Microeconomics

people have unlimited wants and resources are limited, This is why economic decisicions must be made

Shows how much of 2 goods or services an economy can produce during a specific time and limited quantity of resources, or factors of production

When one economy can make a product cheaper than another

• Market
• mixed
• planned (e.g. Socialism)
• barter

a way to study microeconomics where change specific variables and watch how effects others and whole system

• Where supply and demand are the same through perfect competition
• 
• Price of market balance:
• P - priceQ - quantity of goodS - supplyD - demandP0 - price of market balanceA - surplus of demand - when P<P0B - surplus of supply - when P>P0

• 1. Demand increases and supply unchanged = higher equilibrium price and quantity
• 2. Demand decreases and supply unchanged = lower price and quantity
• 3. Supply increases and demand unchanged = lower price and higher quantity
• 4. Supply decreases and demand unchanged = higher price and lower quantity
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Change Quantity Supply; movement along supply curve as result of change in price

Change Quantity Demanded; movement along demand curve as result of to a change in price

Change in Supply; shown by drawing a new supply curve

Change in Demand; shown by drawing a new demand curve

• price ceiling
• price floor

• -prevent price gouging and unsure income for producers of certain goods
• -too low of a floor = shortages and queuing
• -Too high and create a black market

• percentage change in quantity demanded in response to a one percent change in price
• -hold all other determinants of demand constant
• - demand for a good is INELASTIC when PED is less than one, ELASTIC when greater than one
• -INELASTIC change in rpice has small effect on quantity
• -ELASTIC change in price has a large effect on quantity
• -= %change in quantity demanded / % change in price
• -More substitutes something has it is likely to be more elastic
• -perfectly inelastic when it = 1
• 

• PES is % change in quantity supplied that would happen after a 1% change in price.
• E.g.; 10% rise in price means 20% increase in quantity supplied; PES = 2; (20%/10%)

• Determination;
• -supply is usually more elastic in Long Run; allowed time to build more factories

%change in revenue = %change in quantity demanded + %change in price

- Price inelastic to consumer means a rise in price, small demand loss would be accounted for by the extra revenue

• is how much a price change of one product effects quantity demanded of another product.
• -If substitutes purchase more of one when price of other increases
• -If complements price rise on one product cause demand for both to fall

• -If CPEoD > 0 two goods are substitutes
• -If CPEoD = 0 two goods have no relationship
• -If CPEoD < 0 two goods are compliments

CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)

IEoD = (% Change in Quantity Demanded)/(% Change in Income)

• -is used to to see how sensitive demand for a good is to an income change
• - Very higher income elasticity suggest that when a consumer's income goes up, consumers will buy a lot more of product
• -Low price elasticity changes in income has little influence on demand
• -IEoD > 1 then good is a luxury good and income elastic
• -IEoD < 1 and IEoD > 0 then good is a normal good and income elastic
• -IEoD < 0 then good is an inferior good and negative incom elastic

most amount a consumer would pay for a good and the price actually paid

Difference between lowest amount producer would be willing to sell and price producer actually sold it for

Normal Good; demand increases when income increases and falls when income decreases; while price remains constant. Positive Income Elasticity of Demand

Inferior Good; decreases in demand when consumer income rises

at any given time prices in a market reflect all available info about a particular product and no investor has an advantage because everyone has access to the same info

• Tax incidence falls on consumer when;
• apples are price inelastic (meaning you raise the price, demand decrease but is made up for from an increase in revenue)

• Tax incidence falls on producer when;
• apples price elastic (price increase means demand lost would more than revenue gained)
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• 

• measures inefficiency caused from a market distortion
• -such as a tax levied on an item or a min price
• = consumer surplus + producer surplus ;(that is caused by the policy)

• Relates preferences to consumer demand curves
• -Consumers face trade-offs in their purchase decisions, since income limited.

• measures the benefits (or drawbacks) from consuming a good or service or from working
• -Usually the more a person consumes the larger their utility
• -Usually increases as more of a good is consumed, but once you reach a certain threshold utility increases slower than the amount consumed

• -can't be directly measured, but can be inferred from the decisions that people make
• U(x) = 2x + 7, where U is utility and X is wealth

How much happier (in terms of utils) will an additional dollar make me? or what is the marginal utility of money

How much less happy will working an additional hour make? or what is the marginal disutility of labor

Consumer says, "How Should I spend my money in order to maximize my utility?"

"well I face a number of constraints; income and price, most importantly"

• "this is my consumer problem"
• when this problem is solved, decision made, you have consumer equilibrium

as a price for one good increases consumers will replace this good with a less costly alternative

• as a consumers income increases the negatively sloped budget constraint curve will shift to the right
• As income increases the amount of an inferior good purchased will decrease

• -Individual consumer's demand for a particular good
• however individual is only 1 of many market participants

-Market demand is the demand curve of a product for entire market, every consumer's demand curve

• -describes quantities of inputs to quantities of an output
• -specifies the output of a firm for all combinations of inputs

short run; period of time in which quantity of at least one input is fixed and can not be changed

Long run; period of time in which the quantities of all inputs can be varied

change in a firm's total product that results from an increase in that factor by one unit (holding everything else constant)

• So if you add one unit of labor and you get 3 more shirts, then 3 is the marginal product of labor
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• 

when you keep on adding a unit of a variable factor of production with fixed factors of production the gains begin to decline (instead of increas) after a certain point

the marginal gain declines after you reach a certain point

This is a short-run phenomenon, because in the long run none of the factors of production are fixed

At low levels of output a firm can usually increase its output at higher rate than the increase in inputs required

eventually amount of output per input begins to decline

• is a line where all points on the line have the same quantity of output, while changing quantities of two or more inputs
• -This idea is similar to utility maximization problem for consumers

firm's goal when producing things is to maximize profits

all about relationship between costs and profits

Economic profit factors in implicit costs; opportunity costs, e.g. cost of capital or money that could be made by renting out part of factory instead of using it for making goods

explicit costs; money paid to the factors of production

This is when economic profits are zero; firm is covering explicit costs and all implicit costs

• firm will continue to increase number of goods produced until MR = MC
• -After diminishing returns and and MR is declining when it equals MC you stop adding more units

• -When MR is below MC firm is losing money
• -When MR is more than MC firm can earn more profits by increasing output

1. Must have many firms in market, where none have ability to influence price on their own, they are price takers; take the price given

2. Firms should be able to enter and exit market easily

3. Firms produce and sell non-differentiated, homogeneous products

4. Everyone, firms and consumers, have complete information

• When avg total costs (curve) are above marginal revnue *curve) at the profit maximizing level of output, firm losing money
• But
• It is still has sunk costs/ fixed costs, firm will continue to operate in short run if avg variable costs lower than marginal costs

• 1. High barriers to entry
• 2. There is only one firm in market
• 3. There are no close substitutes

• -can come from holding certain patents
• -large start up costs
• -limited acess to resources, e.g. Diamond market where one firm owns most diamond mines

monopolist faces a downward sloping demand curve, implies that price will not be constant as monopoly increases output.

It will engage in price searching behavior looking for the price that maximizes profits

Will discriminate on price between consumers

produces less out put and sells at higher price than perfectly competitive firmPoint C where MR = MC, but monopoly charging more avg total costs making a profit, because no competition to come in

MPP tells how many more chairs you can make

MRP tell how much more revenue can make from the additonal chairs produced by the additional worker