Microeconomics Finals Notes

8/18/2019 Microeconomics Finals Notes

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MICROECONOMICS FINALS NOTES


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LECTURE 1: Economic ThinkingEconomics: the science of how individuals and societies deal with the fact that wants aregreater than the limited resources available to satisfy those wants

♦ Coordinated by money

♦ Microeconomics: behavior and choices for small units (consumers, industry, rms)

Four primary resources that drive economics:! "and (physical land and natural resources)#! "abor (people)$! Capital (machines%e&uipment%buildings)'! Entrepreneurship (uni&ue ability to productively put together resources to maegoods)

rimary *esources: original resources that everything else is produced from+ntermediate +nputs: purchased from other businessesupply Chain: tracing inputs bac through other companies and it eventually traces all theway bac to being a primary resource

-tility: satisfaction that a person received from a good or service . value

rice rationing: the pricing mechanism to decide who gets what . stu/ goes to the highesbidder

0 1ig +deas that drive Economics:! 2pportunity Cost:

♦ 3he opportunity cost of any choice is what we give up when we mae that choice

♦ 4ot 5ust the actual price to buy something

♦ E6ample: a 7free ticet8 to the movies isn9t an actual free ticet because you give upyour time#! ecisions at the margin

♦ Margin: small changes, one at a time

♦ E6ample: what happens if you raise the price by a dollar;


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LECTURE 2 + LECTURE 3: Economic Systemspeciali>ation: each person focuses on one or two, and then trades these goods

Comparative Advantage: someone can produce a good at lower opportunity costs thansomeone elseAbsolute Advantage: where someone can produce at a lower cost of resources thansomeone else

♦ E6ample: esert +sland model B two people (*obin Friday) need sh and coconut:(woring alone: *obin can mae D sh or ' coconut Friday can mae @ sh or coconut)• First, gure out the individual production possibilities:

• Conclusion: *obin can produce !@ Coconut for every Fish, or # Fish for everyCoconut

• Conclusion: Friday can produce # Coconut for every Fish, or !@ Fish for everyCoconut

• *obin is giving up "E Coconut for every Fish, so she should produce the rst Fis

• roduction ossibility Frontier: combinations of goods and services that an

economy can produce in a given time period, with given technology, and allresources fully employed

• Graphically, the height and width of *obin9s segment matched her individual F,and the same is for Friday

"aw of +ncreasing 2pportunity Costs: as you move along the e=ciency frontier, as more ofa good is produced, the opportunity costs of producing the good increases


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LECTURE 3 + LECTURE 4 + LECTURE 5: Supply & em!n"emand: the willingness and ability of buyers to purchase di/erent &uantities of a good orservice at di/erent prices during a specic time

♦ "aw of iminishing Marginal -tility: for every additional unit, the utility decreases foyou

♦ Marginal ontal adding

Change in emand: shifts the whole demand curve♦ An e6ample would be things lie having sales or promotions

Change in Huantity emanded: a movement along the demand curve♦ An e6ample would be things lie a rise in income

upply: the willingness and ability of sellers to produce and o/er to sell di/erent &uantitieof goods or services at di/erent prices during a specic time

♦ Changes or shifts in supply can be a/ected by:

• rices of factors and input resources . lowers supply• ubsidies . raises supply

• Government restrictions . raises supply

♦ Can also be seen as the Minimum


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• roducer urplus . (price received B minimum selling price

♦ ummed up, it9s the distance added all the way up to the &uantity purchased or soldand the price at the end of it

rice Floor and rice Ceiling♦ rice Joor: intended conse&uence to help produces

• An unintended conse&uence is e6cess supply and &uantity reduction

• et above the maret e&uilibrium

♦ rice ceiling: intended conse&uence to help consumers• An unintended conse&uence is e6cess demand and rationing

• et under the maret e&uilibrium

hifts in upply and emand! +ncome goes up: the demand for vacation pacage sales goes up (shifts right)#! A rise in price of transportation methods to Manhattan: the demand for hotels inManhattan goes down (shifts left)$! An increase in corporate spending: the demand for business travel'! An increase in price of 5et fuel: the supply for air travel goes down (shifts right)@! An increase in price of 5et fuel: the demand for train travel goes up (shifts right)0! rice of corn rises: the supply for corn goes up (shifts up)K! A new hotel enters the maret: the +thaca hotel maret: the supply goes down (shiftsright)

Graphically speaing about shift in supply.♦ +f the number of sellers go up, the supply will shift to the right, and sellers will sell

less at the new e&uilibrium


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Lectu#e 5 + Lectu#e $: El!sticity Elasticity of emand: a measure of the responsiveness of &uantity demanded to changes price

♦ E&uation for E .

+t is used to describe and recogni>e how the &uantity demanded changes as prices for agood or service change B there are no units when calculating elasticityE6ample: calculating the Elasticity of emand

Measuring Elasticity:♦ Elastic

• Elasticity calculated is greater than

• L Huantity emanded N L rice

♦ -nit Elastic

• Elasticity calculated is e6actly

• L Huantity emanded . L rice

♦ +nelastic

• Elasticity calculated is inelastic

• L Huantity emanded O L rice

♦ erfectly Elastic

• L Huantity emanded . too big

♦ erfectly +nelastic

• L Huantity emanded .

Factors that can a/ect Elasticity of emand:! 4umber of substitutes

♦ 3he more number of substitutes, the more elastic it is

• Many substitutes to cooies but not many substitutes to gluten?free sugar?freecooies

P percent change in &uantitydemanded P


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♦


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LECTURE % + LECTURE : Consume# ChoiceConsumers mae decisions that will ma6imi>e utility sub5ect to budget constraints

3otal -tility: the total satisfaction of a bundle of goodsMarginal -tility: the e6tra satisfaction of one e6tra unit of good, ceteris paribusiminishing Marginal -tility: every time you add more units of a good, the additionalsatisfaction gained from this e6tra good goes down

+ndi/erence curves: sets of bundles that give the consumer the same utility♦ Movement along the indi/erence curves describe tradeo/s

♦ +n one indi/erence curve, the utility gained at any point on the curve is e6actly thesame at each point or bundle

3his second graph of bundles of indi/erence curves is an e6ample of how regardless of homany bundles of Good 1 (Q?A6is) there are, the total satisfaction or utility gained is e6actlythe same B this could be because the person is allergic to or hates the Good 1 so having ainnite amount of it won9t change their happiness

1udget ets: given prices of two goods and total income, the budget is a combination of

the two goods a person can purchase

ing -tility . refers to nding the point on the budget constraint with the

highest indi/erence curve♦ Ma6imi>ation is at the point where the budget constraint and indi/erence curve are

tangent♦ Ma6imi>ation Criteria: if you move in either direction (while staying on the budget

line), your utility is going down

+n order to gure out which bundle gives the highest satisfaction given the income orbudget constraint, nd the highest set of bundles that are tangent to or go through thebudget constraint


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LECTURE ' + LECTURE 1(: )#o"uction & CostsE6plicit Costs: costs that are monetarily paid+mplicit Costs: costs that aren9t monetarily paid (usually in opportunity costs lie time)un Costs: cost incurred in the past that cannot be changed by current decisions andcannot be recovered

♦ 3hese should be ignored when maing a decision

Accounting rot: 3otal *evenue B 3otal E6plicit CostsEconomic rot: 3otal *evenue B 3otal E6plicit Costs B 3otal +mplicit Costs

♦ 4ormal rot . >ero economic prot

• 3his means you cover all the implicit and e6plicit costs

• Qou can have positive accounting prot, but >ero economic prot

hort *un: when some costs and input choices are 6ed"ong *un: when all or many input choices can be ad5usted

+mportant terms in calculating prots and costs♦ Fi6ed Costs

♦ Rariable Costs

♦ 3otal Costs (Fi6ed Costs I Rariable Costs)

♦ Average Fi6ed Costs (3otal Fi6ed Costs % Huantity

♦ Average Rariable Costs (Rariable Costs % Huantity)

♦ Average 3otal Cost (3otal Costs % Huantity)

♦ Marginal Cost (di/erence in cost for the additional unit of the good)

Ma6imi>ing rot:


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LECTURE 11 + LECTURE 12: )e#*ect CompetitionFour Maret tructures:

♦ erfect Competition

♦ Monopoly

♦ 2ligopoly

♦ Monopolistic Competition

erfection Competition: the four ey assumptions of perfect competition B! 3here are many sellers and many buyers, none of which is large in relation to total salesor purchases#! Each rm produces and sells a homogenous product$! 1uyers and sellers have all the relevant information about prices, &uality, and sources osupply'! Firms have easy entry and e6it

Maret emand Firm emand sets the price because the rm is a price taer . it can seas many units as it wants at the maret?determined price

♦ rice 3aer . seller that does not have the ability to control the price of its productbecause it 7taes8 the price determined in the maret

erfect Competition in the hort *un: the price is e&ual to marginal revenue ( . M*) andtherefore the rm9s demand curve is the same as its marginal revenue curve *esource Allocative E=ciency: situation when rms produce the &uantity of output at whicprice e&uals marginal cost ( . MC)

Applications of prot?ma6imi>ation by perfectly competitive rm! rice is above Average 3otal Cost


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♦ 3otal *evenue N 3otal Cost . rm earns prot

♦ Continue to produce in the short runCalculationsE&uilibrium rice . S@Huantity of 2utput . H units 3otal *evenue ( 6 H) S,@ 3otal Cost (A3C 6 H) S,

3otal Rariable Cost (ARC 6 H) SK 3otal Fi6ed Cost (3C B 3RC) S'rots (3* B 3C) S'

#! rice is below Average Rariable Cost

♦ 3otal *evenue O 3otal Cost

♦ huts down in the short run because it minimi>es its losses by doing so

• 1etter to lose S' which covers 5ust the Fi6ed Costs than to tae a loss of S'@E&uilibrium rice . S'Huantity of 2utput . H @ units 3otal *evenue ( 6 H) S# 3otal Cost (A3C 6 H) S0@ 3otal Rariable Cost (ARC 6 H) S#@ 3otal Fi6ed Cost (3C B 3RC) S'rots (3* B 3C) ?? S'@

$! rice is below Average 3otal Cost but above Average Rariable Cost

♦ 3otal *evenue O 3otal Costs


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♦ Firm taes a loss but continues to produce in the short run because it minimi>eslosses by doing so

E&uilibrium rice . STHuantity of 2utput . H D units 3otal *evenue ( 6 H) SK# 3otal Cost (A3C 6 H) SD 3otal Rariable Cost (ARC 6 H) S'

3otal Fi6ed Cost (3C B 3RC) S'rots (3* B 3C) ?? SD

Figuring out:


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LECTURE 13: Loosening )e#*ect Competition*eview the ' ey assumptions of perfect competition:! 3here are many sellers and many buyers, none of which are in large relation to totalsales or purchases#! Each rm produces and sells and homogenous product$! 1uyers and sellers have all the relevant information about prices, &uality, and sources osupply

'! Firms have easy entry and e6it

Capacity Constraints: there9s a certain limit to the number of supply


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LECTURE 14: onopoly 3hree ey assumptions to monopoly! 3here is one seller#! 3he seller sells a product that has no close substitutes$! 3he barriers to entry are very high

*easons for monopoly:

♦ "egal barriers♦ Economies of scale

♦ E6clusive ownership of a necessary

E&uation for Marginal *evenue:+f emand is . a B (b 6 H)

M* . a B (#b 6 H)E6ample:

H . D B ' . ?!#@H I # . # B !#@H

M* . # B !@H

! Find the Marginal *evenue#! rot Ma6imi>ing:

♦ Add the Marginal Cost curve

♦ Find the point in which M* . MC (this is the prot?ma6imi>ing point)$! *ead o/ the price from the emand curve, at the H point where M* . MC'! *ead o/ prots or losses(same as from perfect competition)

♦ +mplications:

• N A3C . rots

• ARC N N A3C . roduce with "osses• ARC N . hutdown


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LECTURE 15 + LECTURE 1$: ,ligopoly 2ligopoly Models:

♦ Cartels

♦ 4ash?Cournot 2ligopoly

♦ rice "eadership

Cartels . rice 6ing: an agreement by sellers to only sell at a certain price and is needed

as way to somehow decide what &uantities each rm gets to sell♦ Firms act as if they are one rm and price as monopolist

♦ Cooperate to 5ointly decide the best outcome

• 3hey act as if they are one rm

• E6ample: 3wo hotel rms with capacity constraint of $ rooms: they act as ifthey are one rm with a capacity of 0 rooms

-se the same steps as they do in a monopoly:! Get the M*#! Find prot ma6imi>ing point, which is where M* . MC

$! *ead o/ the rice o/ the demand curve at the point H of where M* . MC'! *ead o/ prots or losses

3wo rms 4ash?Cournot in &uantities♦ 1e given the emand e&uation and Marginal Cost

• . B H

• MC .

• 3he other rm9s &uantity is 6ed

• Conditional residual demand curve

♦ 3here will be a condition: the &uantity that the other rm pics or the &uantity you

thin they9re going to pic♦ E&uation for 4ash?Cournot: Hcrd . Hdemand B Hothers

• *ewrite demand e&uation: H . B

• Fill in the 4ash?Cournot e&uation

♦ E6ample of: a rm with the demand e&uation . B H (rewritten as H . B )and if a rm thins the other rm is going to produce a &uantity of $• Hcrd . ( B ) B ($)


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LECTURE 1% + LECTURE 1: )#ice isc#imin!tion !n" -un"lingrice iscrimination: a price structure in which the seller charges di/erent prices for theproduct it sells to mae more money

egrees of rice iscrimination:st egree: charge every buyer the ma6imum they are willing to pay for it#nd egree: set a price schedule

$rd

egree: charge di/erent prices to observably di/erent segments of the buyingpopulation

st egree rice iscrimination:

$rd egree rice iscrimination:

Conditions of rice iscrimination:! 3he seller must e6ercise control over the price and can9t be a price taer#! 3he seller must be able to distinguish between buyers who have di/erent willingness topay$! 3he seller must prevent resale


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1undling: practice of selling two or more products as a pacage to increase prots beyondselling them separately

♦ 3hey are useful when the willingness to pay for each product are negativelycorrelated


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LECTURE 2(: onopolistic Competition 3hree assumptions for Monopolistic Competition:! 3here are many sellers and buyers#! Each rm in the industry produces and sells a slightly di/erentiated product$! Entry and e6it are easy

i/erentiated roduct: a product in the same category, but has di/erences in things lie

location, &uality, purpose, and branding♦ 1randing: di/erentiates a product from competitors

-nlie perfect competition, monopolistic competition has price di/erences within thecategory . each company has some control over its price and are not a price taer

Monopolistic Competition in the "ong *un . Vero Economic rots♦ 2ther rms enter

♦ 3hey don9t copy the incumbents completely

♦ 3hey 7steal8 some of the demand for the product

♦ Qour individual residual demand curve shifts left until there is no more prot

1arriers to Entry:♦ First mover advantage

♦ atents

♦ i/erentiation and 1rand "oyalty

♦ 3rade ecrets

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Microeconomics Finals Notes