ECO105 Micro

Normative Economics

Describes how people/the market should behave\####Positive Economics

2. Unlimited wants, limited resources

3. Decision-making\####Scarcity Principle

Unlimited wants and limited resources (having more of one thing means having less of another i.e. tradeoffs)\####Cost-Benefit Analysis

2. Income (normal vs. inferior goods)

3. Preferences

4. Population of buyers

5. Expectations i.e. beliefs about the future\####Supply shift causes

1. Changes in input costs / technology

2. Change in number of sellers

3. Change in expectations\####Price Elasticity of Demand

The percentage change in quantity demanded relative to the percentage change in price\####What Determines Elasticity

2. Share in budget (cars vs. pencils)

3. Time (car fuel)\####Elasticity

% change in quantity / % chang in price\####If greater than one it is. . .

Stop producing: P less than AVC\####Short run

the period of time during which at least one of a firm's inputs is fixed\####long run

2. identifiable market segments

3. prevention of resale

4. price differences not fundamentally driven by MC\####first degree price discrimination

charging each individual customer a different price based on their willingness to pay\####second degree price discrimination

Problem: MC less than LRATC\####Second-best solution

P=LRATC, "fair rate of return"

problem: who pays?\####perfect price discrimination

A firm charges all buyers their entire willingness to pay\####Total Revenue =