variable cost divided by quantity; (TVC / Q)
41.   Average total cost (ATC)	Total cost divided by quantity; (TC / Q) or (AFC + AVC)
42.   Marginal cost (MC)	Change in total cost divided by change in quantity; (ΔTC / ΔQ)

 

  Marginal Revenue Product

43. MRP of labor = Change in total revenue / Change in quantity of labor. For a firm in perfect competition, MRP of labor equals the MP of the last unit of labor times the price of the output

MRP = Marginal product * Product price
A profit-maximizing firm will hire more labor until: MRPLabor=PriceLabor
Profits are maximized when: MRP1Price of input 1=…=MRPnPrice of input n

Unit Labour Cost is calculated as:

44. ULC=W∕O
    Where:= Output per hour per worker
    W= Total labor compensation per hour per worker

Marginal Revenue

45. The relationship between MR and price elasticity can be expressed as: MR = P[1–(1EP)]
    In a monopoly, MC = MR so: P[1–(1∕EP)] = MC $

Key Formulas of Macro Economics

1. GDP = C + I + G + Xn: The expenditure approach to measuring GDP
2. GDP = W + I + R + P: The income approach to measuring GDP
3. Calculating nominal: The quantity of various goods produced in a nation times their current prices, added
4. GDP deflator: A price index used to adjust nominal GDP to arrive at real GDP. Called the ‘deflator’ because nominal GDP will usually over-state the value of a nation’s output if there has been inflation.
5. Real GDP: Nominal GDP/GDP Deflator x100
6. GDP Growth rate: Current year’s GDP-Last year GDP/ Last year’s GDP x100
7. The inflation rate via the CPI: This year’s CPI- Last year’s CPI/ Last year’s CPI x100
8. Real interest rate = nominal interest rate – inflation rate.
9. Unemployment Rate = Number of unemployed/Number in the labour force x 100
10. Money Multiplier = 1/RRR
11. Quantity theory of money: MV = PY – a moneterist’s view which explains how changes in the money supply will affect the price level assuming the velocity of money and the level of output are fixed
12. MPC + MPS = 1. Households may consume or save with any change in their income.
13. Spending Multiplier = 1/1-MPC or 1/MPC
14. Tax multiplier = -MPCMPS. It tells you how much total spending will result from an initial change in the level of taxation. It is negative because when taxes decrease, spending increases, and vis versa. The tax multiplier will always be smaller than the spending multiplier.

15. Gross Domestic Product

GDP = [(quantity of A X price of A) + (quantity of B X price of B) + … + (quantity of N X price of N)] for every good and service produced within the country   GDP = (national income) = Y = (C + I + G + NX)

16. GDP Deflator

GDP deflator = [(nominal GDP) / (real GDP)] – 1

17. GDP Per Capita

GDP per capita = (GDP) / (population)

 

Nominal GDP

Nominal GDP refers to the value of goods and services included in GDPmeasured at current prices. Nominal GDP = Quantity produced in Year t× Prices in Year t

GDP Deflator

19. GDP deflator = Value of current year output at current year pricesValue of current year output at base year prices×100

GDP deflator = Nominal GDP Real GDP×100

The Components of GDP

20. Based on the expenditure approach, GDP may be calculated as: GDP = C + I + G + (X × M)

C = Consumer spending on final goods and services

I = Gross private domestic investment, which includes business investment in capital goods (e.g. plant and equipment) and changes in inventory (inventory investment)

G = Government spending on final goods and services X = Exports

M = Imports

GDP

21. National income + Capital consumption allowance + Statistical discrepancy

The capital consumption allowance (CCA)

22. accounts for the wear and tear or depreciation that occurs in capital stock during the production process. It represents the amount that must be reinvested by the company in the business to maintain current productivity levels. You should think of profits + CCA as the amount earned by

Solow (neoclassical) growth model

23. Y=AF(L,K) Where:

Y = Aggregate output L = Quantity of labor K = Quantity of capital

A = Technological knowledge or total factor productivity (TFP)

Growth accounting equation

24. Growth in potential GDP = Growth in technology + WL(Growth in labor) + WK(Growth in capital)

Growth in per capita potential GDP

25. Growth in technology +WK(Growth in capital-labor ratio)

Measures of Sustainable Growth

26. Labor productivity = Real GDP/ Aggregate hours
27. Potential GDP = Aggregate hours × Labor productivity
28. This equation can be expressed in terms of growth rates as:

29. Potential GDP growth rate =

30. Long-term growth rate of labor force + Long-term labor productivity growth rate

Required Reserve Ratio

31. Required reserve ratio = Required reserves / Total deposits
32. Money multiplier = 1/ (Reserve requirement)
33. The Fischer effect states that the nominal interest rate (RN) reflects the real interest rate (RR) and the expected rate of inflation (∏e).

    
    
    

34. RN=RR+∏e

The Fiscal Multiplier

35. Ignoring taxes, the multiplier can also be calculated as: 1/(1-MPC) = 1/(1-0.9) = 10

Assuming taxes, the multiplier can also be calculated as: 1[1−MPC(1−t)]

Balance of Payment Components

36. A country’s balance of payments is composed of three main
37. The current account balance largely reflects trade in goods and
38. The capital account balance mainly consists of capital transfers and net sales of
    non-produced, non-financial assets.

39. The financial account measures net capital flows based on sales and purchases of domestic and foreign financial assets.
    
    
    

40. Real exchange rate=DC∕FCSDC∕FC×(PFC∕PDC) where:

SDC∕FC = Nominal spot exchange rate

PFC = Foreign price level quoted in terms of the foreign currency PDC = Domestic price level quoted in terms of the domestic currency

41. FDC∕FC=1SFC∕DC×(1+rDC)(1+rFC) or FDC∕FC=SDC∕FC×(1+rDC)(1+rFC) Forward rates are sometimes interpreted as expected future spot
42. Ft=St+1
43. 43.(St+1)S−1=Δ%S(DC∕FC)t+1=(rDC+rFC)(1+rFC) $

Marshall-Lerner condition

44. ϖX εX + ϖM (εM – 1) > 0
45. Where: ϖX = Share of exports in total trade ϖM = Share of imports in total trade
    εX = Price elasticity of demand for exports εM = Price elasticity of demand for imports