MICROECONOMICS + Economics: The study of how scarce resourees are allocated among competing uses + Key Economic Questions Inc What is produced? 2-How ist produced? 3. Who gets what is produced? - PRODUCTION POSSIBILITY FRONTIER: The alternative combinations of final goods and services tht could be produced in a given time period ‘with al available and imited resources and technology. [tastes opportunity cost Obtain more production of one good requites a reduction inthe production (lost opportunity) of one or more oer good. 2.Law of increasing opportunity cost means that obtaining more of a good requires giving up ever larger amounts of the alternative god S.lnside frontier: Unemployed (inefficiency) 4.Expanding frontier: technological advances Increases in resources and ‘This economy produces only 2 goods (XY). Poins on the curve (A,B,C) represent diffrent combinations fof the 2 goods when all resources are used (fill employment of resources}. Ifthe allocation is inside the ceurve, some resources are not used or used ineticienty Good ¥ 148 ° TO BBB coed x Explanation: This concave prodstion posits frontier shows the ny of inereasing opportunity cor Moving down the carve mess his economy rodecing mor of X and es of Y. At pint A, the ‘Sonony podaces 14 unis oF Vand ero X. At in B.TOQ nis of X se now produced. To do his, Luni a1 i given up To proce the next 100 however, ¥ roc drops fom 13 010 meaning its of i fiven up (point C). Finally to rode an aon Tunis oFX 10 units oY has be gven up (point 1) ebecomes more and mor expenive to prods the sane units ofX DEMAND + Demand Curve (Schedule): \ curve (abl) showing ‘the quantities of & good a consumer is willing and able to buy at allemative prices given constant tastes, and rember of buyers, I: Increase in price (P) causes decrease in quantity (Q) demanded + Change in demand: Change in sts, price of elated ‘goods, income, incase in nambor of buyers alters planned consumption at ll prices, shifting. curve to Fight (inezeao) oF left (decreas). + Change in quantity demanded: Caused by own price ‘change and results in movenen along curve ‘Related prices: Include prices of complements or substitutes including future consumption SUPPLY * Supply Curve: A curve (abl) showing the quant of ac aseleris wing and alt sell st aematve prices "AVERAGE ata given cs of praution determin by consan put fH SHOR prices, technology nd numberof sles. + Law of Supply inrease in price (P) causes increase in quantity (Q) supplied. + Change in suppl ‘Change in cost of production, technology, pric of other produced goods: number of 8% sellers ates planed sales at all pices, shifting curve to ight (increase) or Tet (decreas). ELASTICITY AND TAX BURDEN siete supply curve is more laste than the demand urve,constmers cart mare ofthe tax burden. fthe demand cure it more clase than the supply uve, supplies earty mare ofthe tax burden, sit the supply (demand) curve is perfectly elastic, con sumers (uppies) carry ALL of the tx burden, “IF the supply (demand) curve is perfect incasti, supplies (consumes) cary ALL ofthe tax burden costs *ECONOMIC COSTS INCLUDE: nt only est ci geting cui) a a apc cn seowathigcapial ed upina predic acti INTHE SHR RUR fo sone td Ge overs reheat) abd same ae ROTAL COSTS (FC) ~ tial variable cons (TVG) plas a feed cote TEC) WERAGE COSTS sre cos er unit of output SAVEIAGE TOTAL COSTS (ATC) = average variable average fed cote (AFC) RUN'AVERAGE TOTAL COST CURVE ie wdaped cece dectng perge food coe Ketgeonsdoveat oe peaton ret Age pdcine Ie mg vg vt css ram ttt “MAREINAL COST (teste er co of roti additional unit FORMULA: (STC/SQ). *rpreaucing ‘gg ct yn duce eans, her + Change in quanety supplied: Caused by own price 2 When uginal cose blow average costs, average cos change and results in movement long curve, MARKET EQUILIBRIUM ‘+ Equilibrium: When price p is established where «quantity demanded (Pe) = SUPPLY ‘quantity supplied (Qe, + Properties of Equilibrium: P@}~-~)K€~~ Equttorium LLP>P,, surplus n 2.PePE, shortage DEMAND 3.PoPy sable oma + Price Controls: oe 1, Celing below equilibrium = shortage and black market 2.Floor above equilibrium {soere sales) “= Changes In Equilibrium: Equilibrium price will ‘change whenever the supply or demand curve shifts PRICE ELASTICITY OF DEMAND DENIANDED 70.4 CHANGE IN PRICE SSIMPLE FORMULA’ ‘he absolute value of 2% ‘hung in quantity demanded 80 change in price “MIDROINTS | Q2-Q1 Prt Pr FORMULA? -QrFQi" Pa-Ph TYPES OF ELASTICITY — (<): FLASH fey UNITARY ELASTIC lel=1 INELASTIC let “STRAIGHT LINE DEMAND CURVES: se casieat ies gore he nop aad ee pics el paring vo curt nthe seme pap, the Ter Snes pot cla ot xey adc {VERTICAL DEMAND CURVES: SHORIZONTAL DEMAND CUR rest asic pS eer ae urplus and cheating telling hen magi cats are above erg cox, steal ea then ana cons eu eae The ag cot cme rer he verge alco ave {ndthe average variable com curve sie mina ps ECONOMIC PROFIT ‘Accounting Cons ~ explicit cost (etal expenses) “Implicit Costs ~ net benefit tht could have been derived ‘um the net best alternative, s¥conamie Cost (or opperaity costs) = explicit cost + implicit cont Accounting Profit ~ tial revenue - explicit cost, ‘eonomieroft= tool revere exh co mptcos). ‘Narmal Profit “The prot ewned rem investing he ‘sverageinduse ne ecoaon. Nonna proiisashieved ‘wen economic petits zr0MICROECONOMICS PERFEGT COMPETITION *pRopLCTiON-Teonptntepntprainng SLARGENUMER OF BUYERSAND SELLERS. IE PATE: pict om peg se fer aga ren) Tangs enough to peventinivdal bayer or sellers or PAVC), because canst Consumers by what avaible. aIaMIOeENEOUS PRODUCT - Fs ae sting Rel ct AO TC tows shadow) “ERE Btn if Ci he hr rn a longs te price exesots the average varie cost. standardized or identical goods 2.The firm wil shutdown ithe price lowerthan ents Pee anes s NETHBE arabs 8 “PERFECT INFORMATION ABOUT PRICES “the average varuble cost (PEAVC) because it srengelnal sstATC) he monopolist il once "AND SUPPLIES - Producers and consimers doo! cannot cover variable costs. Also TRC: (losses at 2iTthepice exceeds serge al eo he monopot wil mk 8 reed no are fooled by advertising Shutdown) isles than losses at ott -TiRMS AND CONSUMERS ATE PRICE TAKERS - *THESHORTRUNINDIVIDUAL SUPPLY CURVE. Rts lognu he nonopalsan capone eon Fa cc perl csi demande or OFTHE HRM: pn man cos roduct tthe market price (Pra frm sarge Sbysfncreton whem abet Te Drivehigherthan P*thefirmwillhavezerorevenue. If Suthedemand cure equibaum gat. Since he fm Efi chagetaprice lover han Phe firm wil have wil shown Me Satan cutee below he meee owerteeue than dereenuetcanachve ate, wrabeccuve isporana pe marginicotcae's SMUGLIGINLE RARKIENS TO ENTRY = Fe gf fees a eNe any oer ane th ny ee ep cote i ido plt e) ifeeneatiae ticles ) altho apy sponse am incense in demand is | geste de log run thn he sort ma Were ctr fle ged on whee Industry fan discon or eons of ae. MARKET mc “FIRM OBJECTIVE: TO MAXIMIZE PROFIT. Profit is revenue minus costs, where costs include implicit costs *FIRMS CHOOSE TO PRODUCE UP TO THE NORMAL PROFIT POINT WHERE MR=MC: Thorevenue from the DUCTION / (Q* PRO! marginal unit (marginal revenue IMF), sequal to @ a MONOPOLY AND EFFICIENCY te eto reducing tn marin wl arn “EACKOF COMPETITION DOES NOTIORCE THE cas (MC) MONOPOLIST TO PRODUCE WHERE. UNIT T'Margnal Revere i the change in total revenue for MONOPOLY COSTS ARE LOWEST. Thus productive etficiensy eve) ona gant sl (STRUSG) Say notice es # MoNOPOIIST PRODUCES WHERE THE eee eee cece rere ee DSPRODUCEDIAVENOCLOSESUESTITUTES _¢,,PRICEISGREATER THANTHE MARGINAL COST. Far alia SAAN BE MIPERPECTINEORMATION ows Secon pays rn ema odie rs “ MAN BEIMPERDECTINEORMATION, ain Aleaieticten eae ton sul edie TMCE MAKER OM PRICE SEARCHER: THE MONG HOT RS PRODUCE LESS df HIGHER sn PERPECE COMPETITION: Marsinal menu! BONSWARDSLONING DEMAND CUIVE FACING “Drie nhtaN WOUED Se PRODUCED UNDER (MR) = price (P), since the firm isa price taker. The fice nus: celeste rinnopes cs fo vel more tine PERFECT COMPETITION. Monopoly profit educes pertetl competitive frm therefore. expand: mecpste brie brea iol ae Eure vl ty eure cone erp ree ate tens wis megan! cos phat, 2temamplacateeieeesrimetitueaian flues rietoncen her edot ter Wel. price. Likewise, marginal revenue is equal to average* BECAUSE PRICE DECLINES AS OUTPUT IS eit “tor fo ecu revenue which is the same as the demand curve. EXPANDED, marginal revenue is less than price. PRICE DISCRIMINATION = a /AT Q where MR (CHARGING CONSUMERS DIFFERENT PRICES ot Reems mexmind FOR ESSENTIALLY THE SAME PRODUCT 2 Easy of Demand Cv tay elaic *REQUIREMENTS cnunnves soenane Seley must be opis or have comer Tegal en, st ad ames 2 Salen mabe capable of dividing consumes into tent 2 ena a compen ete et lass coh la having a dirent demand care ‘Sn indy ema hight essed mpalst——_3.Nayinal ews of proce ote cfc cesses mus ‘Shenlen ere moma) te nmise {Gz of sea ure can Pee campetas fom Cant charged a loer pice mst be capable of ‘core mar Tesling a coanes he fisher pred cas “ROR EACH CLASS OF CONSUMERS THE MONOPOLIST SHOULD ALLOCATE OUTPUT UP TO THE POINT WHERE: the marginal revenues from selling to each class are equal 9 Q* PRODUCTION ae cee nieatell matMICROECONOMICS MONOPOLISTIC Market Palle (nena ae cly opm nan anes wee on cen GOMPETITION fi ope enon pe *DASIC CHAR ACTERISTI Resirer vee {erp rn see Fromicton | Paice soa =saply-2as, MSC MAC Ther nfs: pcs ake Eeraty_| Tragle=DWL Gefen sewer te metres “ited per chaser ands SECTS | it tally opie Sty rte iy dat Toit serve Con git sores $60 Sci pina Guaty oe cu esi ye Pariceae poe retain we ioe nema paces sip ceded ne SSH MGC ree os ctv anco ep opine ah" gSSieaphres oma Tew aer-bose Poe aNTHE TONG RUN Ms Paper enna ey oer oere hy demand oe i ai oe ei PATE actin tat nese deren ett tiectoone petro Toate [Rares weve 2itec reer magn cots tut de comumer | Production | Pra = c= ‘wiliopeymortustcousiprcetepot te | teratty | Tage=DW al neo) ce Be wos ces MES eh wn tomesaiinn | MERASE [Reem 0S Average Cos, 30 tive effictency is not achieved —_ . oF the quantity desired by soc B80 Oe ee ect [MSB =MSC, where scl bene and css xu, ram gariy-Q* Feel Cot neste ane Shy enol pedton rane nparee DvLisefecey aes hat nr or ea pt Taste | Reese Cpt | Gremepon == emi, 2 caves, MSE, MPD Eceraly | Tgle= DW Gal wii) ee ewe dma aes Ssooen | Trang usm soen) Artem | SOQ Sty Opn Guay egy dey sey Cedar rata et on aig Be SDC NSC bx sn bemcancrsoon e Feel Conon ‘tate ach, pri dere. sano inr DLiceecedy ates hat rae odes pt few sean may re | ean amee ‘epee nme: pcs fxtermalty | Tle = DWE al wig) wee to demu cuves {aREeineny ae seee ncaa etongarsmmnepey, [MNS MSD | Tenge ce) oetscfsac mais uy ote sve cay | Pemtrt_ | S0Q Socal Oral Qn oe gai ey wi *oLiGOPOLY MODELS: redone aie wont oes od are Oley SS MSC roe ctv anc ol ob ey Q* Stes age treo eral Ceo canes ioreee Init arr can, Pr ae, osunpl deen. aba ORE a DLisefecedy scant ecea ut epee ar aad | nape ae OR Io oe eT ee ee cs ated SS Se ee sure ese Spear | stant Pang oot Tiehematiconmedstcioningctmuininy | OmCANE | [ntact tpn mon fut cbetbe atau see ‘Se Sa th SSipaasceeraanysa an eedgecreeteeseatga on conse mapa eo ee Public Good ofthe CaS Faas Tooaiakas Same agrenaatian, [Retna tae certnerat pt IKED-DI IRVE ses tnt [ nh hhowchr vu aon Tae Senge Srrnoeyeecr|ar nd wh ion hy fee RIVAL WILL NOT FOLLOW edivdnls tom esoygtbnc,Qve- | Sece bee halackefonnerip a eer oper] he sin) iii)” _[enervd weg mec cry ee Taj te ne fs aime ub ee) | RIVAL Timea aT | FOLLOWS TERESA ae Rter ASCE | Ne va ns Tee a ‘ieimanatbudeasnanam dices [ek enec acaats orba etc DEMAND rhe fei pra a th se. ar CURVE Monopoly as Market Palle aps. one =a open Sr soar Sor ny ere dw SoMACROECONOMICS MEASURES OF OUTPUT/INCOME MACROECONOMIC THEORIES "Gross domestic product (GDP): Value of production *Neo-Classical Equilibrium: within «counts bounds, Explanation: Short run equilibrium occurs where the 1.Value Added Concept = value of production less Shor-Run Agaregate Supply curve (SRAS) intersects ‘alt of material inputs summed seros Firms ‘Aggregttc Demeed (AB)- This is temporary. The 2.Acome Method = wages and salaries + rent + profits“ geonony will seladjust so that bath curves Will + interest + adjusiments intersect on the Long-Run Aggregate. Supply 3.Expenditure Method (Sum of expenditures on final (LAS) thus achieving, economis stabi goods and serves) ~ Private Consumption (C) Gross fll employment Private Domestic Investment (1) Government Purchases * Keynesian Theory: (Proponent: British economist John (G) + Exports (X) Imports (M) = (C#F#G*X-M) Maynard Keynes) Wages and prises are sticky (slow to Sar re CON ching. Pits dead io ncenly ene, tas [Net Domestic Prodct (NDP) = GOP kas capital HUME active goverment inrveen Peet Scnsumpton illovence tmunplgmen eqs tan tepalises eg cers - National Income (NI) =NDP - Indirect Business Taxes, ernment spending and tax cuts Political liberals. omen - Personal Income (PI) = NI = (corporate taxes + retained FISCAL POLICY rings sol scuriy wn) stuterpeymants "| + Definion: Te ue of governent spending (Gorter Dispsable Income (D1) Pt - Pron anes {change alpen he eno AGGREGATE DEMAND: ‘Toul quanity of ouput "Spating or edaien inte gser bugs dtc demunvodatalematveprcevelsinaghen tine pod _ (Cot) New Del wan espana seal ple. “Rawoos wy ais occa dope -Gontaetionsry “Foca Paley, Dees n Test bashers cece Pike ees afc the eal” govement pening or Ince in te Salle wee CDE Shor runlar O21) Shor (9 inizocn mnpors tip. Goose ne BUSINESS CYCLE tate pene hae tol caper seed, Lower Defakion: ANernatng periods of econele growth 09 lsh mpots Tower eApENRWES 08 an contraction, A singe business ele woul have 3.Interest-rate effect: Increase in prices causes an these four parts: gop Insc Mong Demand nce in demand fot 1 Trak tmey its ices rs, och let aren 2.Recovry tower ol exnentiones a AGGREGATE SUPPLY: Total quantity of output vee won al prodiced atallrative ric eves na iva ine pecoc * Short Run Agzrogate Supply (SRAS): img INFLATION ‘sel higher profits In shor rum pices of inputs are" Tamallon: Contino increas in the average level of feed OE «-Butaon Conining Sores the average level of 2. Asie expan dtp ee with fed inp prices, ‘atnung dete in he wera velo siete behing Sal ps of gots nse oe aon ms) Mor tes proctve). Overtime + Long Ry Aggregate apply (LRAS): As pice level Dist eno ices cupat bsabe apt ie ae tl ncn. ling inflation eae, Note that pices are proportionate ‘aMation rate: between time period one and time NO PAYOFF TO CHANGING AGGREGATE a baween ime DEMAND IN THE LONG RUN Baied be ies “Increase in aggregate dentand ADy to AD, moves * Types of Iatation csonomy t0 short rum equlibtum fom ato above fal Supply side inflation Empleyment because wages ae icky. a. Wage-push = wage inerease leads to price increase + As ages adstupwand LRAS RAS, __b-Costspush = increase in nonlabor costs leads to Shore run aggregate p ‘supply gradually shits “upward from + Short run equtlibeiuen ‘ouput gradually alls Pe| te longrun equilibsun a fall employment Yi to Ye In he Tong run ‘output cannot be raised above Ye and atemps to do so merely aise P roe increase inated by excassive aggregate demind, + Macro Consequences of (Uranticipated) Inlaton Uncertainty 2 Speculation 3.Non-productive investments wy + Rational Expectations Boonamists believe economy goes sively fim original long run eulibium to es fn ly crm ee s _ tun equilibrium i government policy is anticipate. UNEMPLOYMENT + Labor force: Employed or Unemployed + Bmplayed: Working and not looking for work + Unemployed: 3 requirements to be categorized as unemployed, I. not working, 2 able o work, 3. locking Tor work + UNEMPLOYMENT rate = Types of Unemployment: unemployment tl Taborfores “10° Searonal: Unemployed during periods between agricultural seasons, tourist seasons, schoo breaks, et 2 Frletional: Unempioyme {jobs or into the labor market, as people move between 3.Structural: Workers laid off by declining industries ‘rin declining ions of by jab obsolescence, 4.Cyeical: Unemployment dic to general economic Macro consequences of unemployment: Lost Outputs Okun's Law: reduces GDP by 2.5% SPECIAL CLASSES OF WORKERS! [-Underemployed: People seeking full-time paid employment work, Working only part increase in unemployment rate femplayed at jabs below thei capability (phantom ‘unemployed, 2.Laid-off individuals with promise to be rehired: Not looking for work but part-of unemployed population as an exception tothe ele 3.Discouraged workers: Not considered in because not looking for work Likely to re-enter when Tabor market imoroves, PHILLIPS CURVE bor force Inflation and unemplayment relationship: The theory when ‘unemployment is low, peopl have obs, people have wages, pucimes are made, denn) Increases, prices Incr, ladng to an icrese im inflation rates When Unemployment fs high, people are laid of, no income dleruand if, picesdserete, he nation rats cop. Shortran "Phillips Curve (SRPC): ‘Graphical Fepresetation of the negative relationship between Inflation and unemployment rte ‘eon Fae 1968 4 1966, 1967 2 1865 1954, 1982 ‘Unemployment =" Note: Until 1968, the dowawardsloping Phillips cur ‘was apparent n the early "70s it appenred to break down LONGRUN ein the Jong, run, when expectations of ination are fac, Ghnges in expectation hie no effet on the level of ‘employment athe Long Run Philips Curve 2 (LRPC) represents the situation ten cual ination equals expected inflation Instation| ato LRPC 2-Demand-pllnftation: An inrease inthe rie level Whe tnemployment ws ih, isin also high nem pees 3, Beonomy i ble to aj corey tthe inflaton rt