Microeconomics

Perfect Competition

1. Many Producers

2. Price Takers

3. All Products Identical

4. Easy Entry and Exit

5. Perfectly Elastic Demand

Oligopoly

1. Few Firms

2. Price Makers

3. Differentiated and Identical Products

4. Barriers to Entry

5. Downward Sloping Demand Curve

Monopoly

1. 1 Firm

2. Price Maker

3. 1 Product

4. Barriers to Entry

5. Downward Sloping Demand Curve

Monopolistic Competition

1. Many Firms

2. Price Maker

3. Differentiated Products

4. Easy Entry and Exit

5. Downward Sloping Demand Curve

Loss Minimizing

P<ATC (but over AVC)

Shut Down

P<ATC (UNDER AVC)

Negative Externality

Supply Side Failure

More Supply Hurts Society

Positive Externality

Demand Side Failure

More Demand Helps Society

Increasing Economies to Scale

ATC is Downward Sloping

Constand Economies to Scale

ATC is Flat

Diseconomies to Scale

ATC is Inc

Accounting Profit

Total Revenue - Explicit Costs

Economic Profit

Total Revenue - Explicit Costs - Implicit Costs

Dominant Strategy

Find what’s always your best option

Nash Equilibrium

The point where both dominant Strategies and equal or the point where you know exactly what both players would choose

Collusion Difficulties

1. Level of Concentration

2. Complex Pricing

3. Differences in Intersts

4. High Bargaining Power of Buyers

Income Tax

Differences between ranges and then multiply by tax rate

Off Shoring (Foreign Direct Investment)

Moving Company Internationally for Cheaper Production

Outsourcing (Foreign Direct Investment)

Moving a Part of Production Internationally (They Create and Send Back)

• Hire External Company

• Investing In Stocks of Foreign Firm

Horizontal (FDI)

All Production is Foreign (offshore or outsource)

Vertical (FDI)

Different Stages of Supply Chain International

• Backward (upsteam): inputs from foreign country

• Forward (downstream): buying firms that create the output

Absolute Advantage

Intercept Comparison

Comparative Advantage

Opportunity Cost (Lower has Comp Advantage)

• OC x = Max Y/Max X

Imports

Below Autarky Price + Quant

Exports

Above Autarky Price + Quant

Sunk Costs

1. Consider Irrelevant Costs

2. Ignore Relevant Costs
   - Money that already is gone and can’t be recovered (ignore it and think about future costs)

Concerns about Fairness (1)

Helping Others in Need

Nonmonetary Reward (2)

Experiences that feel good (traveling or quality time with loved ones)

Bounded Rationality (3)

“Good Enough Choice” based on other factors (like tired)

Risk Aversion (4)

Sacrifice some Economic Profit to Avoid Potential Loss

8 Mistakes in Economic Decision Making (1-4)

1. Misperceptions of Opportunity Costs

2. 2. Overconfidence

3. 3. Unrealistic Expectations

4. Counting Dollars Unequally (Spending more with credit than cash)

8 Mistakes in Economic Decision Making (5-8)

5. Loss Aversion (Losing Makes People Give Up)

6. Framing Bias ($.99 Looks Better than $1)

7. FOMO

8. Status Quo Bias (Avoid Making A Decision)

Types of Goods (x4)

Private Goods: R, E (Any Product)

Public Goods: NR, NE (Sewer System)

Common Resources: NE, R (Fishing in Ocean)

Artificially Scarce Goods: E, NR (Online Movies on Amazon)

Cost-Benefit Analysis

Keep Producing till MC>MB

How Much Public Good Should be Provided

MB=MC

Marginal

Look at Slopes (tables + graphs)

Gini Coefficient

Higher Coefficient => less income equality

Adverse Selection

One Party has more Information than the Other

Death Spiral

People Leave Insurance Pool Making it More Expensive and Everyone Eventually Leaves

Optimal Consumption Bundle

Any Point on the Line is Optimized (like PPF)

Marginal Benefit is Equal to Marginal Cost

VMPl=W at profit OR

P x MPl = Wage

VMPL

P x MPk

VMPL (rent)

VMPK = r

MP (capital)

MPk = aK^a-1L^b

MP (Labor)

bK^aL^b-1

Average Products

APk = (K^a x L^b)/K

OR

APl = (K^aL^b)/L

Productivity

F(K,L) = K^aL^b

Compensating Differentials

Dangerous Jobs Pay More

Efficiency Wages

Paying higher wages to get the best talent (motivation)

Substitution Effect

Higher Wages => Work More

• Positive Slope

• 40 → 50 Hours

Income Effect

Higher Wages => Higher Leisure (normal good)

• Negative Slope

• 40 → 30 Hours

Private Information

Information some people have but others dont

Asymmetric Information

One Party Has More Information Over the Other (adverse selection)

Mitigating Adverse Selection

• Screening - less informed gathers info

• Signaling - revealing information to less informed party

• Reputation (disperses misinformation in long term)

Moral Hazard

Altering Behavior After Deal Signed

• Not Locking Doors if you have Insurance

Solutions to Moral Hazard

• Deductibles - insurance pays for most but not all and takes part back