GE

\*
ME
RG
EF
OR
MA
T1

MICROECONOMICS
A CTU Student Notebook
 MICROECONOMICS

Chapter 1. PRILIMINARIES

What’s economics? -> Economics is the study of how people use limited resources to meet
unlimited demand.
Economics originates from the scarcity of resources.
● What to produce?
● How to produce? => depends on the market (in free market economy)
● Produce to whom?

Name:
Resource allocation (phân Truong
bổ nguồn Luu
lực) Diemfor
is crucial Quynh
a society, and it’s handled in different
ways in different societies. (Command economy/central-planning economy, mixed economy,
Major: International Business – KT20W4F5
free market economy)
Tel: +84 945-738-742
Vietnamese’ ecconomy is Mixed Economy, the same for the majority of countries around the
world.
Scarcity forces choices to be made
Opporunity cost (chi phí cơ hội) is a crucial concept in economic analysis. The quantity of other
goods that must be sacrificed to obtain another unit of goods.
The production possibility frontier (PPF) - đường giới hạn khả năng sản xuất
PPF shows the maximum possible of output combinations of two goods or services that an
economy can achieve when all resources are fuly and efficiently employed.
Microeconomics: offers a detailed treatment of individual economic decisions about particular
commodities.
Microeconomics deals with limits (limited budgets, time, abilitiy to produce), and makes most
of limits also allocates scarce resources.
All workers, firms and consumers must make trade-off (to give up sthg to earn sthg with the
same value instead)
Macroeconomics: emphasizes the interactions in the economy as a whole.
Market definition: a collection of buyers and sellers, through their actual or potential
interaction, determine the price of products.
Buyers: consumers purchase goods; companies purchase labor and inputs.

2 | Page
 MICROECONOMICS

Sellers: consumers sell labor; resource owners sell inputs; firms sell goods.

Chapter 2. THE BASICS OF SUPPLY AND DEMAND

What is Supply? -> Supply means the relationship between the quantity of a good that
producers are willing to sell and the price of the good.
Measure quantity on the x-axis and price on the y-axis
Qs = Qs (P)
Qs: quantity supplied at a given price.
Other variaties affecting the supply: cost of production (labor, capital, raw materials, exise tax,
technical advances); lower costs of production allow a firm to produce more at each price and
vice versa.
The supply curve:
● Change in quantity supply caused by a change in price.
● Change in supply caused by a change in sthg other than the price (cost of production)
What’s demand? -> the relationship between the quantity of a good that consumers are willing
to buy and the price of ther good.
Measures quantity on the x-axis and price on the y-axis.
QD = QD(P)
QD= a +bP
dQD/dP=b
d QD P
E= ×
dP Q
QD: quantity demanded at a given price
E: elasticity
The demand curve sloping downward means customerss are willing to buy more at a lower
price as the product becomes relatively cheaper.

3 | Page
 MICROECONOMICS

Other variables affecting demand: Income; consumer taste; price of goods (substitutes (hàng
thay thế) _as price of this good increases, quantity demanded of the other goods increases;
complements_ as price of this good increases, quantity demanded of the other goods decrease)
The demand curve: changes in quantity demanded; changes in demand.
The market mechanism is the tendency in in a free market for price to change until the market
clears. Market clear when quantity demanded equals quantity supplied at the prevailing price.
(QD=QS)
Market clearing price_price at which market clear.

The Market Mechanism

In equilibrium:

 There is no shortage or excess demand.

 There is no surplus or excess supply.
 Quantity supplied equals quantity demanded.
 Anyone who wants to buy at the current price can and all producers who want to sell at
that price can.
The market surplus:
The market price is above equilibrium:

 There is excess supply – surplus

 Downward pressure on price
 Quantity demanded increase and quantity supplied decreases
 The market adjusts until new equilibrium is reached
The market price is below equilibrium:

 There is excess demand – shortage

 Upward pressure on prices
 Quantity demanded decreases and quantity supplied increases
 The market adjusts until the new equilibrium is reached
Supply and demand interact to determine the market-clearing price.
When not in equilibrium, the market will adjust to alleviate a shortage/surplus and return the
market to equilibrium.
Market must be competitive for the mechanism to be efficient.
Changes in Market Equilibrium:

 Equilibrium price is determined by the relative level of supply and demand

4 | Page
 MICROECONOMICS

 Changes in supply and/or demand will cause change in the equilibrium price and/or
quantity in a free market.
Shifts in supply and demand:
When supply and demand change simultaneously, the impact on the equilibrium price and
quantity is determined by:
1. The relative size and direction of the change
2. The shape of the supply and demand models

Price Elasticities of Demand

Elasticity gives a way to measure by how much a variable will change with the change in
another variable. Specifically, it gives the % change in 1 variable resulting from a 1% change in
another.
Example: Y=f(X); QD
∆Y
100 %
%∆Y Y ∆ Y X dY X X
EY,X = = = × = × =f ' ( X )
%∆X ∆X ∆ X Y dX Y Y
100 %
X

X Y ∆X ∆Y

10 20 +50% -25%
15 15 +5 -5

∆X 5
%∆ X= 100 %= 100 %=+50 if 1
X 10
∆Y −5
%∆ Y = 100 %= 100 %=−50 % => -0.5= eY,X is the Elasticity of Y respected to X.
Y 20
Price Elasticity of Demand measures the sensitivity of quantity demanded to price change. It
measures the % change in the quantity demanded of a good that results from a 1% change in
price.
% ∆ Q d ∆ Qd /Qd P ∆ Q
⇨ Price Elascity of Demand: E DP = = = ×
%∆ P ∆ P /P Q ∆P
Price Elasticity of Demand is usually a negative number:
● As price increase, quantity decrease
● As price decrease, quantity increase.

5 | Page
 MICROECONOMICS

⮚ When |EP| > 1, the good is price elastic.

|%∆ Q| > |%∆ P|
⮚ When |EP| < 1, the good is price inelastic.
|%∆ Q| < |%∆ P|
⮚ When |EP| = 1, the good is unit elastic.
|%∆ Q| = |%∆ P|
The primary determinant of price elasticity of demand is the availability of substitutes: many
substitutes, demand is price elastic (can easily move to another good with price increases); few
substitutes, demand is price inelastic.
Expenditure share for the good in total expendities: the smaller is the share, the more inelastic
does the good have (notebooks, pens, tissues, etc); the larger is the share, the more elastic
does the good have (rice, pork, electricity, etc).
Other Demand Elasticities:
Income Elasticity of Demand: measure how much quantity demanded changes with a change in
income.
∆ Q/Q I ∆ Q
E I= = ×
∆I/I Q ∆ I
Normal goods: EI > 0; luxury goods: EI > 1; Inferior goods: EI < 0.
Cross-price Elasticity of Demand: measure the % change in the quantity demanded of 1 good
that results from a 1% change in the price of another good.
∆ Qb /Qb Pm ∆ Qb
EQbPm= = ×
∆ Pm /Pm Q b ∆ P m

Complements (cars & tires): cross price elasticity of demand is negative (price of cars increase,
quantity demande of tires decreases)
Substitutes: butter & margarine: cross price elasticity of demand is positive (price of butter
increase, quantity of margarine demanded increase)

Price Elasticity of Sypply

Price Elasticity of Demand measures the sensitivity of quantity supplied given a change in price.
Specifically, it measures the % change in quantity supplied resulting from a 1% change in price.

S % ∆ QS
E P=
%∆ P

6 | Page
 MICROECONOMICS

Point vs Arc Elasticity:

● Point Elasticity of Demand: the price elasticity of demand at a particular point on the
demand curve.
● Arc Elasticity of demand: price elasticity of demand calculated over a range of price.

Inelasticity has price fluctuating less than demand.

Short-Run versus Long-Run Elasticity:

Demand: in general, demand is much more price elastic in the long run (due to consumption
habits adjustment time customers need; demand might be linked to another good that changes
slowly; more substitutes are usually available in the long run)
Example: when fuel price increase from 15.000 to 20.000 VND, in the first time, the consumed
amount of fuel in the first few weeks changed slightly; however, after a long time, customers
will adjust the consumption habits, also interference of scientists affects the demand, so the
consumed amount of fuel will change significantly.
Demand and Durability: for some durable goods, demand is more elastic in the short run (if
goods are durable, then when price increase, consumers choose to not replacing it), but in long
run, older durable goods will have to be replaced.
The lower chance for goods to be replaced, the more inelastic they are.
Effects of Price Controls
● Excess demand sometimes takes the form of queues.
● Sometimes get curtailments and supply rationing
● Producers typically lose, but some consumers gain. Some consumers lose.
Effects of tax
● As the government imposes a tax, t$/unit, the supply curve moves upward by t unit.
● The equilibrium price increases by an amount less than t. Both consumers and suppliers
incur the tax.
● The more elastic is the demand, the less tax the consumers do incur.
● The more inelastic is the demand, the more tax the consumers do incur.
Supply function: Qs’=Q(P-tax)
QD=Qs

Price elasticity, price and revenues

● Revenues from seliing a quantity of commodity, Q, at price, P, are given:

7 | Page
 MICROECONOMICS

TR=P.Q
TR: total revenues
● Should the seller increase or decrease the selling price in order to increase revenues? =>
increasing the price results in lower quantity demanded and vice versa.
● Taking the first order derivative of revenues according to P:

dTR d ( PQ) dQ dQ P
dP
=
dP
=Q+
dP
P=Q 1+
dP Q (
=Q(1+e D) )
Elasticity

eD > -1: ineleastic demand, TR is increasing with P, as P increase, TR increase.

eD < -1: elastic demand, TR is decreasing with P, as P decrease, TR decrease.
eD = -1: unit elasticity, TR reaches maximum.

Chapter 3. CONSUMER BEHAVIOR

Steps involved in the study of consumer behavior: consumer preferences_to describe how and
why they prefer one good to another; budget constraints_people have limited incomes; Given
preferencea and limited incomes, what amount and type of goods will be purchased_what
combination of goods will consumers buy to maximize their satisfaction.
Market basket is a collection of one or more commoditied. Individuals can choose between
market baskets containing different goods.

Consumer Preferences

Consumer Preferences – Basic Assumption

● Preferences are complete (thị hiếu hoàn chỉnh): consumer can rank market baskets.
● Preferences are transitive (có tính chất bắt cầu): if they prefer A to B, and B to C, they
must prefer A to C. Consumer preferences are consistent.
● Consumers always prefer more of any good to less: more is better.
Indifferent curves (đường bàng quan): represent consumer preferences by graphics.
−∆ Y −dY
MRS = =
∆X dX
d is the derivative (đạo hàm)

8 | Page
 MICROECONOMICS

MRS: marginal rate of ubstitution

Delta Y is the decreased amount of goods Y
Delta X is the increased amount of goods X
We measure how a person trades one good for another by using the Marginal rate of
substitution (MRS).
MRS quantifies the amount of one good each consumer will give up to obtain more of another
good.
It is measured by the slope of the indifference curve.
Marginal Rate of Substitution:
Indifferent curves are convex: as more of 1 good is consumed, a consumer would prefer to give
up fewer units of a second good to get additional units of the first one.
Consumers generally prefer a balanced market basket.
The MRS decreases as we move down the indifference curve: along an indifference curve, there
is a diminishing marginal rate of substitution.
The MRS went from 6 to 4 to 1.
Two polar cases of interest:

 Perfect substitutes: two goods are perfect substitutes when the marginal rate of
substitution of one good for the other is constant.
Example: a person might consider apple juice and orange juice perfect substitutes -> they
would always trade 1 glass of Orange juice for 1 glass of Apple juice.
 Perfect complements (means two goods must be consumed together): Two goods are
perfect complements when the indifference curves for the goods are shaped as right
angle.
Example: if you have 1 left shoe and 1 right shoe, you’re indifferent between having more
left shoes only -> you must have one right shoe for one left.
Utility (sự hữu dụng): A numerous score representing the satisfaction that a consumer gets
from a given market basket.
Utility is a way to measure customers’ satisfaction.
If the utility function is: U(F, C) = F + 2C
U=FC
 A market basket with 8 units of food and 3 units of clothing gives a utility of:
U= 8+2(3)=14

9 | Page
 MICROECONOMICS

Baskets for each level of utility can be plotted to get an indifference curve: To find the
indifference curve for a utility of 14, we can change the combinations of food and clothing that
give us a utility of 14.
Although we numerically rank baskets and indifference curves, numbers are only for ranking. A
utility of 4 is not necessarily twice as good as a utility of 2.
Two types of ranking: Ordinal ranking and Cardinal ranking.
There are two types of functions:

 Ordinal Utility Function: places market baskets in the order of most preferred to least
preferred, but it does not indicate how much one market basket is preferred to another.
 Cardinal Utility Function: utility function describing the extent to which one market
basket is preferred to another.
The actual unit of measurement for utility is not important.
An ordinal ranking is sufficient to explain how most individual decisions are made.
Budget Constraints: Budget constraints also limit an individual’s ability to consume in light of
the prices they must pay for various goods and services.
Budget Line: indicates all combinations of two commodities for which total money spent equals
total income.
PAA+PBB+…+PNN=I This is the budget constraints equation

P: price of each good the buyers wish to buy.

A, B: kinds of goods.
I: Income
● Let F equal the amount of food purchased, and C is the amount of clothing
● Price of food = PF and price of clothing = PC
● Then PFF is the amount of money spent on food, and PCC is the amount of money spent
on clothing.
Consumer choice: Given preferences and budget constraints, how do consumers choose what
to buy? => Consumers choose a combination of goods that will maximize their satisfaction,
given the limited budget available to them.
The maximizing market basket must satisfy 2 conditions:
1. It must be located on the budget line: they spend all of their income – more is better.
2. It must give the consumer the most prefered combination of goods and services.

10 | Page
 MICROECONOMICS

−∆ C
The slope of an indifference curve is: M RS= (tỉ lệ thay thế biên)
∆F
−P F
The slope of the budget line is: Slope=
PC
MU C P F
MRS= =
MU F P C

● If MRS ≠ PF/PC then individuals can reallocate basket to increase utility

● If MRS > PF/PC: will increase food and decrease clothing until MRS= PF/PC
● If MRS < PF/PC: will increase clothing and decrease food until MRS= PF/PC
Marginal Utility: measures the additional satisfaction obtained from consuming 1 additional
unit of a good.
The principle of diminishing marginal utility states that as more of a good is consumed, the
additional utility the consumer gains will be smaller and smaller.
Note that total utility will continue to increase since consumer makes choices that make them
happier
Marginal utility is the derivative of total utility with respect to the amount of good X.

∆U ∂UX
MU X = = =U ' (X )
∆X ∂X
(tỉ lệ thay thế biên) MRS=MUF/MUc=PF/PC (tỉ lệ hữu dụng biên)
= MUF/PF= MUC/PC

Chapter 4. INDIVIDUAL AND MARKET DEMAND

Individual Demand

Price changes: using the indifference curves. For each price change, we can determine how
much of the food the individual would purchase given their budget lines and indifference
curves.
⇨ When the price falls, Pf/Pc and MRS also fall.
The level of utility that can be attained changes as we move along the curve.
At every point on the demand curve, the consumer is maximizing utility by satisfying the
condition that the MRS of food for clothing equals the ratio of the prices of food and clothing.

11 | Page
 MICROECONOMICS

Income changes (can be illustrated by using the indifference curves): Changing income, with
prices fixed, causes consumers to change their market baskets.
Engel curves: relate the quantity of good consumed to income. If the good is a normal one, the
Engel curve is upward sloping.

Market demand

Market demand curves: is a curve relating the quantity of a good that all consumers in a
market buy to the price of that good. It is the sum of all individual demand curves in the
market.
⇨ The market will shift to the right as more customers enter the market.
⇨ Factors that influence the demand of many consumers will also affect the market
demand.

Consumer Surplus

Consumer buy goods because it makes them better off.

Consumer surplus is the difference between the maximum amount of a consumer is willing to
pay for a good and the amount actually paid. Consumer surplus can be calculated from the
demand curve.
CS=WTP−P
WTP: willingness to pay
CS: consumer surplus
P: price
Network Externalities (ngoại lai mạng lưới): For some goods, one person’s demand also
depends on the demands of other people.
● A positive network externality (hiệu ứng mạng lưới dương) exists if the quantity of a
good demanded by a consumer increases in responses to an increase in purchase by
other consumers_The bandwagon effect (hiệu ứng đám đông/hiệu ứng đoàn tàu)
● Negative network externalities (hiệu ứng mạng lưới âm) are just opposite.
● If the network externality is negative, Snob effect (hiệu ứng chơi trội/hiệu ứng đua đòi)
exists. It refers to the desire to own exclusive or unique goods.

12 | Page