ECON1101 Summary I Intro to Microeconomics... 5 Supply and Demand... 6 Price Controls... Error! Bookmark not Price Elasticity of Demand... Error! Bookmark not εd = % QD% P = 1slope PQD... Error! Bookmark not Determinants of Price Elasticity of Demand... Error! Bookmark not Cross-Price Elasticity of Demand... Error! Bookmark not εxy = % QxD% Py... Error! Bookmark not Income Elasticity of Demand... Error! Bookmark not εi = % QD% I... Error! Bookmark not Price Elasticity of Supply... Error! Bookmark not εs = % QS% P... Error! Bookmark not Consumer Behaviour Individual Demand... Error! Bookmark not Consumer Surplus... Error! Bookmark not Consumer Behaviour Budget Line... Error! Bookmark not Understanding the Law of Demand, Income and Substitution... Error! Bookmark not Preferences and Utility... Error! Bookmark not Market Demand and Market Supply... Error! Bookmark not Firms... Error! Bookmark not Marginal Product of Labour (MP L )... Error! Bookmark not Marginal Cost (MC)... Error! Bookmark not Individual Firm Demand... Error! Bookmark not Sunk Costs... Error! Bookmark not Marginal Revenue (MR)... Error! Bookmark not Producer Surplus (PS)... Error! Bookmark not Surplus Summary... Error! Bookmark not Deadweight Loss or Excess Burden... Error! Bookmark not Pareto Efficiency... Error! Bookmark not Informational Advantage of Price Mechanism... Error! Bookmark not Efficiency vs. Equity... Error! Bookmark not Impact of Excise Tax... Error! Bookmark not Economic incidence of tax, who bears it?... Error! Bookmark not 1
Costs in the Short Run... Error! Bookmark not Short Run Cost Measures... Error! Bookmark not Total Costs = Fixed Costs + Variable Costs... Error! Bookmark not Marginal Costs (MC) = C Q = TC Q, TC = VC.... Error! Bookmark not Average Fixed Cost (AFC) = Fixed CostQuantity... Error! Bookmark not Average Variable Cost (AVC) = Variable CostQuantity... Error! Bookmark not Average Total Cost (ATC) = Total CostQuantity... Error! Bookmark not i.e. Average Total Cost (ATC) = AFC + AVC... Error! Bookmark not Relationship between MC and AVC (ATC)... Error! Bookmark not A typical MC, AVC & ATC graph.... Error! Bookmark not Economic Costs vs. Accounting Costs... Error! Bookmark not Explicit Costs... Error! Bookmark not Implicit Costs... Error! Bookmark not Accounting Profit... Error! Bookmark not Economic Profit... Error! Bookmark not Average Revenue (AR) = Total RevenueQuantity = (P Q)Q = P, the market price.... Error! Bookmark not Profits, Costs, and Production for Price Taking Firms in SR... Error! Bookmark not Profits = Revenues Total Costs... Error! Bookmark not Break-even Point... Error! Bookmark not Shut-down Point... Error! Bookmark not Costs and Production in LR... Error! Bookmark not ATC LR = TCLRQ... Error! Bookmark not MC LR = TCLR Q... Error! Bookmark not Price-Taking Firm in the Long Run... Error! Bookmark not Returns to Scale... Error! Bookmark not Increasing returns to scale:... Error! Bookmark not Constant returns to scale:... Error! Bookmark not Decreasing returns to scale:... Error! Bookmark not Economies of Scale... Error! Bookmark not Diseconomies of Scale... Error! Bookmark not Economies of Scale... Error! Bookmark not Set-up costs... Error! Bookmark not Economies of scope... Error! Bookmark not Implicit Cost of Capital... Error! Bookmark not Entry and Exit of Firms... Error! Bookmark not When will new firms enter the industry?... Error! Bookmark not When will existing firms exit an industry?... Error! Bookmark not How the long-run equilibrium is maintained... Error! Bookmark not In the Short Run... Error! Bookmark not In the Long Run... Error! Bookmark not In Overview... Error! Bookmark not Consider a decrease in demand... Error! Bookmark not Shifts in Cost Curves (p. 237)... Error! Bookmark not Average Total Cost is Minimised... Error! Bookmark not 2
Efficient Allocation of Capital among Industries... Error! Bookmark not Constant-Cost Industry... Error! Bookmark not External Diseconomies of Scale... Error! Bookmark not External Economies of Scale... Error! Bookmark not Monopoly... Error! Bookmark not Sources of Monopoly... Error! Bookmark not Profit-Maximising Monopolist... Error! Bookmark not Price Discrimination (PD)... Error! Bookmark not First Degree Price Discrimination... Error! Bookmark not Analysing the surplus of the non-discriminating monopolist... Error! Bookmark not Analysing the surplus of discriminating monopolist... Error! Bookmark not Second Degree Price Discrimination... Error! Bookmark not Third Degree Price Discrimination... Error! Bookmark not Types of Market Structure... Error! Bookmark not Product differentiation... Error! Bookmark not How are products differentiated?... Error! Bookmark not Monopolistically competitive industry (MC)... Error! Bookmark not Short Run Situations for monopolistically competitive industries.. Error! Bookmark not How long-run equilibrium looks for monopolistic competition... Error! Bookmark not Note: Demand curve is tangent to ATC curve, P* = ATC (at Q*)... Error! Bookmark not Two characteristics of LR equilibrium for MC industry... Error! Bookmark not Compared to perfect competition... Error! Bookmark not Strategic Behaviour/Interaction... Error! Bookmark not Explained with the Prisoner s Dilemma... Error! Bookmark not Prisoner s Dilemma... Error! Bookmark not Dominant Strategy... Error! Bookmark not Nash Equilibrium Strategy... Error! Bookmark not Incentives to Cooperate: Repeated Games... Error! Bookmark not Grim Strategy... Error! Bookmark not Oligopolies... Error! Bookmark not Duopoly... Error! Bookmark not Approach perfectly competitive outcomes as more firms compete.... Error! Bookmark not Payoff Matrix - Duopoly... Error! Bookmark not Advertising Prisoner s Dilemma... Error! Bookmark not Payoff Matrix Advertising Prisoner s Dilemma... Error! Bookmark not Labour Demand... Error! Bookmark not Marginal product of labour (MP L)... Error! Bookmark not Marginal revenue product of labour (MRP L)... Error! Bookmark not Input demand is linked to output supply... Error! Bookmark not Labour Supply (L S )... Error! Bookmark not Substitution effect: w L S... Error! Bookmark not Income effect: w L S... Error! Bookmark not 3
Demand for Physical Capital... Error! Bookmark not Marginal Product of Capital (MP K)... Error! Bookmark not As K MP K : Diminishing returns to capital.... Error! Bookmark not Marginal Revenue Product of Capital (MRP K)... Error! Bookmark not MRP K = P * MP K... Error! Bookmark not MRP K = r... Error! Bookmark not Implicit rental price or user cost of capital = Depreciation Cost + Interest Cost... Error! Bookmark not Implicit rental rate = Implicit Rental Price / Price of Capital... Error! Bookmark not i implicit rental rate K D (demand for physical capital). Error! Bookmark not Return on stocks = Dividend + Capital Gain/Loss... Error! Bookmark not Rate of return on stock = Return on Stock / Share Price.. Error! Bookmark not Present Discounted Value / Time Value of Money... Error! Bookmark not Risk vs. Expected Return... Error! Bookmark not Efficient Market Hypothesis... Error! Bookmark not Average and Marginal Tax Rate... Error! Bookmark not Australian Individual Income Tax Rates 2014-15... Error! Bookmark not Average Tax Rate = Tax / Income... Error! Bookmark not Marginal Tax Rate = The last tax rate... Error! Bookmark not Progressive Tax... Error! Bookmark not Excise Tax... Error! Bookmark not Analogy for individual income tax... Error! Bookmark not Economic incidence of tax... Error! Bookmark not Transfers and Work Disincentives... Error! Bookmark not Minimum Income Guarantee (Disincentive)... Error! Bookmark not Extreme case of The Poverty Trap... Error! Bookmark not Less extreme case... Error! Bookmark not Externalities... Error! Bookmark not Negative Externality... Error! Bookmark not Positive Externality... Error! Bookmark not Pigouvian emissions tax... Error! Bookmark not Coase Theorem... Error! Bookmark not Property Rights... Error! Bookmark not Example... Error! Bookmark not Setting... Error! Bookmark not What would be best for F?... Error! Bookmark not Corrective actions for externality... Error! Bookmark not Assignment of Property Rights... Error! Bookmark not Bargaining Outcome... Error! Bookmark not Characteristics of Goods... Error! Bookmark not Rival Goods... Error! Bookmark not Non-rival Goods... Error! Bookmark not Excludable Goods... Error! Bookmark not Non-excludable Goods... Error! Bookmark not Types of Goods... Error! Bookmark not Private Goods: Both excludable and rival.... Error! Bookmark not Public Goods: Neither excludable nor rival.... Error! Bookmark not 4
Common Resources: Rival but non-excludable.... Error! Bookmark not Efficient Provision of Public Goods... Error! Bookmark not For Private Goods... Error! Bookmark not For Public Goods... Error! Bookmark not Free Rider... Error! Bookmark not Tragedy of the Commons (Common Resources)... Error! Bookmark not Potential Solutions... Error! Bookmark not Other Common Resource Examples:... Error! Bookmark not Comparative Advantage recap... Error! Bookmark not Opportunity Cost (w/o trade)... Error! Bookmark not Production Possibilities Curve (w/o trade)... Error! Bookmark not World Production Possibilities Curve... Error! Bookmark not Wage Costs and Trade... Error! Bookmark not Reasons for Comparative Advantage... Error! Bookmark not Dynamic Comparative Advantage... Error! Bookmark not Economic Arguments for International Trade... Error! Bookmark not Intra-Industry Trade... Error! Bookmark not Why is there intra-industry trade?... Error! Bookmark not Market Equilibrium Without Trade... Error! Bookmark not World Price... Error! Bookmark not Small Economy... Error! Bookmark not Exporting Country... Error! Bookmark not Price effects with the new and higher world price... Error! Bookmark not Importing Country... Error! Bookmark not Price effects:... Error! Bookmark not Why opposition to trade, e.g. imports?... Error! Bookmark not Tariffs/Customs Duties... Error! Bookmark not Price effects with new higher price... Error! Bookmark not Quota... Error! Bookmark not Impact on supply curve... Error! Bookmark not Price effects... Error! Bookmark not Arguments for Trade Barriers... Error! Bookmark not Intro to Microeconomics Positive vs. Normative Analysis: Positive economics is objective and fact based while normative economics is subjective and value based. Resources are finite (scarce). Wants are unlimited, want more or better. Choices must be made. (Opportunity Cost) Thinking on the margin: Rational to take action if the marginal (additional) benefit exceeds the marginal cost. Voluntary exchange is mutually advantageous; this is only a reallocation of goods. Absolute advantage: Where a person/country is more efficient in producing a good compared to another person or country. 5
Comparative advantage: Where a person or country can produce one good more efficiently relative to another good (lower O.C.) compared to another person or country. PPC (Production Possibilities Curve) U.S. Movies PCs O.C. of last 100 movies produced (PCs foregone) 0 25,000 N/A 100 24,000 1,000 200 22,000 2,000 300 18,000 4,000 400 13,000 5,000 500 0 13,000 PPC shows maximum combinations of two goods that are possible given the economy s resources and level of technology. Producing more capital goods today allows more economical growth and greater production possibilities tomorrow. Supply and Demand Law of Demand: Price and quant. demanded negatively related ceteris paribus. Preference (Population) é, Demand é Negative Information é, Demand ê Income é, Demand é (Opposite for inferior goods) Population é, Demand é Expectation of future price is rising, Demand é Expectation of future price is falling, Demand ê Price of closely related substitute é, Demand é 6
Price of closely related complement é, Demand ê Movement along the demand curve: quantity demanded changes as a result of change in price of good. Shift of demand curve: occurs when a change is caused in any source but the price, causing the whole curve to shift left or right. Demand Schedule: Table of prices and quantity demanded for a good at different prices, ceteris paribus. Law of Supply: Price and quantity supplied are positively related. Technology (anything that can change the amount a firm can produce with a given amount of inputs to production) é, Supply é Weather Conditions (consider negative effects) é, Supply ê Price of Inputs used in Production é, Supply ê Number of Firms in the Market é, Supply é Expectations of Future Prices é, Supply ê Gov. Taxes é, Supply ê Gov. Subsidies é, Supply é Gov. Regulations, case to case basis. Supply curve slopes upward because ceteris paribus, a higher price offers greater incentive for a firm to produce and sell more goods. Supply Schedule: Table of prices and quantity supplied for a good at different prices, ceteris paribus. Excess demand or shortage when Q D > Q S, P will rise as consumers will pay more to have a competitive advantage over other consumers. Excess supply or surplus when Q D < Q S, P will fall as producers want to sell off their surplus and lower price for incentive for consumers to buy. Market Equilibrium: Q D = Q S, price will be stable. Given scarcity and choice, a society must decide: 1. What goods are produced and how much. 2. How these goods are produced. 3. For whom are they produced for. 7