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Microeconomics Principle

Week1 Introduction
Economics : when dealing with a limited resource, there's always more than
one way of distributing that resource amongst people who want it. (Find out
which one is the best)

Opportunity cost : the value you give up of your best alternative. (Only the
highest one)

Net marginal benefit principle

marginal : the small change. how will you make a decision as the next action
If you're deciding whether to hire another employee, you make a decision
on the additional cost that additional employee will actually bring to your
operation and the additional benefits that employee will bring to the
operation. “you only make a decision when the net marginal benefits of an
action, outweigh the costs.”

The invisible hand principle

it's like an invisible hand pushing society to do their best by each
individual person doing what is best for themselves. (Example : old car and new
car consume different amount of gasoline to travel, so the government will
change the price of gasoline in order to encourage ppl to buy eco friendly car)

Trade creates value. The trade occurs, because people who were engaged in
that trade, saw value in that trade. Its generally increase the value as well.
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Week2 Supply and Demand

Market
It's not the sellers or it's not buyers that determine the price. It's the
interactions of both sellers and buyers in a market.

Demand
The change of the price of related good affect the change of demand. (Have
a shift on the demand curve)
The change of price may not change in demand, but change in d quantity of
demand. (The graph still the same, only the point moves)

Change in Demand
– Consumer preference
– The price of related goods
***Demand graph shift to left = quantity of demand decreases.
***Demand graph shift to right = quantity of demand increases.
Supply
The cost side of the market.
Inferior good : goods in which you’ll consume less when your income
increases. ex. Ramen noodles.

output is the finished good or service.

inputs are raw materials, labor, utilities, licensing fees, etc. (factors of
production)
If the price of inputs goes up, the cost of producing the good
increases>>>supply curve shift to the right.
the cost of producing the good
decreases>>>supply curve shift to the left.
Supply surplus >>>the price decreases
Supply shortage >>>the price increases
Equilibrium price : supply=demand (determined by both buyer and seller)
An improvement in technology will increase the supply of the good. Then, the
price will goes down.
Indefinite change : not clearly expressed

Change in supply
** If the cost of tomatoes is higher >> the supply goes down >> the supply
curve shifts to the left which means an increase in the price and a decrease in
the quantity.

***Supply graph shift to left = quantity of supply decreases.

***Supply graph shift to right = quantity of supply increases.

Simultaneous Change in Supply and Demand

What will happen to supply and demand of tomatoes?
1. The price of gasoline increases >>> price goes up + quantity goes down
2. Bad weather >>> price goes down + quantity goes down
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Week3 Market Efficiency and Government Policies

Consumer surplus = Willingness to buy(WTP) - Price (P) (The difference area
between demand curve)
If I’m willing to pay $70 for the album, and the price of the album is $15, after
purchasing the album my happiness from purchasing the album is worth: $55
Assuming WTH is the same, if the price falls, the consumer surplus will rise.

Producer surplus = Price (P) - Willingness to sell(WTS) (The difference area

between supply curve)
Note: Producer surplus subtracts only variable costs from revenues, while profit
subtracts both variable and fixed costs.
Total surplus = consumer surplus + producer surplus = total welfare society
Once the price rises above the market equilibrium price, then total surplus
either starts to decline or no longer increases. Hence, total surplus is
maximized at the market equilibrium price.

Q1: Rubber is an input in the production of tires, and tires and cars are
complements. A decrease in the price of rubber will increase the total surplus in
the market for cars.
REASON : A decrease in the price of rubber will decrease the price of tires, thus
increasing the demand of cars. Because the demand curve shifts outwards, the
total surplus in the market of cars is increased.

Government intervention
1. Price Ceiling : the government limit on how high a price is charged for a
product. Maximum price (Help consumer)
 2. Price floors : the government limit on how low a price is charged for a
product. Minimum price (Help seller) >>> set minimum wage at the same
time.

Q2: The current price in the market for cab rides is $5.00/mile. If the
government imposes a price ceiling of $2.50/mile in this market total surplus in
this market will: not change.
REASON : If price decreases, demand will increase and supply will decrease.
Although demand is up to Q2 , but supply is actually at Q3. (They wanna buy,
but the supply isn’t enough, which finally causing shortage.) ∴ Total surplus
doesn’t change.
This can also apply to price floor.

Minimum wage may encourage some people to come into the industry and
look for those jobs (demand increases) But also encourage firms to get rid of
some jobs because they cannot afford them anymore (supply decreases).
Q3: According the model of supply and demand, a significant increase in the
minimum wage could have the effect of: making to it harder to find jobs.

Could We Reduce the Shortage of Human Organs?

– try to incentivise people to increase the amount of donations ex. marking
something in driver's license, giving a tax incentive every time they become
organ donors.
Playoff Tickets and Scalping Laws
scalper : a person who sells tickets at increased prices without official
permission.
Although, they are not allow to resell the ticket at inflated price, they find
another tricky ways, for instance, if the ticket price must not be higher than
$200, you could get the ticket for free only if you buy a shirt or whatever with
$1,000.
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Week4 Elasticities
Elasticity(E) refers to the degree to which individuals, consumers or producers
change their demand or the amount supplied in response to price or income
changes.

Price elasticity of demand for x = %change Qx / %Change Px = %△Qx / %△Px

(the relationship is inverse, price goes up, quantity of demand goes down,
that’s make it always be negative)
– When the absolute value > 1, we called Elastic.
The quantity demand of the product changes drastically when its price
increases or decreases.
– When the absolute value < 1, we called Inelastic.
The quantity demand of the product changes very little when its price
fluctuates.
Determinants of Price Elasticity of Demand
1. How many substitutes
Ex. Food is more inelastic than automobile. Because we need food to survive,
but for automobiles we may walk or takes public transportation instead.
Automobile have more substitute than food. *the more substitutes the goods
have, the more elastic.
2. How expensive a good
Ex. Candy has a more price inelastic of demand than electricity. We don’t think
too much in buying a candy although the price changed, that’s because it costs
small money. *the higher the price, the more elastic the good is going to be.
3. Goods will be more elastic the longer the time frame is. (At first, people
don’t complain a lot, but in the long term, people start complain it.)

Total revenue(TR) = Price x Quantity = P × Q

the total receipts a seller can obtain from selling goods or services to buyers.
If E is Inelastic, an increase in price results in an increase in total revenue.
If E is Elastic, an increase in price results in a decrease in total revenue.
If E is Unitary, total revenue stays the same. (Rare case)

Other elasticities
1. Income elasticity of demand = %△Qx / %△I (seeing how income affects
demand)
If income goes up, you consume less inferior goods and public transportation.
(Result in a negative sign)
But consume more normal goods. (Result in a positive sign)
2. Cross-Price Elasticity of Demand = %△Qx / %△Py (How demand for
something responds to a change in the price for something else.)
If roses and carnations are considered substitutes, then the cross-price
elasticity between them will be: positive
If pizza and beer are considered complements, then the cross-price elasticity
between pizza and beer will be: negative

Price elasticity of supply for x = %change Qx / %Change Px = %△Qx / %△Px

(result in positive)
measure the rate of change of supply to a change in the price.
**the larger the number is the more elastic the supply is. (Supply dramatically
changes)
**the smaller the number is, the more price inelastic the supply is. (supply
barely changes.)

Determinants of Price Elasticity of Supply

whatever the production process takes more time to adjust to a change in the
price. It's going to have a more inelastic price elasticity of supply. for instance,
housing has more inelastic price than bag .

What is the effect of taxes in the market?

A tax is an incentive for people to stop trading >>> less trade >>> decrease the
size of the market and decrease social welfare. (Society loss)
*the more inelastic the market is, both demand and supply, the less effect a
tax is going to have on welfare. For example, comparing gasoline and luxury
cars. Gasoline is more inelastic than luxury cars, so even the tax on gasoline
increased, people still need it, the trade still occur. Therefore, the effect of tax
is not going to change society's welfare very much.

A deadweight loss is a cost to society created by market inefficiency, which

occurs when supply and demand are out of equilibrium. (A relatively inelastic
demand would result in a smaller deadweight loss)

Quiz
Q1 : Suppose that in response a $3 excise tax being imposed on firms providing
car washes, the price of a car wash rises from $13 to $15. How much of the tax
is actually paid by producers? $1
Q3: If a $2 excise tax is collected from pumpkin farmers on each pumpkin sold,
then the supply curve for pumpkins will shift leftward by $2, thereby increasing
the equilibrium price.

*** The most inelastic side (has the most trouble adjusting to the tax.) of the
market is the one that actually shares most of the burden of the tax regardless
of who send the tax to the government.
But generally the seller has more freedom to adjust to the tax by perhaps
charging a higher price to the buyers. So the buyers will have to put up with
most of the burden.

Q4: If a 12 percent increase in the price of lodging at a ski resort causes a 10

percent decrease in the quantity of skis rented, then the cross-price elasticity
of demand between lodging and ski rentals is: -0.83
Tips: If it is cross-price elasticity of demand, first you may think whether 2
goods are complements or substitutes.

Q5: If the market price for gasoline is currently $3.00. Now say that buyers of
gasoline must pay a tax of $0.50 for every gallon of gasoline they buy. If the tax
changes the equilibrium price of gasoline to $2.80/gallon, sellers will share 40%
of the burden of this tax.

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Week5 Production and Costs

Inputs of production
1. Labor : variable input (can be change) ex. workers
2. Capital : fixed input (can not change or take longer time to change)
ex.place, space

Marginal Product of Labor MP = △Q/ △L

the additional output each additional worker brings

The relationship between a firm’s inputs and its quantity of output is known as
the: production function
Total costs (TC) = Fixed costs (FC) + Variable costs (VC)
Variable cost depends on the quantity of output produced.
Marginal cost (MC) = △TC / △Q , is the cost added by producing one
additional unit of a product or service.
Marginal costs eventually start to increase because you're paying the workers
the same money, but each bringing you less and less output. The marginal cost
curve shows how total variable cost changes with single unit increases in total
output.
Average fixed costs (AFC) = FC / Q (FC always remain the same, output
changes)
Average variable costs (AVC) = VC / Q
Average total costs (ATC) = AFC + AVC

Note
– △Q is marginal product.
– The total product curve shows the relationship between a variable input
 –
(x-axis) and the total output (y-axis)
– The marginal cost curve shows how total variable cost changed with
single unit increases in total output.
– The minimum-cost output is the quantity of output at which average total
cost is lowest.
– Fixed cost doesn’t impact marginal cost or variable cost.

Standards of livings are higher than they were 60 or 80 years is because capital
and technology are increasing >>> increase marginal product.

Natural monopolies (merge into one company) because it is better for one
company to produce it which can lower average fixed costs.

Quiz
Q1: Oscar has negotiated a lease for his sporting goods store in which he is
required to pay $3,000 per month in rent. Oscar pays his staff $20 per hour to
sell sporting goods and his monthly electricity bill averages $600, depending
on his total hours operation. Oscar's fixed costs per month equal: $3,000. Do
not include that electricity bill.

Q2: Suppose Cyd knows the average cost of producing 7 scones is $10, while
the average cost of producing 8 scones is $12. What is the marginal cost of the
8th unit? $26

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Week6 Competitive Output

Profit = Revenue(R) - Cost(TC)

Say you could work for a salary of $100/day. Alternatively, you could go into
business for yourself as a consultant making $200 in Revenue each day. If the
operating cost of having your own consulting business are $100/day, the
economic profits of your consulting business would be: $0