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Principles of Microeconomics Notes

by: Nisha Esmail

Principles of Microeconomics Notes ECON 2106

Marketplace > Georgia State University > Economcs > ECON 2106 > Principles of Microeconomics Notes
Nisha Esmail
GPA 3.89

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About this Document

Ch 2,3,5,6,9,16
Ming Tsang
Microeconomics, intro to microeconomics
75 ?





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This 12 page Bundle was uploaded by Nisha Esmail on Wednesday March 30, 2016. The Bundle belongs to ECON 2106 at Georgia State University taught by Ming Tsang in Summer 2015. Since its upload, it has received 8 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Georgia State University.


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Date Created: 03/30/16
 CH 16 o Optimizing Consumption  Consumers have limited incomes (budgets)  We must make choices of how to allocate our income  We can use utils to measure the marginal utility additional consumption gives us o Consumer Optimum  Combination of goods and services that maximizes utility for a given income  Consumers will be to optimize consumption by spending dollars on goods that give the highest marginal utility per dollar  Most bang for your buck o Benefits!!! Marginal Utility/$  Apples = 6mu/$1 = 6/1  Oranges = 8mu/$2=4/1 o Deciding what to buy  We can narrow our consumption between two goods  Whichever ratio is bigger, we choose o Example  Two goods, pizza and pepsi  Pizza is $2 per slice  Pepsi is $1 per can  You can $10 to spend  Consumption of pizza and pepsi both exhibit diminishing marginal utility o Price change further analysis  Substitution effect  When consumer buys more of a good as result of price change  Real income effect  Occurs when there is a change in purchasing power as result of price change of good  When good gets cheaper, your dollar can buy more, this is similar to increase in income  Assuming normal goods, an increase in income means youll buy more goods. This affects both goods, not just the good whose price decreased  Real income effect is usually smaller than substitution effect (in terms of how greatly it affects consumption)  PRACTICE PROBLEM  TRUE o MARGINAL UTILITY GENERALLY DIMINISHES WITH ADDITIONAL CONSUMPTION OF A GOOD  PRACTICE PROBLEM  Negative marginal utility o EATING TOO MUCH FOOD AT ALL YOU CAN EAT BUFFET  PRACTICE PROBLEM  IF CONSUMORE MORE OF GOOD Z, MARGINAL UTILITY OF GOOD Z WILL FALL  PRACTICE PROBLEM  IF MUx/PX < MUy/Py o BUY MORE Y AND LESS X  PRACTICE PROBLEM  If price of good rises, consumers tend to purchase less of that good and purchase more of another good o SUBSTITUTION EFFECT o CH 5  Price Ceilings – maximum price that can be charged o Ex  If binding price ceiling of p1 is imposed, how much would qd change?  P1 = 80,000  P2 = 68,000 o Qd change by 12,000  If binding price ceiling of p1 is imposed, how much would Qs change?  P1 = 50,000  P2 = 68,000 o Qs change by 18,0000 o Intentions  helps buyers!! o Unintended Consequences  Shortage occurs  Emergence of a black market – helps demand but higher price  Application – Rent Control o Unintended consequences  Charge more misc. fees  Lower quality of apt  Drop in investment of apt  Shortage of apt  Housing gird – stay in apartment  Black market  Application – Loaf of Bread Price Ceiling o Unintended Consequences  Shortage  Size drops  Quality drops  Black market  Increase opportunity costs (lines to get bread)  Price floors – minimum legal price o Intentions  Helps producers of the product o Ex: $6 price floor of milk  Quantity of milk = increase but there will be surplus bc customers purchase less  Size of container = bigger, manufacturers make product more attractive  Producers sell below price floor = illegal discounts would help reduce the milk surplus  Milk producers better off = causes surplus so no o Unintended consequences  Surplus  Black market o Minimum Wage  Lowest hourly wage firms can legally pay workers = price floor  Rationale:  provide a living wage  Help the working poor who are often unskilled  Labor Markets  Consumers are the suppliers of labor  Firm are the demanders of labor  Wage = vertical axis, price of labor  Labor = horizontal axis, number of workers  Demand curve for labor is downward sloping o Firms are willing to buy  More labor at low wages  Less labor at high wages  Supply curve is upward sloping o Individuals are willing to supply  More labor at higher wages  Less labor for lower wages  Questions o Which is true of labor markets  Minimum wage is price ceiling  Unemployment is labor shortage  Firms supply labor  None of above  NONE OF ABOVE  Questions o Supply/demand become more elastic in long run, shortages caused by price ceilings become larger in the long run Ch 3 Fundamentals of Markets o A market is a meeting between buyers and sellers  In person like a store  Via internet as in online purchases  Catalogues The elements of the market are o The goods or services traded o Price o Quantities that buyers want to buy o Quantities that buyers want to sell o The form of interaction between traders Examples of markets o The market for textbooks used at GSU o The market for lunch on broad st o The atlanta market for gas o The us national market for gala apples o The global market for tablets o The global market for oil Markets are also linked o A seller on one market is a buyer on another o The grocer who sells you breakfast cereal is a buyer from a cereal wholesaler o We buy goods on some markets and sell our labor (work effort) on others The invisible hand o Individual markets are linked by self-interest o A supply chain (fisher takes fish to processor who sends to shipper who sends to grocery) -> linked by self interest Markets differ in how competitive they are o Competitive markets  Individual sellers and buyers cannot do much to influence price  They are constrained by the competition on the market  Lots of people in the same market (Hot dog stand)  Price tickers – take price as what it is in marketplace o Imperfect markets  Monopoly has no immediate competition (one seller)  Oligopoly involve a few firms competing primarily in price  Monopolistic competition involve a few too many firms competing in product differentiation Buyer side of markets o For most goods and on most markets buyers react to the price of the good o Most demand models focus on the relationship between the price and the quantity demanded o Recall opportunity cost and trade offs  Buyers could always buy something else Price change causes QD change Everyone does not react the same o Some people react strongly to price others less so o How does that affect market demand o A large grocery store cares less about the reaction of one individual buyer and more about the sum of the reactions Normal goods o How do consumers react when they have more income to spend on normal goods o They spend more, as long as price is not increasing o Non price change, increase income causes QD curve shift to right Other things that affect consumers buying habits o Advertising, fashion, fads, information about health  Changes in taste and preferences o Prices of other goods  Opportunity costs o Beliefs about future prices  Stocking up or delaying purchases   CH 9 : Firms in a competitive market  Skip long run suppy curve p 283-285  Skip table 9.5  Skip p 288-291 long run suppy  Skip more on the long run supply curve o Four Different types of firms  Competitive  Monopolistic competition  Oligopoly  Monopoly o Competitive Markets  Many buyers and seller  Similar if not identical goods  Free entry and exit  Firms are price takers o Price Taker  Has no control over market price  Takes the price as given o Production and Profits for the firm  Goal of a firm  Maximize profits  This is true whether firm is competitive or not  Profit maximizing firm needs to consider  Revenues – money coming in  Costs – money going out o Profit Maximizing Rule  Quantitiy – how many driveways did he plow  Price – price charged per  Total revenue = PRICE X QUANTITIY  Total costs = sum of all production costs at a certain level of output  Profit = Total revenue – minus cost o Profit Maximizing Rule  Marginal Revenue  MR = CHANGE TR / CHANGE Q  Marginal cost  Mc = change tc / change q  Additional costs of producing additional units o For an individual firm under perfect competition  Sellers face intense competition: PRICE = MARGINAL COST o For a competitive firm  Mc = price  Price = mr  MC = PRICE = MR o o *Skip pages 31­37 on production possibilities frontier o Trade­Off Between Present and Future  Consumer goods  o goods produced for current consumption o food, housing, clothing, entertainment  Capital goods o Goods that help produce other valuable goods o Buildings, factories, roads, machinery, computers ­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­  What is India’s opportunity cost for making a digital app? o 50/100 = .5 tablets/1 app (India has comparative advantage of making apps)  What is the US opportunity cost for making a digital app? o 225/90 = 2.5tablets/1app (US should produce tablets India should produce and export apps and import tablets US India Digital Apps 90 100 Tablets 225 50                       ­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ Sculptures Paintings Michael 10 5 Angelo 6 2 What is Michaels OC of a painting? 10/5 = 2 sculptures/1 painting What is Angelos OC of a painting? 6/2 = 3 sculptures/1 painting What is Michaels OC of a sculpture? 5/10 = .5 painting/1 sculpture What is Angelos OC of a sculpture? 2/6 = .3 painting/1 sculpture o How do economists study economy? o Study consumers behaviors, firms behaviors, etc  Economists lab is the world around is  Historical data often used o Similar to “hard sciences”  Construct a theory (hypothesis)  Design experiments to test the theory  Collect data: experimental or empirical  Revise or refute the theory based on evidence o Positive and Normative Analysis o Positive Statement  A claim that can be tested to be true or false o Normative Statement  Statement of opinion, cannot be tested to be true or false  What “ought to be” or “should be” o Which is generally preferred?  Positive!!! o Economic Models o Economists use models to understand the complex real world economy o Models  Simplified versions of reality  Built with some assumptions  Are considered good if they predict accurately o Ceteris paribus  Latin: “other things being equal”  Assumption in which we examine a change in one variable, but hold all  other variables constant  Allows us to isolate the effect of a single variable  o Economic Analysis o Endogenous factors  Variables controlled for inside a model  Independent variables we freely change in the model equations  o Exogenous factors  Variables not controlled inside a model o Danger of Faulty Assumptions o It is necessary to often examine and re­evaluate the assumptions in models o Examples  Assumption that housing prices always rise  Pre 2008 computer models used by banks didn’t have a variable for  declining housing prices CH 6 I. The Efficiency of the Markets and the Costs of Taxation a. Key Concepts i. Consumer surplus 1. Difference between willingness to pay for a good and the price actually paid to get the good 2. Example: a. Willingness to pay =200 b. Price = 125 c. Surplus = 75 ii. Producer Surplus 1. If price > cost, then producer makes a surplus or a profit ; difference between willingness to sell and actual price 2. Willingness to sell determined by: a. Direct costs b. Opportunity costs 3. Example: a. Willingness to sell = 10 b. Market price = 25 c. Surplus = 15 iii. Deadweight Losses 1. The deadweight loss of taxation b. Market Efficiency i. Total surplus or social welfare measures the overall welfare of the society 1. Total surplus = CP +PS ii. In free markets, with voluntary trade 1. Consumers buy until their willingness to pay is equal to market price 2. Suppliers sell until their willingness to sell is equal to market price iii. Efficiency 1. Occurs when total surplus is maximized in a market c. Taxation, Welfare, and Deadweight Loss i. Why Pay Taxes 1. Pay for public goods, police, roads, schools, etc ii. Types of Taxes 1. Income, payroll, corporate, sales, excise, estate a. Excise Tax i. Tax on specific good; alcohol, tobacco, gasoline iii. Tax incidence 1. Refers to the party (consumers or producers) who bears the tax burden d. Balancing Deadweight Loss and Tax Revenues i. Purpose of tax? 1. Gain tax revenues 2. Decrease production or consumption of good (reduce pollution) ii. End Result 1. If tax is levied on business: a. The firm will attempt to raise prices to pass burden to consumers b. If tax is levied on consumers: i. Some of burden is passed to producers since market price falls c. Incidence i. Whether tax is levied on producer or consumer, the end incidence is the same iii. Deadweight Loss 1. In previous graphs a. Prices increases b. Quantity traded decreases 2. Deadweight loss = due to misallocation of resources e. Incidence Depends on Elasticities i. Tax incidence is same no matter who tax is levied on 1. Elasticity of demand and supply can change tax incidences ii. Inelastic demand - consumer still buy same amount 1. Most tax revenues iii. Elastic demand – consumers avoid some of the tax by reducing demand 1. Less tax revenues f. Practice Problem Total Consumer Surplus i. Bob is willing to pay $65 ii. Bill is willing to pay $50 iii. The shoes price is $45 1. Total consumer surplus???? a. $25 g.


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