Notes

MICROECONOMICS
total cost = total fixed cost + total variable cost
monopolistic competition = product differentiation
if price is above ATC, the positive economic profits ensue
if price is on ATC, the normal economic profits ensue
in order to regulate a natural monopoly, set P = MC
profit-maximizing monopolist set output where MR = MC
a price floor causes deadweight loss to increase
total revenue = P x Q

Factors of Production:
land (natural resources)
labor (human effort)
capital (manmade equipment like machines, buildings, roads, computers)
entrepreneurial ability (the effort and know-how to put the other resources together in a productive way)

law of increasing costs (the more of a good that is produced, the greater its opportunity cost -> concave/bowed outward PPC)
specialization
comparative advantage
productive efficiency (all points on PPC)
allocative efficiency (producing optimal mix of goods and services that provide the most net benefit to society) (MB = MC)
economic growth (shifts PPC outward) is a result of
increase in quantity of resources
increase in quality of current resources
technological advancements

Market Economy (capitalism):
private property (individuals, not government, own most economic resources)
freedom (individuals are free to acquire resources to produce goods and services)
self-interest and incentives (individuals are motivated by self-interest in their use of resources)
competition
prices

law of demand (when the price of a good rises, consumers decrease their quantity demanded for that good)
substitution effect (the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods)
law of demand predicts a downward sloping demand curve
income effect (the change in quantity demanded resulting from a change in the consumer's purchasing power / real income)

Shifters of Demand (MERIT)
Market size (number of buyers in the market)
Expectations (consumer expectations about future prices of good)
Related goods prices (price of substitute/complementary goods)
Income (consumer income)
Tastes (consumer tastes and preferences for good)

increase in number of buyers increases the demand for a good
normal goods (demand increases as income increases)
inferior goods (demand decreases as income increases)

law of supply (when the prices of a good rises, suppliers increase their quantity supplied for that good)
increasing marginal costs (as suppliers increase the quantity supplied of a good, they face increasing marginal costs. as a result, they only increase the quantity supplied of that good if the price received is high enough to at least cover the higher marginal cost)
law of supply predicts an upward sloping supply curve

Shifters of Supply (DCTIGER):
Disasters
Cost of an input to the production of the good
Technology (productivity used to produce good)
Inputs
Government qctions
Expections (producer expectations about future prices)
Related goods prices (price of other goods that could be produced)
more producers = more supply

shortage (when the quantity demanded exceeds the quantity supplied) (AKA excess demand)
surplus (when the quantity supplied exceeds the quantity demanded) (AKA excess supply)

total welfare = consumer surplus + producer surplus
consumer surplus = area under the demand curve and above the market price
producer surplus = area above the supply curve and below the market price

Elasticity = when we observe a consumer's purchase decision change in response to a change in some external variable, elsaticity measures the sensitivity of a person's consumption to that external change
elasticity of demand = (%change in quantity demanded of good) / (%change in price of good)
the greater this ratio, the more sensitive (responsive) consumers are to a change in the price of the good
E(d) > 1, price elastic (the responsiveness of the consumer exceeded, in %, the initial change in the price)
E(d) < 1, price inelastic (the initial change in price exceeded, in %, the responsiveness of the consumer)
E(d) = 1, unit elastic (the initial change in the price is exactly equal to, in %, the responsiveness of the consumer)
consumers are more price sensitive at higher prices than they are at lower prices
(if the price is already low, a 10% increase might be almost negligible to consumers; however, if the price is already high, a 10% increase could be pretty drastic)

Midpoint Formula:
use to calculate the percentage change between two prices or quantities on a demand curve
(change in quantity demanded / change in price) x (average price / average quantity)

perfectly inelastic = any increase in price results in no decrease in quantity demanded (ex. life saving drug)
("my demand curve is inelastic" -> straight, vertical line)
perfectly elastic = a decrease in price causes the quantity demanded to increase without limits
(straight, horizontal line)

the more vertical a good's demand curve, the more inelastic the demand for that good is
the more horizontal a good's demand curve, the more elastic the demand for that good is

the more narrow a product (minute maid instead of orange juice), the more elastic it becomes. this is because the number of substitutes for the product grows

consumers pay the entire burden of the tax when demand is perfeclty inelastic
producers pay the entire burden of the tax when demand is perfectly elastic
the greater the elasticity of demand, the more producers pay of the tax
the more inelastic, the more consumers pay of the tax
as price elasticity of demand falls and price elasticity of supply rises, consumers pay more of the tax
as price elasticity of demand rises and prce elasticity of supply falls, producers pay more of the tax
deadweight loss to society increases as the demand or supply curves get more elastic

subsidies shift the supply curve down
minimum wage is a price floor
the more elastic the supply or demand curve, the greater the surplus and the greater the government spending to purchase the surplus (price floors)
the more elastic the supply or demand curve, the greater the shortage (price ceilings)

to protect domestic jobs, nations can impose trade barriers
tariffs and quotas are trade barriers
a revenue tariff is an excise tax on goods not produced in the domestic market
a protective tariff is an excise tax on goods that are produced in the domestic market
("PROTECTIVE" b/c it protects the domestic industry from global competition by increasing the price of
foreign products)
an import quota is a maximum amount of a good that can be imported into the domestic market
tariffs collect revenue for the government while quotas do not

the law of diminishing marginal utility
law of demand coincides with utility
if price is lower, people demand more (increase consumption)
maximize utility where the marginal utility is equal to the price of the good
Utility Maximizing Rule (MUx/Px) = (MUy/Py)

if the elasticity of demand is greater than 1, the firm increases total revenue by decreasing the price
if the elasticity of demand is less than 1, the firm increases tootal revenue by increasing the price

if you are receiving more bang per buck from consuming one good, increases the consumption of that good

INELASTIC DEMAND (price increases, total revenue increases; price decreases, total revenue decreases)
ELASTIC DEMAND (price increases, total revenue decreases; price decreases, total revenue increases)

Cross price elasticity shows how sensitive a product is to a change in price of another good
(% change in quantity of product B) / (% change in price of product A)
pops out a positive number = substitues
pops out a negative number = complements

Income Elasticity of Demand
(%change in quanitity) / (%change in income)
pops out a positive number = normal good
pops out a negative number = inferior good

Consumer surplus is above world price
when there is a tariff, CS is above world price + tariff

Producer surplus is below world price
when there is a tariff, PS is below world price + tariff

excise tax is a tax on producers to get them to produce less
an increase in fixed cost only affects AFC and ATC
an increase in variable cost affects AVC, ATC and MC

UNIT 3:
economies of scale (getting bigger is cheaper, average cost going down) long run average costs fall as more output is produced
constant returns
diseconomies of scale (average cost going back up again) long run average costs increase as more output is produced
a firm should shut down when price falls below AVC
per unit tax/subsidy affects variable cost, so MC, AVC, and ATC will shift (affects quantity produced)
a lump sum tax/subsidy affects fixed cost, so MC stays the same (does not affect quantity produced)
perfect competition profit (measure from where MC = Price down to the ATC)
if firms enter, the market supply curve shifts to the right
perfect competition loss (measure from where MC = Price up to the ATC)
if firms leave, the market supply curve shifts to the left
if there is profit, firms will enter, so supply shifts to the right
shift price back to where it was, but quantity increases
(constant cost industry)
if there is a loss, firms will leave, so supply shifts to the left
shifts price back to where it was, but quantity shifts back
(constant cost industry)
productive efficiency is produce where price = minimum ATC
allocative efficiency is where price = MC
a perfectly competitive firm has both efficiencies in the long run

UNIT 4:
MONOPOLY
monopoly is firm is the market (unique product, price "makers")
demand doesn't equal marginal revenue
when MR = 0, total revenue is maximized
elastic range of demand curve is to the left of MR = 0
inelastic range of demand curve is to the right of MR = 0
monopolies produce where MR = MC, but charge where the Demand curve is

Total revenue = P x Q
total cost, measure from the ATC
determine profit/loss from these two
monopolies are not allocatively efficient
monopolies are not productively efficient
socially optimal price is where P = MC (allocatively efficient)
fair return is where P = ATC (normal profit)
a perfectly discriminating monopoly has its demand curve = to its marginal revenue curve

MONOPOLISTIC COMPETITION
large number of sellers
differentiated products
some control over price
easy entry and and exit
same graph as monopoly (in the short run)
in the long run, ATC is tangent to the demand curve
not allocatively efficient
not productively efficient
monopolisitcally competitive firm operating at a loss = ATC is above demand curve (same for monopolies)
monopolisitcally competitive firm operating at a profit = ATC is below demand curve (same for monopolies)

OLIGOPOLY
a few large producers
high barriers to entry
nash equilibrium (the outcome that will occur when both firms make decisions simultaneously and have no incentive to change)
cartel = a group a producers that agree to set prices high
firms in a colluding market = act as one, monopoly graph

UNIT 5
resource market (perfect competition, monopsony)

Perfectly Competitive (wage takers)
when wage goes down, hire more (law of demand)
when wage goes down, supply less (law of supply)
individuals supply labor
firms demand labor
price increase of the product increases the demand for the resource
minimum wage is a wage floor

MRC is the additional cost of an additional resource
In a perfectly competitive labor market the MRC = wage set by the market and is constant
MRC = (change in total cost) / (change in inputs)

MRP is the additional revenue generated by an additional worker
In a perfectly competitive labor market, the MRP = marginal product of the resource times the price of the product
MRP = (change in total revenue) / (change in inputs)

Hire when MRP = MRC
horizontal supply = MRC = wage set by market
downward sloping demand = MRP

MONOPSONY
"monopoly but for labor"
one firm hiring workers
firm is a wage maker
hire where MRC = MRP (quantity) (wage is measured from the supply curve)
D = MRP
(MPx/Px) = (MPy/Py) least cost rule

UNIT 6
public sector is the part of the economy controlled by government
private sector is the part of the economy run by private individuals and companies that seek profit
free riders are people who benefit without paying
marginal social benefit
marginal social cost
MSB = MSC

negative externalities:
Demand curve is downward sloping = MSB
supply curve is upward sloping = MPC
MPC + externality = MSC
negative externality shifts MSC up (supply)
fix a negative externality with an excise tax
per unit tax the amount of the externality (MSC doesn't move, rather MPC shifts left onto MSC, produce
now where MSC = MSB)

positive externalities:
S=MSC
D=MPB
MSB is more (social is more than private)
MPB + externality = MSB
government fixes a positive externality by subsidizing the amount of the externality
shifts MPB to MSB and makes MSB = MSC

antitrust laws are laws meant to prevent monopolies and promote competition
lorenz curve (bigger banana = more income inequality)
gini coefficient
progressive taxes - takes a larger % of income from high income groups
proportional taxes - takes the same % of income from all income groups
regressive taxes - takes a larger % of income from low income groups (sales tax)