Micro Key Concepts

Opportunity Cost

The amount given up, the second best option

on PPC

Productively Efficient

Point inside PPC

inneficient

Point outside PPC

currently unattainable

Absolute Advantage

Can produce more output with the same resources

Comparative Advantage

Can produce one output with a lower opportunity cost

Mutualy beneficial trade

trade must be between the two producers’ opportunity costs

Keep producing/hiring when

MB >=MC

Law of Demand

Price increase, Quantity decrease. Vice Versa

Shifts along demand curve

changes in the good’s own price

Shifts of demand curve

T - tastes
R - related goods (supplements/complements)
I - income (more money = more purchasing power, but also depends on the type of good: inferior/normal)
B - buyers (more buyers = more demand)
E - expectations (if you expect price go up, demand will be higher right now)

Normal good

Income increase, quantity demanded increase

Inferior good

Income increase, quantity demanded decrease

Substitutes

More substitutes = more elastic
Substitutes price go up = Quantity demanded of our good increase

Complements

Complement price go up = quantity demanded of our good decrease

Supply shifts along the curve

changes in priceS

Shifts in Supply

R - changes in input prices (higher input cost = less supply)
O - Other goods (firms switching production)
T - taxes/subsidies (taxes = supply shift left, subsidies = supply shift right)
T - technology ( more technology = more supply)
E - expectations
N - number of sellers

Per unit tax

Input costs are higher = supply down

Subsidy

input costs are less = supply up

Shortage

Qd > Qs

Excess

Qd < Qs

Elasticity Formula

% change in quantity demanded / % change in price

Ed > 1

elastic

Ed < 1

Inelastic

Ed = 1

Unit elastic

Ed = 0

Perfectly inelastic

Ed = Infinity

Perfectly Elastic

Total Revenue Formula

TR = P * Q

Change in total revenue when Elastic

TR decrease when Price increases

Change in total revenue when inelastic

TR increases when Price decreases

Change in total revenue when Unit elastic

No changes when Price changes

Price Elasticity of Supply

Es = % change in quantity supplied / % change in price

When is supply more elastic (LR / SR)

Long run becuase firms can adjust

Cross Price Elasticity fo Demand Formula

Exy = % change in Qd of good X/ % change in price of Good y

Cross price elasticity: Exy > 0

Substitutes

Cross price elasticity: Exy < 0

Complements

Cross price elasticity: Exy = 0

unrelated

Income Elasticity of Demand Formula

Ei = % change in Quantity demanded/% change in income

Income Elasticity of Demand: Ei > 0

Normal Good

Income Elasticity of Demand: Ei < 0

Inferior good

Income Elasticity of Demand: Ei > 1

Luxury Good

Income Elasticity of Demand: 0 < Ei < 1

Necessity

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Area under demand and above price

Producer Surplus

The difference between what sellers receive and the minimum price they were willing to accept.

Above Supply and below price

Total Surplus

CS + PS

When is a market efficient

when TS is maximized

Allocative Efficiency

MB = MC

Dead weight loss

total surplus lost by producing too much/too little

Price Ceiling

Only binding if it is below Equilibrium price

creates a shortage

Price Floor

Only binding if it is above equilibrium price

creates an excess

Per unit ta & Surplus

Whichever side (consumer/producer) is more inelastic pays more of the tax burden.
if Qd is perfectly elastic, producers pay all. if Qd is perfectly inelastic, consumers pay all.

Government Revenue on a graph

Left of the Dwl. rectangle between CS and PS

The price above which firms can incur economic profit

minATC

Shut down when

P < AVC

Productive Efficiency

P = minATC

Total profit maximization

TP = TR - TC. maximized when MR = MC

Total Revenue Maximization

TR = P * Q, maximized when MR = 0

Total surplus maximization

TS = CS + PS
maximized when P = MC

Monopolistic competition Price & ATC

P = ATC (not minATC)

Hiring rule for Labor

hire more while MRP >= Wage

Source of Income Inequality

Ability, Human Capital, Discrimination, preferencess, market power and luckGini

Gini Ratio

Area between Income equality and the lorzne curve / total area

Market failure

when its not allocative efficient. P ≠ MC

Hiring in monopsony

MC = MRP

Hiring in Perfectly Competitive Labor Market

D = S aka MRP = MFC = wage

Dead weight loss triangle points at?

socially optimal

Price of public goods

P = MC = 0