Jacob Clifford review PDF

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Microeconomics, Jacob Clifford

Micro Unit 1 summary- Basic Economic Concepts Url: https://www.youtube.com/watch?v=2izx5W1FAEU&list=PLA46DB4506062B62B What is Economics?

Economics is the science of scarcity (brist). Scarcity- We have unlimited wants but limited resources Since we are unable to have everything we desire, we must make choices on how we will use our resources. Microeconomics- Study of small economic units such as individuals, firms and industries Macroeconomics- Study of the large economy as a whole or economic aggregates Trade-offs – ALL the alternatives that we give up when we make a choice Opportunity cost – Most desirable alternative given up when you make a choice 5 key Economic assumptions 1. 2. 3. 4.

Society has unlimited wants and limited resources (scarcity). Due to scarcity, choices must be made. Every choice has a cost (a trade-off). Everyone responds to incentives and acts in their own “self-interest.” Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. 5. Real-life situations can be explained and analyzed through simplified models and graphs. What is the production possibilities curve?  

A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs and efficiency

Law of increasing opportunity cost- As you produce more of any good, the opportunity cost (lost production of another good) will increase Consumer good – Products created for direct consumption, like pizzas Capital goods- Products that create consumer good, like an oven PPC Shifters – 1. A change in the quantity or quality of resources. 2. Change in technology

Specialization and trade Absolute advantage The producer that can produce the most output OR requires the least amounts of inputs (resources) - Ex. The US has an absolute advantage in shoes Comparative advantage 



The producer with the lowest opportunity cost - Ex. The Us has a comparative advantage in movies. Countries should trade if they have a relatively lower opportunity cost.

The Quick and dirty method. För att ta reda på vilket land som har comparative advantage, dra två streck igenom tabellen. Ex. Canada 50 plan, 20 bilar. México 40 plan, 10 bilar. 50*10= 500. 40*20=800. Därav ska México producera flygplan och Canada bilar. = Comparative advantage

A production possibilities curve shows: Resources are equally suited to produce either good A bowed-out production possibilities curve shows: Increasing opportunity costs because resources are not easily adaptable Which of the following will not change the demand for apples? The price of apples. It would ONLY change the QUANTITY DEMANDED.

Micro unit 2 Summary- Supply, demand and consumer choice URL: https://www.youtube.com/watch? v=gdXoDkCfcM8&index=1&list=PL6B2DBE4C2FC8F845 What is demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. What is the law of demand? There is an INVERESE relationship between price and quantity demanded The law of demand occurs for three reasons: 1. The substitution effect (If the price of good goes up, you will look for other products with a lower price) 2. The income effect (If you get more income, you are available to buy more) 3. The law of diminishing marginal utility (The first cookie is good, but the more you eat, the less utility for every quantity eaten) 5 Shifters (determinates) of demand: 1. 2. 3. 4. 5.

Tastes and preferences Number of Consumers Price of related goods Income Future expectations Normal goods, Income and the demand for the product are directly related (Milk, increase in income, the demand will increase) Inferior goods, Income and the demand for the product are inversely related (Increase in income, demand falls, decrease in income demand will increase)

What happens to the demand for a product when the price decreases? Demand stays the same, but the QUANTITY DEMANDED increase!

Changes in PRICE don’t shift the curve. It only causes movement along the curve!

Supply defined

What is supply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. What is the Law of supply? There is a DIRECT (or positive) relationship between price and quantity supplied.  

As price increases, the quantity producers make increases As price falls, the quantity producers make falls

Example: When the price goes up for milk, the quantity producers make will increase!

5 shifters (Determinants) of supply 1. 2. 3. 4.

Prices/availability of inputs (resources) Number of sellers Technology Government action: Taxes & subsidies A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase 5. Expectations of future profit What happens to the supply for a product when the price increases? Supply stays the same, but the quantity supplied increases! Changes in PRICE don’t shift the curve. It only causes movement along the curve! Double shift rule: If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous) If the price of peppermint increases and the demand for double mint gum increases, what happens to the price and quantity? Supply will decrease and at the same time, demand up goes. Leading to price up, quantity indeterminate.

Elasticity Inelastic demand Inelastic demand = Quantity is Insensitive to a change in price.  

If price increases, quantity demanded will fall a little If price decreases, quantity demanded increase a little In other words, people will continue to buy it!

% change in quantity/% change in price = 10% decrease / 30% increase 1 40/10= 4. Which is higher than 1, elastic. 20% decrease / 20 % increase = 1. UNIT ELASTIC! Cross-price elasticity of demand Cross-price elasticity of demand shows how sensitive a product is to a change in price of another good % change in quantity of product “b”/ % change in price of product “a” Positive = Substitutes, Negative = Complements Income elasticity of demand Income elasticity of demand shows how sensitive a product is to a change in INCOME % change in quantity / % change in income Positive= Normal good, Negative= Inferior good Welfare economics Consumer surplus is the different between what you are willing to pay and what you actually pay

CS= Buyer´s maximum – price Producer´s surplus is the difference between the price the seller received and how much they were willing to sell it for PS = price – seller´s minimum Price ceiling – Maximum legal price. Below equilibrium Price floor- Minimum legal price. Above equilibrium

Micro unit 3, summary – cost and perfect competition URL: https://www.youtube.com/watch?v=JbJgYpCW4gw&list=PLE70CA726102FB294 (3.1) Diminishing marginal returns Fixed resources- Costs that don´t change with the amount produced. (rent) Variable resources- Costs that do change with the amount produced. (employers) Total cost- Fixed cost + variable costs Marginal cost- Additional cost of one additional output. Change in total cost/change in output Short-run vs. Long-run Ex. Computer company. Two heads are better than one = specialization. But if have more work the company will get less and less additional output = The law of diminishing marginal returns Which means: As you add variable resources to fixed resources the ADDITIONAL OUTPUT will eventually decrease. By calculating numbers of workers (input) with numbers of pizzas (output) you get a Marginal product for each step. Workers (input) 0 1 2 3 6

Pizza (output) 0 5 15 20 18

Marginal product 5 10 (specialization) 5 -2

By the 3rd worker the Law of diminishing marginal returns sets in. (3.2) Economies of scale Long-run production. All resources are variable Economies of scale – You more output you produce, the average cost for every unit decrease. “Getting bigger is cheaper” By producing more, the total cost is higher, but the VARIABLE cost is lower.

(3.3) Costs of production. Marginal cost = Additional cost of one additional output Change in total cost/ change in output = MC Output

Variable cost $0 $10 $17 $25 $40 $60 $110

0 1 2 3 4 5 6

Fixed cost 10 10 10 10 10 10 10

Total cost 10 20 27 35 50 70 120

Margina l cost 20 7 8 15 20 50

AVC

AFC

ATC

10 8.50 8.33 10 12 18.33

10 5 3.33 2.50 2 1.67

20 13,5 11.66 12.50 14 20

As we go from output 1  2. The Variable cost is 10  17 = Change in 7 (MC). The AVC is the Change in variable cost (17) / change in output (2) = AVC = 8.50 Per unit cost. AVC = Variable cost/ quantity AFC = Fixed cost/ quantity ATC = Total cost/ quantity Calculate: 1. 2. 3. 4. 5. 6. 7.

ATC of 6 units. 120/6= 20 AFC of 2 units 10/2= 5 AVC of 4 units 40/4= 10 ATC of 1 unit 10/10 = 20 AVC of 5 units 60/5= 12 AFC of 5 units 10/5= 2 ATC of 5 units 70/5= 14

Total cost of 5 units. 5*14= 70 Variable cost = 12*5= 60 Fixed cost = 10

(3.4) Marginal cost and average total cost https://www.youtube.com/watch?v=C3m9FC3T3vw&list=PLE70CA726102FB294&index=8 (3.6) Economic profit and costs Profit= revenue- costs Accounting profit = Revenue – Explicit costs (wages, rent) Economic profit = Revenue – Explicit & implicit costs (opportunity costs) Ex. Taco shop, Lee Bron James. Total revenue 2m, explicit costs 1m. Accounting profit = 1 million. Implicit costs = 20m. Money he would have if he played in the NBA instead of running the taco shop. That means = Economic profit= -19 million. Zero economic profit = Normal profit (3.8) Perfect competition in the short run

4 market structures Perfect competition- Oranges Monopolistic competition – Fast food Oligopoly- Cars, cell phones Monopoly- Systembolaget In a perfect competition the products are identical to other firms. They are perfect substitutes for each other. Firms are prices takers – Each firm must take the price set by the market. All firms should produce were MR EQUALS MC. At the quantity 10 and price of 10. The total revenue is 10*10 = 100. The ATC= 10*6= 60 and the profit is 100-60= $40

(3.9) Maximizing profit practice MR=MC

Maximizing profit at 5 units.

Micro unit 4: Imperfect competition URL: https://www.youtube.com/watch?v=vCa7mITLmu8&list=PL6EB232876EAB5521&index=1 Monopoly    

One large firm (the firm is the market) systembolaget � Unique product (no close substitutes) High barriers – firm cannot enter the industry Monopolies are “price makers” IN PERFECT COMPETITION, FIRMS ARE PRICE TAKERS!

TR is 6*7 (quantity * price) =42 TC is 6*6 (quantity * where the curve hits ATC) = 36 Profit= 42-36= 6 Profit per unit 6/6= 1

Monopolies are inefficient for the society needs, society wants more output. But the only thing monopolies care about is to maximize profit! Economies of scale- Getting bigger makes it cheaper!

GAME THEORY! CHAPTER 9! https://www.youtube.com/watch? v=AOEbJF0k8vM&index=13&list=PL6EB232876EAB5521...