Micro Economics all Units

Scarcity

When goods and services are limitted

Opportunity Cost

Value of the next best thing not chosen

Ceterebis Paribus

other things equal

Positive Economics

"the way the world is"

Normative Economics

"the way the world is supposed to be"

Comparative Advantage

the ability to produce a good at the lowest opportunity cost

Absolute Advantage

The ability to produce more goods than someone else

Law of Demand

As price rises, quantity demanded falls

Market Demand

the horizontal sum of all consumers individual demand curves

Market Supply

The Horizontal sum of Individual firms supply curve

Things that can move demand curve

1. Changes of prices of substitutes or complements

2. Changes in expectations

3. Changes in tastes and preferences

4. Changes in income

5. Changes in the number of consumers

6. Weather and natural disasters

7. Changes in taxes, subsidies, and regulations

8. Changes in regulation

Substitudes

goods that are consumed in place of eachother

Complements

goods that are consumed together

Normal Goods

ppl buy more when income increases

Inferior Goods

Ppl buy less when income increases

Law of Supply

as price rises, quantity supplied rises

Things that can move supply curve

1. Changes in Input prices

2. Changes in # of producers

3. Changes in technology

4. Changes in taxes, subsidies, and regulation

5. Natural disasters and weather

6. Changes in expectations

7. Changes in prices of other products that could be produced

Surplus

more supply than quantity demanded

Shortage

more demand than supply

Price Ceilings

Maximum legal prices

Effects of price ceilings

1. Lower quality

2. Black Markets

3. Discrimination

4. Failure to allocate goods to their highest valued uses

5. Time wasted in lines

non-binding price ceiling

does not change anything unless price reaches the ceiling

Price floors

minimum legal price

Effects of Price Floors

1. Increases in quality

2. Discrimination by buyers

3. Black Markets

4. Firms produce less

Inelastic Demand

a small change in quantity demanded when price increases

Arc-own Price elasticity of Demand (midpoint formula)

| Qnew-Qold / (Qnew + Qold)/2 |

---

| Pnew-Pold / (Pnew+Pold)/2 |

if E > 1, elastic demand

if E = 1, unit elastic demand

if E < 1, inelastic demand

Arc-Cross Price Elasticity of Demand

Qxnew-Qxold / (Qxnew + Qxold)/2

---

Pynew-Pyold / (Pynew+Pyold)/2

e > 0, substitutes

e = 0, unrelated

e < 0, compliments

Arc Price Elasticity of Supply

| Qnew-Qold / (Qnew + Qold)/2 |

---

| Pnew-Pold / (Pnew+Pold)/2 |

e > 0, elastic supply

e = 0, unit elastic

e < 0, inelastic supply

Diminishing Marginal Utility

As consumers consume additional units, the value or benefit of those units fall

Consumer surplus

The difference between what a consumer is willing to pay and what they actually pay

Producer Surplus

the difference between the lowest price a supplier would be willing to accept for a good or service and the price it actually receives

Economic surplus

the sum of consumer and producer surplus

Deadweight Loss

the fall in total surplus that results from a market distortion, such as a tax

The Laffer Curve

Allocative Efficiency

there is no rellocation of goods and resources that has benefits greater than costs

The laffer curve

Pushing the tax rate pass some point will reduce potential gains

Factors or Production

1. Land

2. Labor

3. Capital

4. Entreprenourship

Short run

Period in which some inputs are fixed

Long run

period during which all inputs are variables

Marginal product

the additional output produced when ,ore input is used

MPl = deltaQ / delta L

Average Product

APl = q/L

Specialization

each worker focuses on a specific task

Law of diminishing returns

when more variable input is added, while some inputs are fixed, marginal product will eventually fall

Explicit Costs (accounting costs)

costs paid by a business that are viewable on accounting statements

Implicit Costs

the costs of using the businesses resources one way, rather than next best way

Fixed costs

the cost of fixed inputs

Variable costs

the cost of variable inputs

Sunk costs

costs that have already been incurred and cannot be recovered. Should not affect decisionsA

ATC

TC/q or AFC + AVC

TC

FC + VC

AVC

VC / q

AFC

FC / q

Marginal Cost

delta TC / delta q or delta VC / delta q

Economies of Scale

as firms move to larger fixed inputs, average costs fall

Diseconomies of scale

as firms move to larger fixed inputs, average costs rise

TR

price x quantity

Profit

TR - TC

Positive Economic Profit

the firm is doing better than it would be w/ the next best opportunity

Negative economic profit

the firm is doing worse than it would w/ the next best opportunity

Zero economic profit

The firm is doing the same as it would w/ the next best opportunity

Perfect competition

assumptions

1. Homogenus goods

2. Many buyers and sellers

3. Free entry

Model - two graphs, the firm and the market

Zero economic profit in the long run

Efficient

Price takers

Rule for maximizing profit

MC = MR

Shut down rule

if you get enough revenue to cover your variable costs you should keep producing until you can get rid of your fixed inputs and exit

Increasing cost industry

• an industry in which as firms enter and industry output grows, costs increase

• An industry in which as firms exit and industry output falls, costs decrease

Constant cost industry

• an industry in which as firms enter and industry output grows, costs stay the same

• An industry in which as firms exit and industry output falls, costs stay the same

Decreasing cost Industry

• as firms enter and industry output rises, costs fall

• as firms exit and industry output falls, costs rise

Long Run Supply

the relationship b/w price and quantity supplied when firms can enter or exit an industry

Monopoly

assumptions

1. One firm

2. High barriers to entry

Model - one graph with more inelastic demand

Positive economic profit in the long run

Not efficient

Price searchers

Why would monopolies occur?

1. Legal barriers

2. Control of a key resource

3. Network effects

4. Natural monopoly

Market Failure

When individuals pursuing their rational self-interest results in an outcome that is inneficient

Static inefficiency

the dead-weight loss from high monopoly prices

Dynamic inefficiency

patents encourage creation of useful ideas more quickly

Solution 1: Antitrust Law

Law that restricts mergers and acquisitions or breaks up harmful monopolies

Solution 2: Marginal Cost Pricing

Gov’t forces monopoly to sell @ efficiency

Problems:

• information is scarce

• Misinformation is plentiful

Solution 3: ATC Pricing

impose zero economic profit

Problems:

• its not efficient

• Firms that are guaranteed zero profit face perverse incentives

Price discrimination

firms w/ the ability to raise their price w/o losing all their customers might be able to charge different consumers different prices, taking advantage of differences in their own price elasticity of demand

Price discrimination only works if

1. Different consumers have different own-price elasticity of demand

2. Consumers cannot easily resell products

3. Firms face downward sloping demand

First Degree Price Discrimination: The amazing telepathic monopolist

1. Selling to every consumer at exactly the price they are willing to buy it at

Second Degree Price Discrimination

Quantity based pricing

1. Each unit gets a different price

ex. Loyalty cards, BOGO deals

Third Degree price discrimination

Charging different prices to people with different observable characteristics

ex. old, young, students, etc.

Monopolistic Competition

Assumptions

1. Many firms and many consumers

2. Differentiated products

3. Law barriers to entry

Model

1. One graph with elastic demand

Zero economic profit in the long run

Maybe efficient

Price Searchers

Oligopoly

Assumptions

1. There are only a few firms

2. High Barriers to entry (not too high)

3. Not producing identical goods (might be)

Model - No graph

probably positive economic profit

probably not efficient

Price Searchers

Two fundamental temptations with oligopoly

1. Collude (cartelize)

   1. Act like a big monopoly, reducing output and raising prices to increase profit

2. Cheat

   1. Each individual firm earns larger profits if it increases output in violation of the cartel agreement

Externalities

When the actions of buyers and sellers have spillover effects on third parties

Negative Externalities

The spillover effect is harmful

ex. Pollution

Command and Control

The government tells firms how to reduce pollution

Digourian Taxes

Impose a tax equal to marginal damage

Cap and Trade

Government sells a max level of pollution and sells tradeable permits to pollute

Positive Externalities

A beneficial spillover effect falls on a third party

Example: Vaccinations, basic education

Public Goods

• Nonrivalrous

• Nonexclude

• Free riders

Ex. National Defense, Asteroid Defense

Non rivalrous

One persons consumption doesn’t reduce others

Non excludable

people who do not pay cannot be excluded

Free riders

People will consume without paying, making production unprofitable

Solutions to public goods

1. Advertising, only works for some public goods

2. Taxes on government production