Vietnam Economics Olympiad - Microeconomics
VIETNAM ECONOMICS OLYMPIAD (16-19/6/2022)
TOPIC 1: INTRODUCTION TO ECONOMICS
The Foundations of Economics
Fundamental Problem:
Unlimited economic wants vs. Limited economic resources
Society’s Economic Wants:
The economic wants of its citizens and institutions.
Economic Resources:
The means of producing goods and services, which include:
Labour
Capital
Natural resources
What is Economics?
Definition:
Economics is the study of how a society manages its scarce resources to fulfill the needs and wants of its people.
It focuses on the efficient use of scarce resources to achieve maximum satisfaction of economic wants.
Scarcity and Choice
Scarcity:
There are not enough resources to produce all the goods and services that people want.
Choice:
We must make decisions on what to have and what to forgo, as we "can’t have it all".
Opportunity Cost:
The opportunity cost of an item is what you give up to obtain that item. It is the next best alternative forgone.
Three Basic Economic Questions
What to produce?
What types of goods and services does society choose to produce?
How to produce?
What sort of technology can be used to produce the goods and services?
For whom to produce?
How are the goods and services distributed among people?
Economic Systems
Definition:
An economic system is a set of institutional arrangements and a coordinating mechanism.
Differentiating Factors:
Ownership of factors of production
Method used to coordinate and direct economic activities
Types of Economic Systems
Market Economy:
Characterized by private ownership of resources and using market prices to coordinate economic activities.
Command Economy:
Resources are owned by the government with decision making occurring through a central economic plan.
Mixed Economy:
Combination of market and command features. The government and the private sector work together to solve economic problems.
Microeconomics and Macroeconomics
Microeconomics:
Studies specific economic units (consumers, firms, investors, workers) and individual markets.
Macroeconomics:
Examines the aggregate behavior of the economy, seeking to provide an overview of the economy’s structure and relationships of overall aggregates.
Tools of Economics
Models:
Simplifications of reality that help in understanding economic relationships.
Composed of diagrams and equations showing relationships among economic variables.
Quote: "All models are wrong, but some models are useful."
TOPIC 2: MARKET ANALYSIS
Demand
Definition:
Demand is the amount of some good or service consumers are willing and able to purchase at each price.
Demand Schedule:
A table showing the relationship between the price of a good and the quantity demanded.
Demand Curve:
A graphical representation of the relationship between the price of a good and the quantity demanded.
A Buyer’s Demand For Apples
Price per kg:
$5 - Quantity Demanded: 1 kg
$4 - Quantity Demanded: 2 kg
$3 - Quantity Demanded: 4 kg
$2 - Quantity Demanded: 7 kg
$1 - Quantity Demanded: 10 kg
Law of Demand
Definition:
All else equal, as price falls, the quantity demanded rises; and as price rises, the quantity demanded falls.
Demand and Quantity Demanded
Demand:
Describes behavior at every price (demand curve).
Quantity Demanded:
A specific amount demanded at a certain price.
Movement Along the Demand Curve:
A change in quantity demanded caused by a change in the product’s price.
Shift of the Demand Curve:
A change in demand results in:
Increase in demand: Demand curve shifts to the right.
Decrease in demand: Demand curve shifts to the left.
Determinants of Demand
Factors Influencing Demand (Demand Shifters):
Consumers’ tastes and preferences
Consumers’ income
Prices of related goods
Consumer expectations
Number of buyers
Weather
…
Income
Normal Goods:
Products whose demand varies directly with income.
As income increases, demand increases (and vice versa).
Inferior Goods:
Products whose demand varies inversely with income.
As income increases, demand decreases (and vice versa).
Prices of Related Goods
Substitute Goods:
Goods similar to each other; as the price of one falls (or rises), the demand for the substitute decreases (or increases).
Complementary Goods:
Goods consumed together; as the price of one falls (or rises), the demand for the complementary good increases (or decreases).
Supply
Definition:
Supply is the amount of a product that producers are willing and able to sell at each price.
Supply Schedule:
A table showing the relationship between the price of a good and the quantity supplied.
Supply Curve:
A graphical presentation of the relationship between the price of a product and the quantity supplied.
A Producer’s Supply of Apples
Price per kg:
$5 - Quantity Supplied: 60 kg
$4 - Quantity Supplied: 50 kg
$3 - Quantity Supplied: 35 kg
$2 - Quantity Supplied: 20 kg
$1 - Quantity Supplied: 5 kg
Law of Supply
Definition:
All else equal, as price rises, the quantity supplied rises; and as price falls, the quantity supplied falls.
This illustrates a positive/direct relationship between price and quantity supplied.
Supply and Quantity Supplied
Supply:
Describes seller behavior at every price (supply curve).
Quantity Supplied:
A specific quantity supplied at a certain price.
Movement along the Supply Curve:
Change in quantity supplied due to price change.
Shift in the Supply Curve:
Change in supply resulting in:
Increase in supply: Supply curve shifts right.
Decrease in supply: Supply curve shifts left.
Determinants of Supply
Factors Influencing Supply (Supply Shifters):
Resource prices
Technology
Taxes and subsidies
Prices of other goods
Expectations
Number of sellers
Weather
…
Market Equilibrium
Definition:
Achieved at the price where quantities demanded and supplied are equal.
Established at the intersection of demand and supply curves.
Market Equilibrium Diagram
Equilibrium Price (P*):
Equilibrium Quantity (Q*):
Market Analysis
Definition:
Study of price and quantity fluctuations due to changes in market conditions.
Changes in market conditions can cause equilibrium changes due to:
Change in supply
Change in demand
Change in both supply and demand
Exercises
Equilibrium Calculation:
Demand and supply equations:
Task: Calculate the equilibrium price and quantity.
Government Controls on Prices
Free Unregulated Markets:
Market forces establish equilibrium prices and quantities.
Government Intervention:
Can create price ceilings and floors when market prices are seen as unfair.
Price Ceilings and Price Floors
Price Ceiling:
Legal maximum price for a good.
Can create shortages.
Price Floor:
Legal minimum price for a good.
Can create surpluses.
Exercises
Price Ceiling Scenario:
Given demand and supply equations, determine the impact of a price ceiling of 18.
Elasticity
Definition:
Measure of buyer and seller responsiveness to market changes.
Price Elasticity of Demand
Definition:
Measures responsiveness of quantity demanded to price changes.
Formula:
Example:
If the price of an ice cream cone increases from $2.00 to $2.20 and purchases fall from 10 to 8 cones, calculate elasticity.
Demand Types by Elasticity
Elastic Demand:
Percentage change in quantity demanded > Percentage change in price.
Inelastic Demand:
Percentage change in quantity demanded < Percentage change in price.
Unit Elastic:
Percentage change in quantity demanded = Percentage change in price.
Perfectly Inelastic:
Quantity demanded remains unchanged with price changes.
Perfectly Elastic:
Small price change leads to a large percentage change in quantity demanded.
Price Elasticity and Total Revenue
Total Revenue (TR):
Elastic Demand Impact on TR:
Increase in price → Decrease in TR
Decrease in price → Increase in TR
Inelastic Demand Impact on TR:
Increase in price → Increase in TR
Decrease in price → Decrease in TR
Unit Elastic Demand Impact on TR:
Change in price results in no change in TR
Cross Price Elasticity of Demand
Definition:
Measures responsiveness of quantity demanded of one good due to change in price of another good.
Calculation:
Interpretation:
If E_{X,Y} > 0 → Goods are substitutes.
If E_{X,Y} < 0 → Goods are complements.
If → Goods are unrelated.
Income Elasticity of Demand
Definition:
Measures responsiveness of quantity demanded to changes in income.
Calculation:
Normal Goods:
Positive income elasticity; demand increases with higher income.
Inferior Goods:
Negative income elasticity; demand decreases with higher income.
Necessities:
Income inelastic, EI < 1 (e.g., food, clothing).
Luxuries:
Income elastic, EI > 1 (e.g., sports cars).
Price Elasticity of Supply
Definition:
Measures responsiveness of quantity supplied to price changes.
Formula:
Elastic Supply:
Price elasticity coefficient > 1
Inelastic Supply:
Price elasticity coefficient < 1
Unit Elastic Supply:
Price elasticity coefficient = 1
Perfectly Inelastic Supply:
Price elasticity coefficient = 0
Perfectly Elastic Supply:
Price elasticity coefficient = infinity
TOPIC 3: THE THEORY OF CONSUMER CHOICE
Theory of Consumer Behavior
Definition:
Describes how consumers allocate incomes among goods/services to maximize well-being.
Three Steps:
Budget constraints
Consumer preferences
Consumer choices
Budget Constraints
Definition:
What consumers can afford given their income.
Equation:
Budget Line:
Shows all combinations of goods within budget limit.
Effects of Changes in Income and Prices
Income Changes:
Shifts budget line.
Price Changes:
Changes slope of budget line.
Consumer Preferences
Definition:
What consumers want.
Assumptions:
Completeness: Consumers can compare and rank all bundles.
Transitivity: Preferences are transitive.
More is better than less: Consumers prefer more of any good.
Utility
Definition:
Satisfaction from consuming a good or service.
Total Utility (U):
Total satisfaction from consuming a specific quantity.
Marginal Utility (MU):
Additional satisfaction from consuming one more unit.
Total Utility and Marginal Utility Table
Q | U | MU |
|---|---|---|
0 | 0 | - |
1 | 10 | 10 |
2 | 18 | 8 |
3 | 24 | 6 |
4 | 28 | 4 |
5 | 30 | 2 |
6 | 30 | 0 |
Law of Diminishing Marginal Utility
Definition:
As more of a good is consumed, the marginal utility gained from each additional unit declines.
Implication:
Indifference Curves
Definition:
Shows all combinations of goods providing the same satisfaction.
Indifference Map:
A graph containing a set of indifference curves.
The Shapes of Indifference Curves
Marginal Rate of Substitution (MRS):
The amount of one good that a consumer will give up for an additional unit of another good, keeping satisfaction constant.
Property:
MRS is the slope of the indifference curve.
Properties of Indifference Curves
Higher indifference curves are preferred to lower ones.
Indifference curves are downward sloping.
Curves do not cross.
Curves are bowed inward (convex).
Consumer's Optimal Choice
Optimization:
Consumers choose how to allocate their income among different goods/services to attain highest satisfaction.
Optimal Choice Point:
Where the budget constraint is tangent to the highest indifference curve.
Conditions of Consumer's Optimal Choice
At the optimal choice, the slope of the indifference curve equals the slope of the budget constraint:
Utility Maximization Condition
Utility Max Combination:
Impact of Changes in Income on Choices
Normal Good:
Higher income increases quantity demanded.
Inferior Good:
Higher income decreases quantity demanded.
Impact of Price Changes on Choices
Price Fall Effects:
Substitution Effect:
Buy more of the cheaper good, less of the expensive good.
Income Effect:
Increased real purchasing power due to reduced price.
TOPIC 4: THE THEORY OF FIRM: PRODUCTION AND COSTS
What is a Firm?
Definition:
A business firm employs factors of production to create goods/services for consumers, other firms, or the government.
The Objective of the Firm
Two Sides of a Firm:
Revenue Side: Total Revenue (TR)
Money received from selling products.
Cost Side: Total Cost (TC)
Costs incurred for input use.
Profit Formula:
Profit ($C0$) = TR - TC
Objective:
Maximize profit.
Production Function
Definition:
Process of transforming inputs into outputs.
Function Representation:
Q = output, K = capital, L = labor
Short Run Production Relationships
Total Product (Q):
Quantity of output produced.
Marginal Product of Labor (MPL):
Additional output from employing one more unit of labor.
Average Product of Labor (APL):
Output per unit of labor input (labor productivity).
Short Run Production Costs
In the short run, some inputs are fixed while others are variable.
Cost Types:
Fixed Costs: Do not vary with output (e.g., rent).
Variable Costs: Change with output level (e.g., labor, materials).
Total Costs
Formula:
TFC = Total Fixed Costs; TVC = Total Variable Costs
Average and Marginal Costs
Average Fixed Cost (AFC):
Average Variable Cost (AVC):
Average Total Cost (ATC):
Marginal Cost (MC):
Additional cost incurred to produce one more unit.
Relation of MC to AVC and ATC
The MC curve intersects the ATC at its minimum point.
If MC < ATC, ATC decreases as Q increases.
If MC > ATC, ATC increases as Q increases.
Shifts of Cost Curves
Cost curves shift due to:
Changes in taxes/subsidies
Changes in input prices
Technological advancements
Long Run Production Costs
Definition:
In the long run, all inputs can be adjusted (no fixed costs).
Total Costs:
The Long Run Cost Curve
The long-run ATC curve (planning curve) shows the lowest average total cost at any output level.
It is the envelope of all short-run ATC curves.
Economies of Scale
Definition:
Long-run average total cost decreases as output increases.
Constant Returns to Scale:
Long-run average total cost remains unchanged as output increases.
Diseconomies of Scale:
Long-run average total cost increases as output increases.
Minimum Efficient Scale (MES):
Output level at which firms can minimize long-run average total cost.
TOPIC 5: MARKET STRUCTURES
Market Structures
Definition:
Set of characteristics determining the economic environment in which a firm operates.
Dependence Factors:
Number and size of firms within the industry
Degree of product similarity or differentiation
Conditions for entering or exiting the market
Types of Market Structures
Monopoly:
Single seller, unique product, blocks entry, price maker.
Oligopoly:
Few large firms dominate, differentiated/homogeneous products, mutual interdependence in decision-making, significant barriers.
Monopolistic Competition:
Many sellers, differentiated products, easy entry/exit, price makers.
Perfect Competition:
Numerous small firms, standardized product, free entry and exit, perfect knowledge, price takers.
Demand as Seen by Perfectly Competitive Firm
The perfectly competitive firm can sell any quantity it wants at the market price, leading to perfectly elastic demand.
Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR)
Total Revenue (TR):
Average Revenue (AR):
Marginal Revenue (MR):
Output Decision in the Short Run
The firm maximizes profit at the output level where $MR = MC$.
Profit Maximization Rule
If $MR > MC$, increase output.
If $MR < MC$, decrease output.
If $MR = MC$, profit is maximized.
For perfectly competitive firms: $P = MR = MC$ ensures profit maximization.
Long Run Equilibrium
Entry and exit lead firms to reach zero economic profits in the long run.
Firms continue operating as long as economic profits cover opportunity costs.
Why Competitive Firms Stay in Business with Zero Profit
Total costs include opportunity costs (time, money invested).
Economic profit is zero, but accounting profit is positive.
Monopoly Characteristics
Single Seller: Only one firm supplies the entire market.
Unique Product: No close substitutes available.
Blocked Entry: High barriers prevent new competitors.
Price Maker: Monopolist can set prices due to market power.
Why Monopolies Arise
Barriers to Entry: Factors that restrict competition.
Monopoly Resources: Key resources owned exclusively by one firm.
Government Regulation: Legal right granted to one firm.
Economies of Scale: Lower costs permitting single firm dominance.
Monopoly’s Demand and Marginal Revenue
Demand Curve: Market demand, which is downward sloping.
MR Curve: Lies below the demand curve; monopolists can’t sell all units at a single price.
Revenue Formula:
Marginal Revenue Characteristics
At every output level, price is higher than marginal revenue: $P > MR$.
Pricing Decision for Monopolist
Optimal Output Level:
Set where $MR = MC$.
Pricing Implications:
Monopolists charge prices higher than marginal cost ($P > MC$).
Possibility of Losses by Monopolist
Monopolists can incur losses if demand is low and costs are high.
Price Discrimination
Definition:
Charging different prices for the same product to different consumers.
Conditions for Price Discrimination
Monopoly Power: Ability to control output/price.
Market Segregation: Distinguishing buyers based on willingness to pay.
No Resale: Buyers cannot resell the product.
Monopolistic Competition Characteristics
Many Sellers: Numerous firms operate within the market.
Differentiated Products: Products are not identical, allowing some price-making power.
Easy Entry/Exit: Low barriers.
Demand Curve of Monopolistically Competitive Firm
Each firm faces a downward-sloping demand curve influenced by competition and differentiation.
Short Run in Monopolistic Competition
Profit or Loss:
Firms can earn profit or incur losses in the short run.
Long Run in Monopolistic Competition
Firm Entry and Exit:
Entry occurs with profits, leading to diminished demand for existing firms.
Exit occurs with losses, leading to increased demand for remaining firms.
Long-run Outcome:
Firms earn zero economic profit.
Oligopoly Characteristics
Few Firms: A small number of firms dominate the market.
Product: Can be homogeneous or differentiated.
Mutual Interdependence: Decisions depend on other firms' actions.
Barriers to Entry: Significant barriers exist.
Price Maker: Firms hold some price-making power.
The Cartel Theory
Cooperation Among Firms:
Firms may form a cartel to maximize profit collectively.
Cartel Definition:
A firm organization that reduces output to inflate prices.
Problems with Cartels
Formation Costs: Establishing a cartel is expensive.
Difficulty Reaching Agreement: Disagreements on policy formulation.
Entry of New Firms: New competitors dilute profits.
Cheating Issues: Members may cheat, harming collective benefit.
Game Theory in Oligopoly
Strategic Decision Making: Firms must consider reactions of competitors when making choices.
Game Theory Definition:
A mathematical tool for analyzing strategic interactions.
The Prisoners’ Dilemma Example
Illustrates the conflict between cooperative and non-cooperative strategies among firms.
Nash Equilibrium
Definition:
A set of strategies for which all players are best responding to the strategies of others.
Dominant Strategy
Definition:
Best strategy for a player, regardless of competitors’ actions.
Dominant Strategy Equilibrium: A scenario where players follow their dominant strategies.
Business Application Example
Price comparison of Pepsi and Coca-Cola under various conditions.
TOPIC 6: MARKET FAILURES AND THE ROLE OF GOVERNMENT
Market Failures
Definition:
Occurs when private markets fail to allocate resources efficiently.
Types of Market Failures:
Public goods
Externalities
Information asymmetries
Externalities
Definition:
Costs or benefits affecting third parties external to a market transaction.
Negative Externalities: Adverse impact on third parties.
Positive Externalities: Beneficial impact on third parties.
Negative Externalities
Creates external costs that must be accounted for.
Social marginal costs higher than private marginal costs:
Consequences:
Overproduction leading to deadweight loss.
Positive Externalities
Creates external benefits.
Social marginal benefits higher than private marginal benefits:
Consequences:
Underproduction leading to deadweight loss.
Private Solutions to Externalities
Examples:
Property rights
Moral codes/social sanctions
Charities
Contracts
Government Role in Externalities
Positive Externalities Solutions:
Subsidies to buyers/producers
Government provision of goods as public goods
Negative Externalities Solutions:
Regulation
Corrective taxes (Pigovian taxes)
Markets for externality rights
Market for Externality Rights
Government regulates allowable pollutant discharges to preserve air quality.
Fixed supply of pollution rights, with downward sloping demand determining price.
Private Goods
Characteristics:
Rivalry in consumption: One person’s use diminishes others’ use.
Excludability: Some individuals can be prevented from using it.
Public Goods
Characteristics:
Nonrivalry in consumption: One person’s use does not preclude others’ use.
Nonexcludability: Individuals can't be excluded from benefits.
Free-Rider Problem:
Individuals can benefit without payment once provided.
Government Role in Providing Public Goods
Public goods cannot be effectively supplied privately; thus, government provision and taxation are necessary.
Information Failures
Definition:
Asymmetric information leads to unequal knowledge between parties in a transaction.
Moral Hazard: Changes in behavior after agreements due to information gaps.
Adverse Selection: Knowledge gaps lead to costs for uninformed parties.