ECO 201: Economic Theory and Micro/Macro Analysis

• ECO 201 focuses on the analysis of economic units such as households and firms.
• Microeconomics studies the allocative behaviour of isolated economic units like households, firms, and government.
• Macroeconomics studies the economy as a whole, using broad aggregates such as output, inflation, and the general price level.

Economic Theory

• Economic theory is the construction of models for analysis and prediction.
• There are two approaches: partial and general equilibrium.
• Partial equilibrium analysis examines an individual economic market in isolation.
• General equilibrium analysis examines all markets and decision-making units simultaneously.
• Microeconomics helps understand how economic agents use resources to satisfy wants.
• The course intends to familiarize students with market economy functions, firm output levels, and understanding market structures.

Review of Eco 101

• Economics studies human behaviour as a relationship between ends and scarce means with alternative uses.
• Basic concepts include scale of preference, scarcity, choice, and opportunity cost.
• Economics is regarded as a science due to its involvement of hypothesis formation.
• Functional representation and logical deduction are two methods of analysis.
• Demand refers to the amount of a commodity consumers are willing to buy at a given price over a period of time.
• Factors influencing demand include the price of the commodity, prices of related commodities, consumer income, population, taste, and fashion.
• The law of demand and supply states that lower prices lead to higher quantity demanded and vice-versa.
• Exceptions exist for inferior goods and ostentatious goods.
• Supply is the amount of a commodity sellers are willing to sell at a given price over a period of time.
• Factors affecting supply include the price of the commodity, prices of other commodities, cost of production, and weather.
• Equilibrium price is determined at the intersection of demand and supply curves.
• Price elasticity of demand is defined as the responsiveness of demand to a change in price.
• Types of price elasticity of demand include elastic, inelastic, unitary, perfectly elastic, and perfectly inelastic demand.
• Factors determining elasticity of demand include the availability and cost of substitutes, degree of necessity, period of time, and consumer habits.
• Cross elasticity of demand measures the responsiveness of quantity demanded of one commodity to changes in the prices of other related commodities.
• Complementary goods have negative cross elasticity, while substitutes have positive cross elasticity.
• Income elasticity of demand measures the responsiveness of quantity demanded to changes in income.
• Normal goods have positive income elasticity, while inferior goods have negative income elasticity.
• Price elasticity of supply measures the responsiveness of supply to changes in price.

Consumer Behaviour

• There exist three sets of economic agents: households, firms, and governments.
• Each agent solves economic problems via utility and approaches like cardinalist and ordinalist utility maximization.
• Utility theory and indifference curve theory are the two main theories of consumer behavior.
• Classical economists commonly use utility theory, while modern economists use the indifference curve.
• Utility is the satisfaction a consumer derives from consuming a commodity.
• Total utility is the total satisfaction from consuming some commodities.
• Marginal utility is the change in satisfaction from consuming one more or one less unit of that commodity.
• As consumption of rice increases, total utility increases from 7 to 9 utils, giving a marginal utility of 2.
• With more commodities consumed, marginal utility can reach zero.
• The declining slope of the marginal utility curve shows the law of diminishing marginal utility.
• The household's problem is how to adjust its expenditure to maximize total utility.
• Consumer equilibrium requires two conditions: the ratio of marginal utility to price is equal across commodities, and total expenditure equals household income.
• Early economists related market values to total utilities, but market behaviour is related to marginal utility.

Indifference Theory

• The indifference theory of household behavior was developed by Sir John R
• Hicks in 1939 as detailed in "Value and Capital".
• Indifference theory doesn't invoke a measurable utility concept.
• An indifference curve shows combinations of commodities that yield the same satisfaction.
• The household is indifferent between any two points on one curve.

Features of an Indifference Curve

• Indifference curves slope downward because consumers need more of one commodity to compensate for less of another.
• It's also convex, and its slope gets flatter when moving down the curve.
• The slope represents the marginal rate of substitution, which keeps total utility constant.

Indifference Map

• A set of indifference curves is called an indifference map.
• Curves farther from the origin provide higher satisfaction levels, preferred over lower ones.
• An indifference map's curves are labeled I1, I2, I3, I4, with satisfaction increasing in that order

Budget Line

• The budget line reveals the amount of clothing and food the household could afford given his income I, and the prices of the two commodities.
• The fundamental assumption under the theory of demand suggests that the household spends all of its income on goods and services for current consumption
• Neither spends more than its income nor saves any of it.
• The question remains as to which one the household will choose in its maximization objectives.
• The indifference curve is tangential to the budget line at point c.
• The marginal rate of substitution of the goods in the household's preferences is equal to the slope of the budget line.
• The opportunity cost of one good in terms of the other is determined by market prices.

Changes in Consumer Equilibrium

• Changes in salary results in a parallel shift of the budget line.
• Indifference curves stay tangent to the relevant budget line at each income level.
• The income consumption line connects all equilibrium points, showing how consumption bundles change in the process
• Changes in commodity food and clothing results in the shifting of the relative price on the budget line.
• The price consumption line represents locus of tangency between budget and indifference curves.

Theory of Production

• Producers maximize profits via minimization of costs or maximization of outputs.
• The function to turn inputs into outputs of commodities is called production function.
• The production function is indicative of technological relationships between inputs and outputs.
• Production includes creation of economic value, not just fabrication.
• The firm's technology represents all the resources needed for manufacturing a product
• Technologically, the rate of the flow of inputs is in proportional to the rate of the flow of output, as determined by technology.
• The mathematical expression is Q = f (X1, X2, X3.... Xn).

Production Process

• Activities that convert inputs into material goods and services.
• More capital relative to labour is called capital intensive technique of production.
• More labour relative to capital is referred to as labour intensive technique of production.

Isoquant

• A locus of technically efficient methods to produce the same output level.
• The producer’s equal to the indifference curve of the consumer.
• The degree of substitutability of production factors is defined by slope of isoquant.
• The marginal rate of substitution is the the slope of the isoquant.
• The slope of the isoquant decreases when it moves downwards.
• Given the production function, formula for a total differential for both sides of equation is v=f(K,L)
• However, the production isoquant has various shapes when taking on different shapes depending on the degree of factor substitutability.
• The further the isoquant from the origin can increase the output.

Cost and Expenditure

• Represented as C = rK + wL
• The total cost is proportional to capital multiplied by the capital units and wage to labour input.

Equilibrium

• Optimum input can be demonstrated geometrically by the equation.
• W/r is the MRTS, Marginal Rate of Technical Substitution, the slope of the isocost curve.
• By cross multiplying MPL * PL = MPK * PK

Expansion Path

• The entrepreneur's aim is to organize most efficiently to production path by maximizing profit.
• An isocline is a point with the MRTS, Marginal Rate of Technical Substitution,
• A production expansion is automatically a production expansion path, MRTS, Marginal Rate of Technical Substitution.

Return to Scale

• In the long run three cases result in cases: increasing returns to scale, constant returns, and decreasing returns.
• Increasing returns to scale is a the proportionate change in output which surpasses the proportional change in inputs. Figure 3:5 demonstrates how output doubles relative to doubling inputs.

Homogeneous Function

• A homogeneous function is one which can be removed from a function which multiplied others.
• If the functions cannot be factored it is not homogeneous, K has to be powered by V
• If V<1 it yields decreasing returns to scale, if if is >1 it indicates increasing returns.
• But the from cannot all inputs using the same ease.

Costs

• Usually one unit of commodity can using many production methods.
• Inefficient methods won't be utilized by rational agents in production only concentrates on production and efficient methods.
• Factors depends on the prices in relation to technology, it describes production laws.
• Distinction occurs during the analysis of short and long run terms
• K or capital yields that capital is fixed on the short run with variable period, and Q=f(L,K--)3 equation will be rewritten.
• To increase the amount variable inputs with a fixed input.

Short-Run Production Definitions

• Total Product (TP): Total output in a period with all production factors employed.
• Average Product (AP): Total product per variable factor unit, calculated as TP/L.
• Marginal Product (MP): Change in total product from using one more or less unit of the variable factor, calculated as TP/L.

Variation of Output(one fixed, one variable)

• The output variation includes one or more factors on capital or revenue streams
• At the MP and AP are at an equilibrium they are equivalent.
• According to the hypothesis the graph is seen to be decreasing and increasing.

Hypothesis on Diminishing Returns

• In the economics the theory is one of the most famous and explains outputs depending various factors.
• An increase in any of the factors or the existing ones indicate the marginal product will result in a steady decline of the over product.
• A food crisis today has increased production and workers, which cause reduced outputs.
• But improving tech/skills will increase outputs to offset food returns.

Production Cost Definitions

• Fixed Cost: Is the total expenditure on production, and it cannot decrease no matter the output.
• The firms cost will depending on the short or longer run term.

Theories on the the Cost of Economics (4)

• Cost is economics refers to an opportunity cost give a time period, cost is both implicit and explicit.
• Firms create direct payment on the factors on production, to pay any resources towards the contribution of creating the production, with resources used should returns yield for the company.
• Long run costs: during this period the term can be increased to see how its operations is scalable.
• Short run costs: A firms does not always vary given if its based on short or long runs.

Types of Fixed Cost

• The fixed costs are expenditures spent during the period, management earnings, rents, debts, and machinery decay.
• Short runs, the firm's equipments don't vary on a period.
• Total variable costs is total spendings that has expenditures of expenditures with firms total inputs
• If variable rates increase then outputs will increase, in particular labour or raw resources.
• The shape and average cost indicates depending on products.

Averages Costs

• Variable costs depend on products and how will be used
• This also factors is that outputs has certain operations.
• The factors are indicative of the products values and how they are shipped to end users.

The Theory on Firms

• The action on behavior is the same across the overall economy.
• There is one assumed goal for firms is to maximize profits.
• While this is a theory on all firms to increase capital or revenue, firms want to balance these objectives.

Profit Maximization

• Profit is the differences of revenues and produced goods.
• Cost relies on usage, where benefits are lost with another usage.
• Estimations depend on values reflecting factors and the overall best usage to earn it. -A short run doesn't refer to calendar time, instead refers to time that is available to adjust the inputs.
• To use those available variables on production terms that can be utilized.
• The long run is enough to change inputs and operations to its operations.
• Unlike short and long run, the very long run can improve production and products and production operations.

Concepts of Revenue

• Revenues represent the amount of profits a firm earns selling their products.
• There are three parts, revenues, total revenue, total sales, and the firms costs determine revenue/sales.
• The equation is TR=pq where p represents price and q represents quantity.
• The equation to calculate the average revenue is TR/Q, this also represents commodity prices.
• Revenue can have one of three behavioural parameters: -1: The price to decide is to perform or not perform as the options are producing nothing. -2: The cost production is above the revenue, where firms perform to reduce outputs -3: To show profit is at its minimum revenue

Models

• A firms has it costs will below a revenue if they want a higher production values.
• If a firm's equipment on its existing plant is to vary that equipment, its long run marginal should indicate the proper quantity level in short run values.

Market Structure Review

• According to competition the market categorized, perfectly and imperfect competition.
• Price taker are small sized to make a difference on a market based, small entities must receive and change depending on market values.
• Exist and entries must be seamless for all firms.
• Industries must be composed of a high number of firms, to determine the smaller revenue/product from others/suppliers.

The Demand Curve Model

• Price won't differ and vary.
• Depending total revenue increases steadily alongside increased outputs.
• Price is determined across the total revenue graph, while quantity is determined by the curve of the MR, Marginal revenue.
• Under equilibrium and short run terms firm adjusts depending prices on production that change its overall production.
• Short and variable based terms for practical applications will utilize variations on output based decisions.

Cost Analysis

• Imperfect production terms can result in profit or losses or the level depends on the location the price and average of costs.
• When considering supply, it reflects correlations between how supplied quantities and prices are.
• So what production levels are supply at those levels.
• For prices under AVC will supply 0 while prices over AVC can set equal price marginal cost.

Short Run Equilibrium

• The industry's demand and supply is determined by economical dynamics
• The equilibrium price and quantity for a commodity is determined at the intersection of the demand and supply curves.
• Also firms in the market look for maximum productivity at optimal prices.