Microeconomics Chapters 1-6 Notes

• The notes cover Microeconomics chapters 1-6

Chapter 1: Foundations of Economics

• Microeconomics focuses on the behavior of individual decision-making units like consumers and firms.
• Macroeconomics examines the economy as a whole, using aggregates of individual units for a broad overview.
• The four production factors are Land (all natural resources), Labour (Physical/mental effort), Capital (man-made production factors), and Entrepreneurship (organizes other factors and takes risks).
• Capital includes physical, human (skills/knowledge), natural (expanded land meaning), and financial (investments).
• Opportunity cost measures the value of the next best alternative that must be sacrificed for a good.
• Scarcity exists due to finite resources and infinite wants.
• Economics is the study of choices using scarce resources to satisfy unlimited needs/wants.
• Sustainability means the environment and economy can produce future needs/wants.
• A free good is non-scarce with zero opportunity cost.
• An economic good is scarce and has an opportunity cost > zero.
• The fundamental economic questions are: What to produce? How to produce? For whom to produce?
• Resource allocation assigns resources to specific uses from alternatives.
• Government intervention alters resource allocation.
• The Production Possibilities Curve (PPC) shows maximum combinations of two goods an economy can produce.
• Points on the PPC represent production possibilities.
• All resources must be fully employed and used efficiently to be on the PPC.
• Scarcity prevents production outside the PPC.
• Economies must decide on the goods combination.
• Choices involve opportunity costs.
• Economic growth increases output over time.
• Actual growth is caused by reduced unemployment and increased production efficiency.

Chapter 2: Competitive Markets (Demand and Supply)

• Markets are where buyers/sellers exchange goods, services, and resources.
• Markets operate locally, nationally, and internationally.
• Goods/services are sold in product markets; resources are sold in factor markets.
• Competition is when rivals compete to achieve objectives.
• Greater market power implies more control over price.
• Competitive markets have many independent buyers/sellers.
• No single seller controls product price; price is determined by seller/buyer interactions.
• Individual demand shows the quantity of goods a consumer can/will buy at prices (ceteris paribus).
• The law of demand has a negative causal relationship between a good's price and quantity demanded (inversely proportional, ceteris paribus).
• Market demand sums all individual demands for a good.
• Non-price determinants of demand are variables besides price that shift the demand curve.
• Increases in income raises demand for normal goods and decreases demand for inferior goods.
• Demand also shifts based on preferences, tastes, substitute/complementary goods prices, and the number of consumers.
• Price changes cause movement along the demand curve (ceteris paribus).
• Individual supply shows the quantity of goods a firm can/will produce and sell at prices (ceteris paribus).
• The law of supply has a positive causal relationship between a good's price and quantity supplied (proportional, ceteris paribus).
• Market demand sums all individual supplies for a good.
• A vertical supply curve means a fixed quantity.
• Vertical supply happens when there is no time to produce more or no possibility of greater production.
• Non-price determinants shift the supply curve.
• These determinants include production costs, technology, prices of related goods (competitive/joint supply), producer price expectations, taxes/subsidies, the number of firms, and shocks/unpredictable events.
• Price changes cause movement along the supply curve (ceteris paribus).
• Market equilibrium means quantity demanded equals quantity supplied.
• The equilibrium price is the price at market equilibrium.
• The equilibrium quantity is the quantity at market equilibrium.
• Market disequilibrium is excess supply/demand that changes prices until equilibrium.
• Excess demand causes shortages.
• Excess supply causes surpluses.
• Changes in market equilibrium are caused by demand/supply curve shifts.
• Prices act as signals conveying information to decision-makers.
• Prices motivate decision-makers due to incentives.
• Market demand/supply determine equilibrium prices/quantities for goods.
• Firms produce goods that consumers are willing/able to buy.
• The price mechanism determines how to produce.
• Price rationing determines the accessibility of goods.
• Non-price rationing is used in planned/non-price rationing systems.
• Allocative efficiency means producing the quantity of goods most wanted by society.
• Marginal benefit is the extra benefit from each additional unit bought.
• Demand curve equals the marginal benefit curve.
• Marginal cost is the extra cost of producing one more output unit, increases with output.
• MB = MC achieves allocative efficiency.
• MB > MC means the last unit of the good has more value than its production cost.
• MB < MC means the last unit of the good costs more to produce than its value.
• Consumer surplus is the difference between the highest price a consumer will pay and the price actually paid.
• Producer surplus is the amount sellers receive for their goods minus the lowest price they're willing to accept for production.
• Social/community surplus is the sum of consumer/producer surplus.
• Welfare is the amount of consumer/producer surplus when MB = MC.
• Governments intervene because efficiency has strict conditions, competitive markets can't answer the "for whom" question, and to correct failing markets and realize advantages.

Chapter 3: Elasticities

• Percentages are used for elasticities because they are independent of units/currencies.
• Percentages allow for easy elasticity comparison and put responsiveness into perspective.
• Price elasticity of demand (PED) measures quantity demanded responsiveness to price changes.
• The minus sign is dropped.
• A steeper demand curve is less elastic; a flatter curve is more elastic.
• Price elastic means quantity demanded is highly responsive to price changes.
• Price inelastic means quantity demanded is not very responsive to price changes.
• The Formula for PED: (% change in Quantity)/(% change in Price)

Determinants of PED:

• The more and closer the number of substitutes, the more elastic the demand is
• Necessities vs. luxuries: more necessary goods have less elastic demand.
• Length of time: the longer the time, the more elastic the demand.
• Total revenue is the money firms receive from selling a good (Price × Quantity).
• If PED > 1, total revenue increases with a price decrease.
• If PED < 1, total revenue decreases with a price decrease.
• If PED = 1, total revenue remains constant with price changes.
• Firms must consider PED when changing product prices.
• Governments must consider PED when taxing goods to increase revenues. If PED is lower, taxed revenue is greater.
• Income elasticity of demand (YED) measures demand responsiveness to income changes (involves demand curve shifts).
• Formula: (change in quantity/initial quantity) / (change in income/initial income).
• YED can be positive or negative.
• A positive YED is a normal good
• A negative YED is an inferior good.
• YED<1 is a necessity good.
• YED>1 Luxuries and services
• The Engel curve is: if the lines' projection touches the vertical axis (luxury or service)
• Also, The Engel curve is: if the lines' projections doesn't touch the vertical axis (necessity)

Price elasticity of supply (PES)

• Price elasticity of supply (PES) measures quantity supplied responsiveness to price changes.
• Steeper supply curves are less elastic; flatter supply curves are more elastic.
• Price elastic means quantity supplied is highly responsive to price changes.
• Price inelastic means quantity supplied is not very responsive to price changes.
• The Formula for PES: (% change in Quantity)/(% change in Price)

Determinants of PES:

• Length of time: firms can't quickly change inputs.
• Production factor mobility: easily shifted resources increase PES.
• Space capacity of firms: higher spare capacity increases PES.
• Rising costs: rapid cost increases result in inelastic supply.

Chapter 4: Government Intervention in Microeconomics

• Reasons for government intervention in markets: earn revenue, support firms/households, influence production/consumption, correct market failures, and promote equity.

How Governments Intervene:

• With price controls, indirect taxes, subsidies, direct service provision, command/control regulation, and consumer nudges.
• Fixed prices are set at a level like ticket prices.
• Price controls set minimum/maximum prices.
• Price ceilings set a maximum price below equilibrium to make goods affordable.
• Market consequences are shortages, non-price rationing, black markets, underallocation, and negative welfare impacts.
• Stakeholder consequences are: partly gain and partly lose
• Producers sell a smaller quantity at a lower price
• Workers -> some workers are likely to be fired
• Governments gain political popularity
• Price floors set a minimum price above equilibrium to support farmers/low-skilled workers.
• Market consequences are surpluses, government surplus disposal, firm inefficiency, overallocation, and negative welfare impacts.
• Stakeholder consequences are: higher price
• Consumers now pay a higher price
• Producers gain a higher price and produce a larger quantity
• Workers -> gain as employment increases
• Government -> less government funds to spend on other desirable activities in the economy
• Minimum wages are the minimum prices an employer must pay.
• Results are labor surplus, unemployment, illegal below-minimum wages, resource misallocation, increased production costs, job loss, and decreased product supply.
• Indirect taxes are imposed on spending for goods/services, paid partly by consumers but given to the government by producers.
• Excise taxes are imposed on a good (fixed amount tax per unit or percentage).
• Governments impose taxes to raise revenue, discourage harmful goods, redistribute income (luxury goods), and correct negative externalities.
• Impacts are higher consumer prices, lower seller prices, decreased output, positive effects for the government, and underallocation for society.
• Subsidies are government assistance to individuals/groups for firms.
• Subsidies can increase producer revenue, make goods affordable, encourage production/consumption, support industries/exports, correct positive externalities.
• Results are lower prices for consumers, higher producer prices and quantity, negative government budget, increased employment, resource over-allocation, and negative impacts for foreign producers.

Chapter 5: Common Pool Resources and Negative Externalities

• Common pool resources not owned by anyone, have no price, and are accessible without restrictions (rivalrous and non-excludable).
• Rivalrous meaning when one persons consumption reduces the availability for another
• Non-renewable resources are resources that do not last

Externalities:

• Externalities occur when consumer/producer actions cause negative/positive side effects on third parties, whose interests aren't considered.
• A positive externality means benefits to third parties
• A negative externality means side-effects to third parties.
• Marginal private cost (MPC) is the cost for one more of good to producers.
• Marginal social cost (MSC) is the costs of producing one more unit of a good to society.
• Marginal private benefits (MPB) are the benefits to consumers. Marginal social benefits (MSB) are the benefits to society.
• Negative production externalities are external costs by producers.
• This causes welfare loss, reducing social benefits.
• Qm > Qopt and MSC > MSB
• These exist because: external costs are created by consumers causing benefit reductions (MSC > MSB), and are considered undesirable but overprovided.

Market-Based Policies:

• Indirect taxes: welfare losses
• Taxes permit allocative efficiency
• Advantages are less expensive
• Disadvantages are the measurement difficulties

Government Legislation and Regulation:

• Regulation is used to prevent or limit consumer activities that impose costs on third parties
• Advantages are restricting
• Disadvantages are the consumption difficulties

Education and Awareness

• Creation: educating the public increases
• Advantages: simpler
• Disadvantages: less funds

Chapter 6: Positive Externalities and Public Goods

• Positive production externalities are created by producers. The market undersupplies the good relative to social optimum.
• Welfare loss is the underallocation of resources.
• Solutions- The government can shift of the MEC, also direct government provision

Positive Consumption Externalities Solutions:

• There are benefits created by consumers
• The government makes legislation, awareness. Also the government provides certain goods
• Direct government and subsidizes has the same effects

Public Goods Government Intervention:

• They have problems with Free riders and it has market failure due private farms fail
• Provide the government direct access
• Contracting out the private sector