Micro for small displays
Contents 1-3
Abbreviations 4-5
Ceteris paribus 6Competitive firm (long-run) 7Competitive firm (short-run) 8Consumer optimum 9Consumer surplus 10Cost curves (SR, LR) 11Cost minimization 12Costs 13Cross-price elasticity of D 14Demand (shifts) 15Demand and qd 16Demand for labour 17Economic problem 18Edgeworth box 19
Elasticities 20Externality (negative) 21Externality (positive) 22Firm and market 23Import tariff (effects) 24Income elasticity of demand 25Income tax 26Marginal and average revenue 27Market equilibrium 28Market structure (demand) 29Maximum price (ceiling) 30Minimum price (floor) 31Minimum wage 32Natural monopoly 33Pareto efficiency 34Price discrimination 35Price elasticity of D and TR 36Price elasticity of demand 37Price elasticity of supply 38
Producer surplus 39Production possibility frontier 40Profit and loss (rules) 41Profit maximization monopolist 42Returns to scale 43Subsidies 44Supply (shifts) 45Supply and quantity supplied 46Tax incidence 47Utility 48
Abbreviations
AC Average costAR Average revenueAT Average taxATC Average total costAVC Average variable costC CapitalCe Cross-price elasticity of DD Demande Price elasticity of demandIe Income elasticity of DL LabourLR Long runMC Marginal costMR Marginal revenueMT Marginal taxMU Marginal utilityP Price
PPF Production possibility fr.Q Quantityqd Quantity demandedS SupplySe Price elasticity of supplySR Short runTC Total costTR Total revenueTU Total utility
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Ceteris paribus
Ceteris paribus means ‘otherthings being equal’ (constant).
By this assumption, causalrelationships are possible: If Aoccurs, then B follows.
Example: If the price rises,quantity demanded falls.Other things being equal: Income,prices of other goods, tastes,number of buyers.If other things change, thedemand curve shifts. If ‘only’price changes, we move alongthe demand curve.
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Competitive firm (long-run)
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- The competitive firm is a price-taker: Price is given.
- All costs are variable.- P = AC; if not, exit or entry.
A normal profit is part of AC.
P=AR=MR
$
- Long-run equilibrium
ACMC
Q
Long-run supply curve
Competitive firm (short-run)
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- The competitive firm is a price-taker: Price is given.
- There are fixed and variablecosts.
P=AR=MR
$- Short-run equilibrium
ATCMC
Q
Short-run supply curve
AVC
Shut-down Break-even
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Q good A
Characteristics of the optimum:- Budget constraint touches
highest indifference curve.- Hence, slope indifference curve
is equal to slope budgetconstraint.
Q good BBudget constraint
Indifferencecurve
Consumer optimum
P
Q
Consumer surplus
S
D
Consumer surplus
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AC
LRAC
2
Cost curves (SR and LR)
Q
LRAC
1
34 5
67
SRAC = Short-run average costLRAC = Long-run average cost
Economiesof scale
SRAC
Diseconomiesof scale
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Labour
Capital
Isoquant
Cost minimization
C*
L*
Isocost line:different factor combinationswith equal TC
Isocost
Isoquant curve:different factor combinationsto produce given output
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Costs
Total cost = Fixed + variable cost- Fixed cost: Independent of Q- Variable cost: Dependent on Q
Average Cost =TCQ
Marginal Cost =Change in TCChange in Q
or MC = (TC)’
Relation between AC and MC
CostMC
Q
AC
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% change in qd of good X% change in the P of good Y
=
Ce > 0
Substitutes
Ce < 0
Complements
P good Y
qd good X
P good Y
qd good X
Cross-price elasticity of demand
P
Q
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12
12
Increase in D (outward shift)
Decrease in D (inward shift)
Possible reasons: Changes in- income- the prices of other goods- tastes- the number of consumers
Demand (shifts)
P
Q
Demand
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10
10
4
6
- Demand refers to the curve anddisplays the relationship betweenprices and quantities demanded.
- Quantity demanded refers to apoint on the curve.Example: If P = 4, then Q = 6;6 is the quantity demanded.
Demand and quantity demanded
Demand for labour
- The firm is a price-taker.- The demand for labour depends
on the output produced multi-plied by the marginal revenueof the output:Marginal revenue product =Marginal product * Marginalrevenue (>>> MRP = MP * MR)
- Demand for labour
Wage (W)
Labour hours (L)
W*
Demand(=MRP)
L*
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Economic problem
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Many wantsof goods andservices
Scarceresources toproduce goodsand services
Choices
- 2 consumers, A and B- 2 goods, X and Y- Combination of 2 indifference
curve maps of A and B
A
Contract curve:Efficient outcomes
Edgeworth box
B
Good X
Good X
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Elasticities
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Price elasticityof demand
Cross-price elas-ticity of demand
Income elasticityof demand
Price elasticityof supply
% change in qd% change in price
(result in absolute values)
% change in qd of good X% change in price of good Y
=
=
% change in qd% change in income
=% change in quantity supplied
% change in price
=
by production, example.: Pollution
- MPC: Marginal private costs- MSC: Marginal social costs- MPB: Marginal private benefits- MSB: Marginal social benefits- EC: External costs- S*/P*: Social/private optimum- Dwsl: Deadweight social loss
Dwsl
Externality (negative)
Activity
MSC
MPC
MPB=MSBEC
S* P*
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$
by consumption, ex.: Vaccinations
- MPC: Marginal private costs- MSC: Marginal social costs- MPB: Marginal private benefits- MSB: Marginal social benefits- EB: External benefits- S*/P*: Social/private optimum- Pwfg: Potential welfare gain
Pwfg
Externality (positive)
Activity
MPC=MSC
MSB
EB
S*P*
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MPB
$
A competitive firm is a price-taker.It chooses Q to maximize profit orminimize loss. Normal profits arepart of AC. Long-run equilibrium?
Competitive firm
Q
Firm and market
$
Market
MC
Q
$
D
S
AC
P=AR
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P
World P
Domestic D
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Domestic S
Domestic P
P
Q
Imports
Producer surplus
Tariff revenues
Welfare losses
Consumer surplus
Effects of an import tariff:
Import tariff (effects)
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% change in quantity demanded% change in income
=
Ie > 0
Normal good
Ie < 0
Inferior good
Income
qd
Income
qd
Income elasticity of demand
Income tax
Proportional tax Progressive tax
Tax rate
Income
AT=MT
Tax rate
Income
AT
MT
Total tax risesin proportionto income.
Total tax risesmore than pro-portional to in-come.
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$
Q
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10
105
From average to marginal revenue:- AR = 10 - Q- MR relates to changes in TR,
therefore, a bit of calculus:-- TR = AR * Q = 10Q - Q2
-- MR = (TR)' = 10 - 2Q
MR
AR
Marginal and average revenue
P
Q
Supply
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10
104
2
8
Demand
- Demand (Q) = 10 - PSupply (Q) = P - 2
- At equilibrium:Demand = Supply; therefore:10 - P = P - 2P = 6 and Q = 4
6
Equi-librium
Market equilibrium
Competition
$
Market structure (demand)
Monopoly
Oligopoly Monopolistic competition
Q
$
Q
$
Q
$
Q
MR
D=AR=MR D=AR
D1=AR1
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MR1
D2=AR2
MR2
D=AR
MR
P
Q
S
D
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Excess demand
Maximum price (ceiling)
P
Q
SD
Minimum price (floor)
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Excess supply
A minimum wage causesunemployment (U),...
Minimumwage
Minimum wage
1)
2)
1)
... except when labourdemand increases.
Q L
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LD
LSU
Minimumwage
Q LLD 1
LSLD 2
Due to cost advantages (fallingAC/economies of scale) naturalmonopolies have a strong marketposition. Example: A firm investingin infrastructure (high fixed cost)
AC
P*
Natural monopoly
D=P=AR
$
QMR
MCAC
Supernormal profit
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Pareto efficient inefficient
$ person B
$ person A
It is impossible to make one personbetter off without making anotherone worse off.
Example: Distribution of wealthbetween 2 persons
$ person B
$ person A
FrontierFrontier
Pareto efficiency
$
Q
D=P=AR
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Q
$
Pro
fit
A
D=P=AR
MRMR
MC =ACMC=AC
BP
rofit
Price discrimination
Segment B Segment A
Price in segment A
Price in segment B
Price elasticity of demand and total revenue
Price elasticity of demand
e > 1 e = 1 e < 1Price rises TR falls TR unchanged TR risesPrice falls TR rises TR unchanged TR falls
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1) e and D curve
4) e = 13) e=
2) e = 0P
Q
P
Q
P
Q
P
Q
Pe=
e=0
e=1
DD
D
D
83
3
8
Price elasticity of demand
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1) Se > 1
4) SR/LR S3) Se = 1
2) Se < 1P
Q
P
Q
P
Q
P
Q
P
LR SS 3
SS
S 2
S 1
SR S
Price elasticity of supply
P
Q
Producer surplus
S
D
Producer surplus
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Q good X
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Q good Y
PPF
1
2
Characteristics:- Concave shape of PPF:
Opportunity costs are risingwhen substituting more and moreX for Y.
- Points on the PPF are efficient.Other points:
inefficientunattainable
12
Production possibility frontier
Profit and loss (rules)
Marginal condition:
MC = MR
Average condition:
Maximum profit: AC < AR
Minimum loss: AC > AR
Normal profit: AC = AR
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$
Q
D=P=AR
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MR
AC
MC
AC
P
Find point MC = MR
Set price > MC = MR
Profit = (P - AC) * Q
Profit maximizationby a monopolist in 3 steps:
Q
Profit maximization by a monopolist
Long-run average cost
Q
Returns to scale
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1 Increasing returns to scale(= economies of scale)
2 Constant returns to scale3 Decreasing returns to scale
(= diseconomies of scale)
321
P
Q
S 2
D
Subsidies
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Subsidy
S 1
P 2
P 1
Q 1 Q 2
By a per-unit subsidy, price isdecreased and quantity is in-creased. In this case both sellersand buyers profit from subsidies atthe cost of taxpayers.
P
Q
Original S
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1
2
1
2
Increase in S (outward shift)
Decrease in S (inward shift)
Possible reasons: Changes in the- costs of production- technology- regulations by the state (taxes)- number of suppliers
Supply (shifts)
P
Q
Supply
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10
10
6
4
- Supply refers to the curve anddisplays the relationship betweenprices and quantities supplied.
- Quantity supplied refers to apoint on the curve.Example: If P = 6, then Q = 4;4 is the quantity supplied.
8
2
Supply and quantity supplied
P
Q
S 1
D
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Tax rate
S 2
P 1
P 2
P 2 -tax
tax borneby buyers
tax borneby sellers
dead-weightloss
Tax incidence
Total utility
Utility
Q
Marginal utility
TU
Q
Law ofdiminish-ing MU
MU
Consumption equilibrium:
MU good AP good A
MU good BP good B=
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