Microeconomics Cue Card

Economic Analysis 1. Point A & Before c'an(e 2. "Delta) * $'an(e 3. Point B & After c'an(e

%carcity / Choices
Ppc HeatK ing Oil Heating Oil .$ .A .L #%
A

# .G #2

$asoline &S2
$

Scarcity & Choice

The Economic Problem !esources /also called "actors o# Production o" Inputs* a"e sca"ce. 6esou"ces .ncomes land /natu"al* "ent la-o" 7ages ca'ital inte"est ent"e'"eneu"shi' '"o(its 4 #eo'les8 7ants and needs (o" $oods and %er&ices '(utputs) a"e unlimited.

&S% $S Q

Gasoline T7o &hoices a"e Trade1(##s Economic Analysis 1. A&allocati#e efficiency "P1*-$/1) 2. & cold 5inter 3. B 6s'ort run (i#e up (asoline to (et 'eatin( oil ne5 allocati#e efficiency "P2*-$/2)

Q2 Q% Gasoline is the opportunity cost o( heating oil. #oint L : ine((icient use o( "esou"ces #oint G : unattaina-le in S6 All 'oints on #'c cu"!e K (ullK em'loyment 0 '"oduction

%peciali.e / Trade : Comparati&e Ad&antage 0ene#its %. .n'ut o" Out'ut '"o-lem@ AAAAAOut'ut -ecause out'uts !a"yAA 2.A-solute ad!antage (o" each@ 1 3.&om'a"ati!e ad!antage (o" each@ 1 (o" Heat, ST (o" Gasoline B.Te"ms o( t"ade@ %.% G 3% HO 3%.3 G 0oth 0ene#it ((( 1Out'ut !a"ies O''o"tunity cost goes O!e" I(- 1 .n'ut !a"ies O''o"tunity cost goes ;nde" Prompt: ,efinery E- produces 33 (al. (asoline or 3. (al. 'eatin( oil per %arrel of crude oil. ,efinery /0 produces 32 (al. (asoline or 21 (al. 'eatin( oil per %arrel of crude oil. /'ould t'ey speciali+e 2 trade3 Heating OilGasoline 1 3C 2B % HO: 33+3C : 2.2$33 % G : 3C+33:.DHO ST2B Oil % HO : 32+2B : %.3G32 %G : 2B+323.456( Gasoline 32 33 Gasoline 32 33
3C

Demand and Demand Elasticity

A Change in Price causes a change in Quantity Demanded. o!e along cu"!e. P QD # 1. A at P1, Q1 #2 #% .$ A D Q2 Q% Q

2. Price of cup of coffee

quantity demanded

&u's o( &o((ee 3. B: P, Q *a+ o# Diminishing ,arginal -tility9The mo"e o( a good a consume" al"eady has, the lo7e" the e2t"a /ma"ginal* utility /satis(action* '"o!ided -y each e2t"a unit. a util : a unit o( satis(action T; T; &onsume"s . . 4 7ant to ma2imi<e thei" Q total utility ; 4 7ant the most (o" thei" money 4 ;X : ;= Q #X #= Snicke" $a"s ; 4 ; : T;
Sally Dickson, Austin, TX [email protected]

A Change in Anything but # Price causes a change in Demand. Shi(t the cu"!e. D3 Determinant D D2 D% Ty'ical Dete"minants o" )ess o"e Q $eteris Pari%us &onditions a"e &u's o( &o((ee $uye" tastes+'"e(e"ences Economic Analysis ,um-e" o( -uye"s + 1. D1 'o'ulation 2. Population .ncome people drin more coffee #"ice o( "elated goods in !ouston. /su-stitutes 0 com'liments* 3. D3 "QD at e#ery P* 12'ectations 7hy the demand cur&e slopes do+n+ard9?hat causes the in!e"se "elationshi' -et7een '"ice and Euantity demanded@ -o#e alon( t'e cur#e. %. The )a7 o( Diminishing ,arginal # -tility 2. Income E##ect9a lo7e" '"ice has #% the e((ect o( inc"easing money #2 income-uy mo"e o( othe" things D 3. %ubstitution E##ect9a lo7e" '"ice Q % Q2 cause 'eo'le to s7itch to the 'u"chase Shoes o( the F-ette" dealG. B. &ommon sense9-uy mo"e i( '"ice is lo7e" Q

Elastic Demands slope: Q>#(latte" Perfect elastic&'ori+ontal P $ ? #2 $ #% A D Q2 Q% Q 4 lu2u"y 4 close su-stitute 4 la"ge 5 income 4 longe" time Inelastic Demands slope: Q3#stee'e" Perfectly inelastic&#ertical P D 1lect"icity #2 $ #%
A

Elasticity Coe##icients -ased on percent o# change /5H* Price Elasticity o# Demand "ormulas 4 1d : 5QD2 5#2 /,o neg. I* 1d : AAQD2
2

o"iginal QD2

o"iginal #2

4 mid'oint /a"c* (o"mulaJ 1d : Q #

Q+2 #+2 Elasticity / Total !e&enue Test 1lastic >% i( #T6 /o''osites* ;nit elastic :% i( H#no HT6 .nelastic 3% i( #T6 /same di"ection* # #% #2 1d>% 0,*P 4 Q 1d:% 1d3% D Q Q% Q2 Cross Elasticity T6 QD

4 4 4 4

Q2 Q% Q necessity no close su-stitute small 5 income sho"te" time

T6

Income Elasticity 1=:5HQD2 5H= /=:income*

12y:5HQD2 5H#y

Supply & Supply Elasticity

A Change in Price causes a change in Quantity Su''lied. ,o&e along cur&e. P Q% Eco Analysis # S 1. A at P1, Q/1 #2 #% $ A Q% Q2 &u's o( &o((ee Q 2. Price of cup of coffee

Quantity supplied
3. B: P2, Q/2

A Change in Anything but Price causes a change in Su''ly. Shi(t the cu"!e. Determinant % Ty'ical Dete"minants o" $eteris Pari%us conditions "esou"ce /(acto"* '"ices technology o" techniEue ta2es+su-sidies '"ice o( othe" goods '"oduction su-stitution #"ice e2'ectations ,um-e" o( selle"s

S2

S% S3

Elasticity o# supply 11%lope o# Cur&e # H Cmmediately #2 .nelastic su''ly #% Qe"tical o" stee' 4 /'ort ,un o"e elastic due to (i"mRs intense use o( (i2ed "esou"ces /u'slo'iing*

,o T6 test S

4 Gon( ,un All "esou"ces can change 1lastic su''ly Ho"i<ontal, (lat

# S #%,2 Q% Q2 Q

Q )ess o"e &u's o( &o((ee Economic Analysis 1. /1 2. /tar%uc s opens more stores7 sellers 3. /3 "Q/ at e#ery P) #"ice M2C

Q%02 Q # #2 #% Q% Q2 Q S

The key dete"minant o( '"ice elasticity o( su''ly is the amount o( time a selle" has to change the amount o( the good they can '"oduce /o" su''ly*. Price Elasticity Coe##icient o# %upply based on ; o# change< not slope 1S : 5HQS2 + 5H#2

%urplus 8 %hortage Dise9uilibrium S # 12cess Quantity Su''lied Eco Analysis Eco Analysis # S% QS>QD : %urplus 1. A=P1, Q1 1. A&&P1, Q1 S S2 M%N 1Euili-"ium #"ice: a"ket #2 2. =faster, 2. (reater $ #% #"ice QS:QD A smaller c'ips popularity " #% A M%C 12cess Quantity Demanded #2 " tec'nolo(y) preferences) $ D % D2 / D QD>QS : %hortage D D Amount o( Q% Q2 Q 3. B&&P ,Q 3. B&&P , Q 2 2 su"'lus QD Qe QS Q% Q2 Q usic &D8s E##iciency *oss 3 Dead 7eight *oss Go!t. ta2es o" "egulations o" mono'oly 'o7e" Economic Analysis "educe consume" and+o" '"oduce" su"'luses -elo7 society8s allocati!e e((iciency. 1. Before c'an(e & 819:$D, quantity at Qe 2. $'an(e: /eller raises price to 82. on ne5 'it $D 3. After c'an(e 6 /urplus %ecause Q/ ; QD at t'e $o&ernment Price "loor $o&ernment Price Ceiling E:cise Ta:es and Ta: Incidence Tari##:im'o"t ta2:customs duty price # S: &S # S: &S /?ho "eally 'ays the ta2 'i('er de'ends on #"ice S ;S elasticity o( su''ly and o( demand.* Te2tiles # S2 #;Snot"ade #( ( d S% #?PTa"i(( Lloo" K A'a"tments $ D T T D #e ?heat # # # e 2 ta2 iPods iPods
e e g

Supply / Demand Equilibrium Product Markets (Industry

Consumer / Producer %urplus 44 &onsume"s8 su"'lus is the di((e"ence -et7een that 'aid /#e* and 7hat one 7ould ha!e 'aid -ased on utility /#hi* # /A"ea Fe,#hi,#eG* #hi C% S #e e #lo P% D Qe Q /A"ea Fe,#lo,#eG* 44 #"oduce"s8 su"'lus is the di((e"ence in the '"ice cha"ged /#e* and the '"ice a selle" limit on Euantity could Quota sell (o"O -ased onthe costs /#lo*. o( im'o"ts #"ice S% S2 #;S no t"ade S3 #;SPEuota #?o"ld ;S Steel
D .# .# D

QD Qe QS Eco Analysis 1. Before&&PeQe 2. $'an(e 6 <o#t. sets price floor to 'elp farmers at Pf.

D: $S Amount o( Q su"'lus

#c

&eiling D: $S Sho"tage amount Q

#% #selle"

Cons.Ta:

&osmetics

?o"ld

D Q% Q2 Q3 QB QN Q

Prod. Ta:

D Q% Q2 Q3 QB QN Q

3. After=>/;QD /urplus of 5'eat 2 efficiency loss area ?ef(@

Sally Dickson, Austin, TX [email protected]

QD Qe QS Eco Analysis 1. Before6PeQe 2. $'an(e 6 <o#t. sets apt. price ceilin( to 'elp poor. 3. After 6 QD;Q/ Apartment s'orta(e 2 efficiency loss area ?cde@

D Analysis Q 2 Q% Q 1. A&& Eo ta4 at equili%rium P1 , Q1

2. &&<o#t. ta4es cosmeticsper unit costs/ "e4cise6%usiness ta4) 3. B 6 P2, Q2 : $onsumer ta4*"P2& P1)Q2F Producer ta4*"P1&Pseller)Q2F Efficiency Goss area ?D@

1. Before&&P5B0ariff., produces Q2 , 'as efficiency loss areas ?D@, (ets tariff re#enues areas ?0@,and imports Q2 to Q1. 2. $'an(e=D0> treaty requires A/ to remo#e tariffs 3. After 6 P"A/ pays PDorld ), Q "domestically producin( to Q1)F - "A/ imports Q1 6 Q9)

1. Before 6 A/ pays PA/Bquota, produces Q2 , 'as efficiency loss areas ?D@, import producer (ets e4tra profits ?CP@, and t'e A/ imports Q2 to Q1. 2. $'an(e 6 D0> outla5s quotas 3. After 6 P "A/ pays PDorld ), QA/ "domestically producin( to Q1), - " A/ imports Q9 6 Q1)

*a+ o# Diminishing !eturns9As e2t"a units o( a !a"ia-le "esou"ce+in'ut /la-o"* a"e added to (i2ed "esou"ces /ca'ital,land*, out'ut /'"oduct, Euantity* 7ill decline at T# some 'oint. T# %* .( T#, # 2* .( T# )ess % 2 # % 2 )a-o" 3 # Q 3 Q Diminishing, #S to C 3* .( T#S, #,egati!e. Li2ed in'utsK Sho"t "un only

%hort !un Production Costs9T&:L&PQ& AT&:AL&PAQ& TC =C

=C

Cost

} "C
TC

T&+Q:AT& Q&+Q:AQ& L&+Q:AL& Li2ed costs can8t change in the sho"t "un. Qa"ia-le costs can change in the sho"t "un.

Cost
A"C{

"C Q ATC A=C A"C

A=C

,arginal CostsJ & is the cost o( '"oducing one mo"e unit o( out'ut. & c"osses AT& and &osts AQ& at thei" lo7est & 'oints. AT& ,o AQ& "elationshi' -et7een & and Q AL& & at lo7est 'oint 7hen a"ginal #"oduct / #* is at its highest 'oint. These cu"!es a"e mi""o" images. *ong !un E9uilibrium ,!3,C3min. ATC3P ' & AT& ' 6:d

*ong !un ATC A All "esou"ces !a"ia-le, none (i2ed AT&

1conomies &onstant Diseconomies o( Scale 6etu"ns o( Scale )6 AT& to Scale

E% E2 Out'ut 1conomies o( Scale due to la-o" 0 manage"ial s'eciali<ation, e((icient ca'ital'e" unit costs &onstant 6etu"ns to Scale'e" unit costs same Diseconomies o( Scale due to ine((iciencies ("om la"ge, im'e"sonal -u"eauc"acy'e" unit costs Industry and "irm in an E:panding Industry # ' S% & AT& #% S 2 '% 6:d A A
#"o(its AT& m $

Per!ect Competition "he #irm

Characteristics 44Qe"y la"ge num-e" o( (i"ms 44Standa"di<ed '"oducts 44#"ice take"s 441asy ent"y into and easy e2it ("om ma"ket 44,o nonK'"ice com'etition /ad!e"tising* 4412J Ag"icultu"e Pro#it ,a:imi.ation !ule ,!3,C ' P3,C AT& & '
1conomic '"o(it AT& ( e

%hort !un *oss ,inimi.ation ,!3,C< P>A=C ' & AT& AQ& AT& e )oss ( ' 6:d

%hut Do+n Decision P?A=C ' & AT& AQ& ' 6:d

6:d Li"m E E 4': 6:d:A6 (o" (i"m 4E 7he"e 6: & 4loss a"ea /AT&,e,(,'*KK'"ice -elo7 AT& 0 a-o!e AQ& 4Li2ed costs a"e co!e"ed /s'ace -et7een AT& 0 AQ&*. Pro#it ,a:imi.ing !ule ,!3,C #+& & #m
#"o(its AT& ( 6: & e

#2

'2 D Q

6:d E2 E
1

Monopoly "$E%&' %# #I&M

Characteristics 44One (i"m:indust"y 44;niEue '"oduct 7ith no close su-stitutes 44#"ice make" 44 any -a""ie"s, ent"y -locked 44)ittle ad!e"tising e2ce't (o" 'u-lic "elations 4412J local utilities, 'atented d"ugs

Li"m E E 4': 6:d:A6 (o" (i"m 4E 7he"e 6: & 4economic '"o(its a"ea /',e,(,AT&* 7hy Demand and ,! arent the same: 63# -+c to sell Q, ono'olist # on all unitsT6 in elastic # "ange elastic
unit elastic inelastic

Li"m E E 4': 6:d:A6 (o" the (i"m 4E 7he"e 6: & 4shut do7n -ecause (i2ed costs /AT&KAQ&:AL&* a"e the least loss 'ossi-le !egulated ,onopoly 4Ty'ically ,atu"al ono'olies 7ith 1conomies o( Scale 4Lai"K6etu"n #"iceJ #(:AT& mono'olist -"eaks e!en 4Socially O'timal #"iceJ #": & su-sidies to mono'olist allocati!e e((iciency #+& #m #( #" 6

Li"m E E 4': 6:d:A6 (o" the (i"m 4E 7he"e 6: & 4(i"m in long "un eEuili-"ium 7he"e #: & at min. AT&

Q% Q2

Analysis Industry "irm 1. A&&Cndustry at P1, Q1 equili%rium firm price ta er at p1, -,*-$ at q1 earns economic profits
,

"p1,m,A,A0$) 2. =>t'er producers see profits and enter t'e mar etnum%er of firmsindustry supply to /2

AT&

D T6
T6

6 #2Q:T6 Q

Qm 6 Q 44Qm 7he"e 6: & 44#m 7he"e Qm inte"sects D 441co #"o(it : /#mKAT&*Qm o" 1conomic #"o(it:T6KT& 441((iciency loss /e, (, 6: &*

Price Discrimination9The '"actice o( selling a '"oduct at mo"e than one '"ice not Tusti(ied -y cost di((e"ences. Due to 4mono'oly 'o7e", 41d seg"egates ma"ket, 4-uye"s can8t "esell '"oduct. 12am'lesJ ai"lines, mo!ies P &aries@ ,!3D #"o(its a-o!e AT&2Q
m

3. B&&P,Q "industry) firm price ta er at p2 * -$ ,onopoly Competiti&e *-, at q2 "allocati#e becomes efficiency), no economic profits # Pm > ,C Pc3,C p2* min. A0$ "producti#e efficiency) 'm 'c
A
$

& D

AT&

1li )ily '"oduces #"o<ac

Em Ec

#+& AT& & D Q

#"o(its ATC

& AT& 6:D Q

Qm

6 %. A #%, Q% O ono'oly 7ith '"o(its, e((iciency loss 2. H The 'atent '"otecting #"o<ac "uns out and othe" (i"ms no7 '"oduce the gene"ic d"ug com'etition (i"m -ecomes '"ice take" 3. $ 'c, Ec

Sally Dickson, Austin, TX [email protected]

Monopolistic Competition "heory o! the #irm

Characteristics 44 any (i"ms 44Di((e"entiated '"oducts 44)imited cont"ol o!e" '"ice 44Le7 ent"y -a""ie"s 44 uch nonK'"ice com'etition9 many ads,-"ands 4412J "etail t"ade, clothing, "estau"ants ,onopolistically Competiti&e #irm reaches *ong !un E9uilibrium # #+& & Demand #ery S% '% AT& A elastic. S2 #"o(its d% AT&% A A A A A A A A A A A $ #% ' A 2 #2 6% $ d2 62 .ndust"y Q% Q2 Q Li"m E2 E% E 1. A Cndustry at equili%rium P1, Q1 Iirm earnin( eco profits "p1;A0$)

%li(opoly
Characterisitcs 44Le7 (i"ms 44Standa"di<ed o" di((e"entiated 44.nte"de'endence limits '"ice cont"ol unless collusion 44 any -a""ie"s to ent"y 44,onK'"ice com'etition high 7ith '"oduct di((e"entiation9ads 4412J Ai"c"a(t, ti"es

2. Ee5 firms enter industry, / firmJs d %:c more close su%stitutes and aInput smaller s'are of total demand -, &esource (#actor) Markets Imper#ect 3. B Cndustry P2,Q2F Iirm in Gon( ,un Equili%rium at p2Competition *A0$, q2 or ,onopsonist '2 #irm D*) H ,esource demand Pure Competition *abor ,arCet 4 Li"m can set 7ages, -ut i( deri&ed o( product ? ,arCet ? "irm one mo"e 7o"ke" hi"ed at ,P:P3,!P*3D* ?2 S)2 S)% ?2 $ s2: 6&2 $ highe" 7age, all cu""ent The H T6 ("om ?% ? s%: 6&% 7o"ke"s "ecei!e 'ay "aise, A % A each added unit o( so %* ,!C. "esou"ce D) d): 6# 7ages3,!C*3%* ? 6& The H T& ("om S) $ each added unit ?c A 4 #"o(it a2 6uleJ Analysis Q2Q% Q E2 E% la-o" E ?m ,!P*3,!C* o" 1. A Iirm is 5a(e ta er at D1, q1 & 6#:D) ' mrps3D*) 3 %* 2. %a%y %oomers retire mar et /G,

De#initionsB H /trate(ic Be'a#iorKA (i"m conside" "eactions o( othe" (i"ms to its actions. H $oncentration ,atioKK5 o( ma"ket cont"olled -y la"gest (i"ms 4 -ar et oli(opolistic i( at least B (i"ms cont"ol BC5 4 $ollusion*$ooperation H /elf&interestnon&coop H $artel=a formal collusion on price, quantity, s'are 4 <ame 0'eory9the study o( ho7 'eo'le -eha!e in st"ategic situations.

$ame Theory E::11T+o Cereal "irms Gene"al ills &e"eals Ad8s ,o Ad8s U MWC MBC e l % l Ad8s MWC MDC o g ,o MDC MNC g Ad8s MBC MNC 4 Dominant /trate(y9-est (o" a 'laye" no matte" 7hat othe" does9 $oth "uns ad8s e!en though it is an in(e"io" 'osition. 4 Payoff -atri49#ayo(( o" '"o(it to each 'a"ty (o" each com-ination o( choices 4 >utcomeJ Qoligo'olists > Qmono'olistV #o 3 #m Economic !ent paid #or use o# *and 6 S)and Eco Analysis 62 Austin $ 1. A at ,1, Q. 6eal 2. Population 6% 1state A 3. $ at 62, QC QC Q Interest paid #or use o# Capital " S)L : Sa!e"s, lende"s /HouseK holds, (i"ms, go!ts. D)L : $o""o7e"s /$usinesses, Homeo7ne"s, Go!ts.* *oanable "und ,arCet r:"eal inte"est 5 Causes o# Income Ine9uality: 4 A-ility, talent 4 1ducation+t"aining 4 Disc"imination 4 #"e(e"encesKty'es o( 7o"k, leisu"e 4 ;neEual 7ealth 4 a"ket 'o7e" 4 )uck, mis(o"tune Income !edistribution Tradeo##: 6educed e((iciency, '"oduction 0 total income

7orCers '%*) $ain ,onopoly Po+er as a -nion ? O"gani<e all 7o"ke"s Ho7 unions "aise S): 6& 7agesJ ? 4 .nc"ease demand ; (o" '"oducts D) ?& A 4 .nc"ease D): 6# '"oducti!ity D) 4 6est"ict mem-e"shi' S) 4 O"gani<e all 7o"ke"s negotiate ?
su"'lus

Market #ailure

firmJs -,$ and *o+ernment Solutions 3. B -ar et to D2,Q2 Iirm D2, q2

)a-o" Qm Qc
"d

Degati&e E:ternalityB#"i!ate costs -o"n -y society+3"d 'a"ty # &S &# Ta2 o" $ 6egulation #2 #% & A $S Q2 Q% Q Analysis $asoline 1. A=-B/*-$P, Efficiency loss "A,B,$)*societyJs cost, resource o#erallocation 2. =<o#t. ta4es or re(ulates 3. B=-B/*-$/, P2, Q2

Positi&e E:ternalityBSocial -ene(its to 3 'a"ties -o"n -y '"i!ate (i"ms # # &# & &S Su-sidy S $ A Su-sidy #2 #% A $ #% $S #2 $# $S Q
%

Q2

Q% Q2

Analysis 6igher Education 1. A=P1,Q1, under& 1. A=P1,Q1 Ander& allocation of resources allocation of resources 2. =<o#t. susidy to 2. =<o#t. su%sidy to consumers-B uni#ersities-$ 3. B=P2, Q2, -B/*-$/ 3. B=P2,Q2, -B/*-$/

Q Public $oods Go!t. '"o!ides the goods+se"!ice 4 #aid -y ta2 "e!enues 4 Di((icult to e2clude nonK 'aye"s ("ee"ide"s 4 Sha"ed consum'tion o( good, se"!ice no "i!al"y (o" good+se"!ice

2. Anion ne(otiates D 3. After QDGKQ/Gsurplus Anti1Trust *a+s of la%or at DA*oren. Cur&eBIncome Ine9uality 5 o( .ncome 4 GoalsJ '"omote com'etition %CC e and e((iciency XC 4 )a7sJ She"man9no #e"(ect eEuality YC mono'oly 0 no "est"aints o( )o"en< &u"!e t"ade /collusi!e '"ice (i2ing 0 BC A $ di!iding ma"kets*, &layton9no 2C &om'lete .neEulity '"ice disc"imination not -ased on costs, no tying cont"acts, no C 2C BC YC XC %CC inte"locking di"ecto"ates, 5 o( Lamilies Lede"al T"ade &ommission Distance -et7een Ce and )o"en< and ?heele" Act9&ease 0 &u"!e sho7s deg"ee o( ineEuality. desist o"de"s 0 no dece'ti!e $ini ratioKKnume"ic measu"e o( acts and '"actices /ads*, o!e"all dis'e"sion o( income &elle"KUe(au!e" 9no antiK Gini "atio : A"ea AA"eas AP$ com'etiti!e me"ge"s. . * perfect equalityF .21L * MapanF . 139 * A/AF .91L * -e4icoF 1 * complete inequality

QD Q& QS Q 1. A $ompetiti#e Equili%rium in la%or mar et&&D$,Q$

Sally Dickson, Austin, TX [email protected]