Summary microeconomics, J. M. Perloff - Chapters 1 to 7, 9, 11 and 19 PDF

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Microeconomics Ch. Microeconomics : The study of how individuals and firms make themselves as well off as possible in a world of scarcity and the consequences of those individual decisions for markets and the entire economy. (often called price theory, because prices plays an important role)  The a...

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Microeconomics Ch.1 Microeconomics : The study of how individuals and firms make themselves as well off as possible in a world of scarcity and the consequences of those individual decisions for markets and the entire economy. (often called price theory, because prices plays an important role) 

The allocation of scarce resources

Consumers pick a mix of good and services that makes them happy and give them limited wealth. Firms decide which good they produce, how much, where they produce and maximize their profits. The government decides which good and service they produce and whether to subsidize tax. Trade-Offs 1. Which goods and services to produce (example. With lack of resources like material no cars.) 2. How to produce (using palm oil or coconut oil for cookies depends on the price.) 3. Who gets the goods and services (the more goods and services you get, the less someone else gets.) Price influence the decisions of individual consumers and firms, and the interactions of these decisions. These Interactions take place in a market (an exchange mechanism that allows buyers to trade with sellers). Model : a description of the relationship between two or more economic variables -> economists use a model to predict how a change in one variable will affect another. The use of models of maximizing behaviour sometimes leads to predictions : 1. Positive statement : a testable hypothesis about cause and effect (scientific prediction) example -> you will suffer terrible economic deprivation if you do not go to college. 2. Normative statement : a conclusion as to whether something is good or bad (value judgement). -> this can’t be tested because a value judgement can’t be refuted by evidence. Example-> you ‘need ’a college education. microeconomic models explain why economic decisions are made and allow us to make predictions and it can be useful for individuals, governments and firms in making decisions.

Ch.2 Supply and demand curve: most important -> supply equals demand Competitive markets : markets with many buyers and sellers like labor market Comsumers choices (demand curve) are affected by: 

taste, information, price of other goods, income, government rules and regulations and other factors. (you want to buy an Iphone if your friend also got one.)

Complement good: Substitute good:

a good what you consume with another good( slagroom bij een appeltaart) a good that similar or identical is to a good that you are buying (jeans)

Quantity demand: the amount of a good that consumers are willing to buy at an given price, holding constant the other factors that influence purchases ( the actually sold products). Demand curve: 



the quantity demanded at each possible price, holding constant the other factors that influence purchases. It shows how quantity varies with price, but not how quantity varies with taste, information etc. (are constant).

Law of demand: consumers demand more of a good the lower its price, holding constant tastes, the prices of other goods, and other factors that influence consumption. -> and de slope is downwards A change in the price causes a movement along the demand curve. A change in a factor other than the price causes a shift of the demand curve. Demand function Q = D(P, Pb, Pc, Y) Example : the quantity of pork demanded, P price pork, Pb price of beef, Pc price of chicken and Y is income. -> with these factors the pork demanded varies. If price changes from P1 to P2 -> ∆P = P2 – P1 If quantity changes from Q1 to Q2 -> ∆Q = Q2 –Q1 Slope of a demand curve: ∆P / ∆Q Supply The producers choices (supply curve) are affected by: 

Costs, government rules and regulations, and other factors ( example. Firms can’t buy at Sundays )

Quantity supplied: the amount of a good that firms want to sell at a given price, holding constant other factors that influence firms’ supply decisions, such as costs and government actions. Supply curve: 



The quantity supplied at each possible price, holding constant the other factors that influence firms’ supply decisions. Slope is upwards (but also horizontal and vertical, no law of supply).

Supply function

Q = S(P, Ph) Example : the quantity of processed pork supplied, p is price of pork, and ph is price of a hog. Quota: be imported.

the limit that a government sets on the quantity of a foreign-produced good that may

Market equilibrium price/quantity = market clearing price 

A situation in which no one wants to change his or her behaviour

Qs =Qd Excess demand: at a specified price.

the amount by which the quantity demanded exceeds the quantity supplied

Excess supply: the amount by which the quantity supplied is greater than the quantity demanded at a specified price. Government can take some action that can shift the supply curves:  

Licensing laws : limits the number of firms that may sell goods in a market. Quotas : limit the amount of a good that can be sold -> limit imports

But have also price control programmas: Price seilings -> causes a shortage: a persistent excess demand. Price floors -> minimum wage law forbids employers from paying less than minimum. The types of markets which the supply-and-demand model is usefull are when:    

Everyone is a pricetaker Firms sell identical products Everyone has full information about the price and quality of goods Costs of trading are low

Consumers and firms are price takers -> they can’t affect the price When there is a monopoly or oligopoly , only a little firms can set the price Transaction costs : the expenses of finding a trading partner and making a trade for a good or service beyond the price paid for that good or service.

Ch.3 Elasticity : the percentage change in a variable in response to a given percentage change in another variable. -> measuring the sensitivity of on variable Price elasticity of demand the percentage change in the quantity demanded (Q) in response to a given percentage change in the price (P).

∆Q/Q / ∆P/P = ∆Q p / ∆P q For linear demand function: Q = a –bp E =( ∆Q p) / (∆P q) = -b (P/Q) At point where the elasticity of demand Is zero = curve is perfectly inelastic P=0 E is between 0 an -1 at midpoint and below linear curve -> inelastic but not perfect. Midpoint = -1 -> unitary elastic E is smaller then -1 at higher than midpoint of curve -> elastic At point where elasticity is more negative = perfectly elastic Q = 0 Horizontal demand curve -> perfectly elastic -> when prices rices nobody buys it -> inruilbaar Vertical demand curve -> perfectly inelastic -> when price rices the quantity stays the same E=0 Revenue = price times the market quantity sold

Income elasticity of demand the percentage change in the quantity demanded in response to a given percentage change in income. IE = ∆Q Y / ∆Y Q Cross-price elasticity The percentage change in the quantity demanded in response to a given percentage change in the price of another good CE = ∆Q Po / ∆Po Q When CE is positive, the goods are substitutes (beef and pork) When CE is negative, the goods are complements (appeltaart en slagroom)

Price elasticity of supply The percentage change in the quantity supplied in response to a given percentage change in the price. ES(N) = ∆Q p / ∆P Q Taxes  

Ad valorem : a fraction of a price in percentage Specific or unit : a specific amount of money of a product

When you have a special tax -> the supply is shifting downward and -> prices are increasing but the quantity is falling.

Th tax is ∆p = ((ES)/(ES – E) ∆ T (tax) ∆T = t -0 =t Incidence of a tax on consumers :

the share of the tax that falls on consumers

Ch4 Model of consumer behaviour: 

Individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume.

You have to allocate your money to buy a bundle of goods, three critical assumptions: Completeness: the consumer prefers one good over another good, only one good is preferred Transitivity:

eliminate some properties of illogical behavior.

More is better: more of a commodity is better than less. Good: a commodity for which more is preferred to less, at least at some levels of consumption. Bad:

something for which less is preferred to more, such as pollution.

Indifference curve: desirable

the set of all bundles of goods that a consumer views as being equal

Indifference map: preferences

a complete set of indifference curves that summarize a consumers tastes or

Marginal rate of substitution (MRS): slope of indifference curve : the max amount of one good a consumer will sacrifice to obtain one more unit of another good A diminishing MRS -> the indifference curve becomes flatter as we move down to the right. Perfect substitutes : good that a consumer is completely indifferent as to which to consume (linear downward sloping line) Perfect complement : goods that a consumer is interested In consuming only in fixed proportions ( straight lines ) can’t take them separate Imperfect substitutes : in between cases Utility A set of numerical values that reflect the relative ranking of various bundles of goods Utility function : the relationship between utility values and every possible bundle of goods.  

Consumers face constraints or limits on their choices Consumers maximize their well-being or pleasure from consumption, subject to the constraints they face.

Ordinal measure = relative ranking but not how much more one has than the other Cardinal measure = absolute comparison between ranks may be made. (money) Marginal utility : the extra utility that a consumer gets from consuming the last unit of a good -> is the slope of an utility function as we hold the quantity of the other good constant MU = ∆U/∆Z Budget line( constraint) : the bundles of goods that can be bought if the entire budget is spent on those goods at given prices. Opportunity set : all the bundles a consumer can buy, including all the bundles inside the budget constraint and on it. MRT (marginal rate of transformation) ;the trade-off the market imposes on the consumer in terms of the amount of one good the consumer must give up to purchase more of the other good. Maximized utility MRS =MRT Behavioral economics: by adding insights from psychology and empirical research on human cognition and emotional biases to the rational economic model, economists try to better predict economic decision making. 1. Test of transitivity: for economic decisions a better than b b better dan c, a better than c 2. Endowment effect : people place a higher value on a good if they own it than they do if they are considering buying it 3. Salience: awareness, finding attention Bounded rationality: people have a limited capacity to anticipate solve complex problems, or enumerate all options.

Ch5 Engel curve : the relationship between the quantity demanded of a single good and income, holding prices constant. ( income vertical and quantity horizontal) Normal good : a commodity of which as much or more is demanded as income rises, like beer E> of equal to 0 Inferior good : a commodity of which less is demanded as income rises, human meat E < 0 Engel curve can bend backwards when a good is switched with an other good -> than the first good is going to be inferior and de curve is going to lead backwards (also on indifferent curve) Effects on price change: Substitution effect : change in quantity good that a consumer demands when the goods price rises, holding other prices and the consumers utility constant.-> consumers substitute other, now relatively cheaper good. Income effect: the change in the quantity of a good a consumer demands because of a change in income, holding prices constant.

At inferior good the income and substitution effect goes in opposite direction. Income effect is smaller than the substitution effect

Leisure: all time spent not working

6, A firm is an organisation that converts inputs such as labor, materials and capitals into output, the goods and services that it sells. Private sector-> profit GDP -

Sole proprietorship -> single, individual liable vor debt General partnership -> 2 or more, personal liable debt Corporations -> owned by shareholders, not liable for firms debts -> board of directors to oversee and operate

Limited liability: the personal assets of the owners of the corporation cannot be taken to pay a corporations debts if it goes bankruptcy. Produce efficiently to profit maximization Input for production -> K for capital – machines, trucks L labor – economics, labores M materials Production function: the relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organisation. Short run: one factor can in short time be varied Fixed input: a factor in production that cannot be varied in short time Variable input: a factor in production that can directly be varied Long run: a length enough period of time that all inputs can be varied. Marginal product of labor: (MPl) the change in total output resulting from using extra unit of labor > how much this extra worker will increase output = ^Q / ^L Average product of labor: (APl) whether output will rise in proportion to this extra labor, ratio of output to the number of workers used to produce that output. =q/L When the marginal product of labor is below the average product of labor, the average product of labor is falling. En andersom

Law of diminishing marginal returns : if a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increases in output will become smaller eventually. Isoquant: Is a curve that shows the efficient combinations of labor and capital that can produce a single (iso) lever of output (quantity) ->shows flexibility. If firm hold one factor constant and varies another with isoquant, it moves from one isoquant to another. Difference isoquant and indifference curve : is that isoquant holds quantity constant whereas an indifference curve holds utility constant -> 3 major properties of isoquant : -

The farther an isoquant from the origin, the greater the level of output Isoquant do not cross Isoquant slope downwards

Why? Otherwise it is not an efficient firm Marginal rate of technical substitution (MRTS) : how many units of capital the firm can replace with an extra unit of labor while holding output constant. -> is negative, because isoquant slopes downwards. = ^K (capital) / ^L (labor) Constant return to scale: (CRS) property of a production function whereby when all input are increased by a certain percentage, output increases by that same percentage. Increasing returns to scale : (IRS) property of a production function whereby output rises more than in proportion to an equal increase in all inputs. Decreasing returns to scale (DRS) property of a production function whereby output increases less than in proportion to an equal percentage increase in all inputs. Technical progress: an advance in knowledge that allows more output to be produces with the same level of inputs.

H7, First produce technologically efficient (so it can produce desired level of output) than make the production process economically efficient ( minimizing the cast of producing a specified amount of output) -> than you can increase your profit. Explicit costs: direct like labor costs Implicit costs: an opportunity Economic cost/ opportunity cost : the value of the best alternative use of a resource. Durable good: a product that is usable for years. Sunk cost: a past expenditure that cannot be recovered.

Short-run costs Fixed costs (F): a production expense that does not vary with output Variable cost (VC): a production expense with the quantity of output produced. Cost (C) : VC+F Marginal cost (MC): the amount of which a firm’s cost changes if the firm produces one more unit of output Average fixed cost (AFC): the fixed cost divided by the units of output produced: AFC: F/q Average variable cost (AVC): the variable cost divided by the units of output produced : AVC:VC/q Average cost: AC: C/q -> AFC+AVC Marginal cost curve: change in variable cost as output increases by one unit. Franchise tax/ business license fee: lump sum that a firm pays for the right to operate a business. Three isoquant approaches: Lowest-isocost rule - pick the bundle of inputs where the lowest isocost line touches the isoquant. Tangency rule – pick the bundle of inputs where the isoquant is tangent to the isocost rule. Last-dollar rule – pick bundle of inputs where last dollar spent on one input gives as much extra output as the last dollar spent on any other input. Expansion path: the cost-minimizing combination of labor and capital for each output level. Straight line through the origin with a slope of 2 Average cost curve slope downwards because the fixed cost is spreading out, and is sloping upward at higher level of output because of diminishing marginal returns. _--> curve is determend by production function Economies of scale: property of cost function whereby the average cost of production falls as output expands. Diseconomies of scale: ‘’’avere cost of production rises when output increases. H9 Welfare : well-being of various groups such as consumers and producers. Economic profit can be zero but still there can be positive business profit. Business profit does not include opportunity costs and is larger than economic costs -> a firm can life with zero economic profit but shuts down when it has zero business profit. Rent: a payment to the owner of an input beyond the minimum necessary for the factor to be supplied. Sunk costs: cannot be recovered Bidding up and investing the revenue in the firms makes that most firms make in the long-run zero economic profit.

Survive in competitive market: maximize profit Marginal willingness to pay: the maximum amount a consumer will spend on extra unit -> marginal value Consumers surplus(CS): the monetary difference between what a consumer is willing to pay for the quantity of the good purchased and what the good actually costs. Consumers surplus over utility -> it can be easily been compared and combined (dollar-denominated) utility not, easy to measure consumer surplus -> calculate area under demand curve. Less elastic demand curve -> losing consumers surplus -> the closer to vertical, higher prices also lost A loss of consumers surplus from a price increase is larger as the demand curve becomes less elastic. Producer surplus (PS): the difference between the amount for which a good sells and the minimum amount necessary for the seller to be willing to produce the good  Above the supply curve and below market price up to the quantity actually produced. PS : R – VC Difference between producer surplus and profit is fixed costs. Can calculate effect of a shock on all firm without measuring profit of the market separately. Totale welfare : CS +PS Deadweight loss (DWL): the net reduction in welfare from a loss of surplus by one group that is not offset by a gain to another group from an action that alters a market equilibrium. -> consumers value extra output by more than the marginal cost of producing it. Calculating deadweight loss: ½ x (height x base) Market failure : inefficient production or consumption. Barriers to enter: explicit restriction or cast that applies only new firms. Exit barriers : raise prices, lower consumer surplus and reduce welfare.

Deadweight loss reflects 2 distortions in a market: Excess production – more output is produced than is consumed Inefficiency in consumption – at the quantity they actually buy Import policies: - Allow free trade - Ban all imports – quota of zero imports - Set a positive quota - Set a tariff (duty) – a tax on only imported goods Rent seeking: efforts ...