ECO201 Cheatsheet - Summary Managerial Economics PDF

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Seminar 1: SU1 and SU2

Long run: The longer the time period, more elastic supply and supply curve becomes flatter. Rational Spending Rule (optimal optimisation): When the utility is maximised, the marginal utility per dollar will be the same for the two types of goods. 

MUa / Pa = MUb / Pb



Look for possible combinations that fulfil the Rational Spending Rule.



Conclude that based on the budget, the optimal combination is __.

(calculate MU first which is *Marginal* Utility. Do not be tricked.)

Market Equilibrium: The quantity demanded equals to the quantity supplied. Mid-Point Formula:

(Q 2 – Q 1)/( Average Q ) (P 2 – P 1)/(Average P)

Incidence of Taxes: 

Taxes can be imposed on demand or supply



Usually shared unless perfectly inelastic



Increase price paid by consumers, reduce price received by producers, reduce quantity traded and creates deadweight loss

Seminar 2: SU3 and SU4 Average and Marginal Costs

Optimal Output

Calculation of Profit

AVC = TVC / Q

MP = MR - MC

TP = TR – TC or Economic profit: TR – (explicit cost + implied cost) Accounting profit: TR –

AFC = TFC / Q

MC = ▲TC/▲Q

explicit cost TR = P x Q

ATC = TC / Q = AVC + AFC

MR = ▲TR/▲Q

TC = TVC + TFC or ATC x

SRMC =▲TC/▲Q =▲TVC/▲Q

MR > MC = (+) MR

Q Alternative method:

Total profit ↑

TP = (P – ATC) x Q

MR < MC = (-) MR

TR > TC = Profit

Total profit ↓

TR = TC = Breakeven

MC = MR

TR < TC = Loss

Total profit maximised, MC = 0 – cannot add anymore to TP.

PC firm Maximise Profit AR = TR / Q, so, (P x Q) / Q = P

SR Shut Down Condition P < AVC = Shut-down (can’t even cover variable

*P = AR = MR = Demand (PC

costs) – still have to pay rent

producers can sell as much produce

P = AVC = Minimum Price (that firm continue to

as they wish to at the same constant

produce) aka shut-down point

price) – horizontal demand curve set

P > AVC = Continue (operate so as to cover FC,

to the market price. P > ATC = Super-normal (LR: firms

loss is smaller) LR Cost and Condition

enter)

All costs are variable so there are no FC.

P = ATC = Normal profit (LR: firms

If TR < TC, firm incur losses and exit in long run

remain) (at the optimal output)

If TR = TC, break-even remain in business

P < ATC = Sub-normal (LR: firms

If TR > TC, firm make profits and remain in

leave)

market

TP = (P – ATC) x Q Profit per unit = (P – ATC)

Determine the optimum price and quantity Categories

PC Firm

Monopoly

Profit-maximisation

1) Demand Curve: When P = 0,

1) Demand Curve: When P =

Q = __, When Q = 0, P = __

0, Q = __, When Q = 0, P = __

2) Supply Curve: When Q = 0, P

2) MR = a – 2bQ

= __

When P = 0, Q = __, When Q =

3) In market, set D = S

0, P = __

Solve for equilibrium quantity and

3) Set MR = MC

price.

Solve for equilibrium quantity

4) For profit maximising firm, P

(sub into MC curve to get the

= MR = MC

price at that level and when Q =

Solve for firm optimum quantity

0, P =__)

using its marginal cost function

4) Insert the optimal Q in the

and based on the market price.

Demand equation to solve for the market price. (At the optimum quantity of the MR = MC, hit demand curve to

Common Mistakes

Being a price taker, P = MR. The

get price.) CS: Area below demand curve

firm best output is at MR = MC/

above the price PS: Area above the supply curve below the price TR: P x Q. At the optimum quantity of the MR = MC, hit demand curve to get price. TVC: Area under the MC curve at the MR = MC price. DWL: Difference between the original equilibrium quantity and the new MR = MC quantity.

PC vs Monopoly (MR = a – 2bQ) in the long-run: 

PC firms can only make normal profit in the long run due to free entry and exit. The outcome is efficient and no DWL. (P = min long-run AVC)



Monopolist can make economic profits in the long run due to high barrier of entry. The outcome is loss in economic surplus. (P > MC, P > min long-run AVC)

Seminar 3 SU5 and SU6.

 

 

Public Good Non-rival, Non-excludable Market demand: Vertical summation of all

Private Good  Rival and Excludable  Market demand: Horizontal summation of

the prices of the product willing to be paid

all the quantities of the product willing to

by customers over the range of quantities

be purchased by customers over the

demanded. Set P = MC Till MSB = MC (maximise social welfare)

 

range of prices. Set P = MC Till MPB = MC (maximise social welfare)

For operating time and unit questions: E.g. Nanyang Eatery, Searching Resale Cars To maximise profit: MB = MC (MB > MC continue doing), (MB < MC stop doing) MR = MC To maximise social welfare: (Can also be solved using demand and supply equation) 

MSC = MPC (supply curve) + External Costs (MC) e.g. $3 tax



Set MSC = MSB



Solve for optimum output.



MSB = MPB (demand curve) + External Benefit (MB) e.g. $3 subsidies



Set MSB = MSC



Solve for optimum output....