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Microeconomics cheat sheet
Basic Economic Concepts
Production Possibilities Curve
Nature & Functions of Product Markets
Demand and Supply: Market clearing equilibrium
Floors and Ceilings
Variations: Shifts in demand and supply caused by changes in determinants Changes in slope caused by changes in elasticity Effect of Quotas and Tariffs
Concepts:
Points on the curve-efficient Points inside the curve-inefficient Points outside the curve-unattainable with available resources Gains in technology or resources favoring one good both not other.
D
S
P
Q
Pe
Qe
Pe
Qe
D
S
P
QD QS^ Q
Floor
Pe
Qe
D
S
P
QS QD^ Q
Ceiling
F
A
C
B
Good Y
D
E
W
Good X
Consumer and Producer Surplus
Effect of Taxes
Theory of the Firm
Short Run Cost
Price buyers pay
P
S
D 2
D 1
Q
Price sellers receive
Price w/o tax
Consumer surplus
D
S
P
Q
Pe
Qe
Producer surplus
A tax imposed on the BUYER-demand curve moves left elasticity determines whether buyer or seller bears incidence of tax shaded area is amount of tax connect the dots to find the triangle of deadweight or efficiency loss.
A tax imposed on the SELLER-supply curve moves left elasticity determines whether buyer or seller bears incidence of tax shaded area is amount of tax connect the dots to find the triangle of deadweight or efficiency loss.
S 2
S 1
D 1
Price buyers
pay P
Q
Price sellers receive
Price w/o tax
AFC declines as output increases AVC and ATC declines initially, then reaches a minimum then increases (U- shaped) MC declines sharply, reaches a minimum, the rises sharply MC intersects with AVC and ATC at minimum points When MC> ATC, ATC is falling When MC< ATC, ATC is rising There is no relationship between MC and AFC
P/C
Q
MC
ATC
AVC
AFC
Imperfectly Competitive Product Market Structure: Monopolistically
Competitive
Long run equilibrium where P=AC at MR=MC output
Factor Market
Perfectly Competitive Resource Market Structure
Perfectly Competitive Labor Market – Wage takers Firm wage comes from market so changes in labor demand do not raise wages.
Q
P
D
MR
ATC
MC
PMC
Qmc
Variations: Short run profits, losses and shutdown cases caused by shifts in market demand and supply.
Variations: Changes in market demand and supply factors can influence the firm’s wage and number of workers hired.
Labor Market
Quantity
Wage Rate
D = ∑ mrp’s
S
Qc
Wc
Wage Rate
Individual Firm
Quantity
DL=mrp
S = MRC
qc
Wc
Imperfectly Competitive Resource Market Structure
Imperfectly Competitive Labor Market – Wage makers Quantity derived from MRC=MRP (Qm) Wage (Wm) comes from that point downward to Supply curve.
Market Failures - Externalities
MPC
D
P
Qe Q
MSC
Spillover Costs
Qo
Overallocation of resources when external costs are present and suppliers are shifting some of their costs onto the community, making their marginal costs lower. The supply does not capture all the costs with the S curve understating total production costs. This means resources are overallocated to the production of this product. By shifting costs to the consumer, the firm enjoys S 1 curve and Qe., (optimum output ).
Qe Qo
MSB
P
Q
S
MPB
Spillover Benefits
Underallocation of resources when external benefits are present and the market demand curve reflects only the private benefits understating the total benefits. Market demand curve (D) and market supply curve yield Qe. This output will be less than Qo shown by the intersection of D 1 and S with resources being underallocated to this use.
S
MRC
MRP
Q
Wage Rate
Qc
Wc
Wm
Qm
a
c
b
Diminishing Marginal Utility
Definition: As a consumer increases consumption of a good or service, the additional usefulness or satisfaction derived from each additional unit of the good or service decreases. Utility is want-satisfying power— it is the satisfaction or pleasure one gets from consuming a good or service. This is subjective notion. Total Utility is the total amount of satisfaction or pleasure a person derives from consuming some quantity. Marginal Utility is the extra satisfaction a consumer realizes from an additional unit of that product.
Theory: Law of Diminishing Marginal Utility can be stated as the more a specific product consumer obtain, the less they will want more units of the same product. It helps to explain the downward-sloping demand curve.
Essential Graph:
Teaching Suggestion: begin lesson with a quick ―starter‖ by tempting a student with how many candy bars (or whatever) he/she can eat before negative marginal utility sets in when he/she gets sick!
Total Utility
Marginal Utility
Unit
Consumed
Unit
Consumed
TU
MU
Total Utility increases at a diminishing rate, reaches a maximum and then declines.
Marginal Utility diminishes with increased consumption, becomes zero where total utility is at a maximum, and is negative when Total Utility declines.
When Total Utility is at its peak, Marginal Utility is becomes zero. Marginal Utility reflects the change in total utility so it is negative when Total Utility declines.
Law of Diminishing Returns
Definitions: Total Product: total quantity or total output of a good produced Marginal Product: extra output or added product associated with adding a unit of a variable resource
MP =
input
change in total product TP change in labor input L
D
D Average Product: the output per unit of input, also called labor productivity AP = total product TP units of labor L
=
Theory: Diminishing Marginal Product …a s successive units of a variable resource are added to a fixed resource beyond some point the extra or the marginal product will decline; if more workers are added to a constant amount of capital equipment, output will eventually rise by smaller and smaller amount.
Essential Graph:
TP
TP
Quantity of Labor
Increasing Marginal Returns
Diminishing Marginal Returns
Negative Marginal Returns
MP
Quantity of Labor
Note that the marginal product intersects the average product at its maximum average product.
When the TP has reached it maximum, the MP is at zero. As TP declines, MP is negative.
Teaching Suggestion: Use a game by creating a production factory (square off some desks). Start with a stapler, paper and one student. Add students and record the ―marginal product‖. Comment on the constant level of capital and the variable students workers.
Marginal Revenue = Marginal Cost
Definitions: Marginal Revenue is the change in total revenue from an additional unit sold. Marginal Cost is the change in total costs from the production of another unit.
Theory: Competitive Firms determine their profit-maximizing (or loss-minimizing) output by equating the marginal revenue and the marginal cost. The MR=MC rule will determine the profit maximizing output.
Essential Graph:
Teaching Suggestion: Be sure to allow students to practice the drawing of the short- run graphs as the lead in to the understanding of the long-run equilibrium in competitive firms and its meaning. Always begin with this lesson by showing why the Demand curve and the MR curve are the same since a perfectly competitive seller earns the price each time another unit is sold.
MC
P ATC
P=D=MR=AR
Pe
Qe Q
Q
P
D
MR
ATC
MC
P
Unit
Cost
Q
MR=MC
For a single price monopolist, the output is determined at the MR=MC intersection and the price is determined where that output meets the demand curve.
In the long run for a perfectly competitive firm, after all the changes in the market (more demand for the product, firms entering in search of profit, and then firms exiting because economic profits are gone), long run equilibrium is established. In the long run, a purely competitive firm earns only normal profit since MR=P=D=MC at the lowest ATC. This condition is both Allocative and Productive Efficient.
Marginal Revenue Product = Marginal Resource Cost
Definition: MRP is the increase in total revenue resulting from the use of each additional variable input (like labor). The MRP curve is the resource demand curve. Location of curve depends on the productivity and the price of the product. MRP=MP x P
MRC is the increase in total cost resulting from the employment of each additional unit of a resource; so for labor, the MRC is the wage rate.
Theory: It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP is equal to its MRC.
Essential Graphs: In a purely competitive market: large number of firms hiring a specific type of labor numerous qualified, independent workers with identical skills Wage taker behavior—no ability to control wage on either side In a perfectly competitive resource market like labor, the resource price is given to the firm by the market for labor, so their MRC is constant and is equal to the wage rate. Each new worker adds his wage rate to the total wage cost. Finding MRC=MRP for the firm will determine how many workers the firm will hire.
In a monopsonistic market, an employer of resources has monopolistic buying (hiring) power. One major employer or several acting like a single monopsonist in a labor market. In this market: single buyer of a specific type of labor labor is relatively immobile—geography or skill-wise firm is ―wage maker‖ —wage rate paid varies directly with the # of workers hired
The employer’s MRC curve lies above the labor S curve since it must pay all workers the higher wage when it hires the next worker the high rate to obtain his services. Equating MRC with MRP at point b, the monopsonist will hire Qm workers and pay wage rate Wm.
Labor Market
Quantity
Wage Rate
D = ∑ mrp’s
S
Qc
Wc
Wage Rate
Individual Firm
Quantity
DL=mrp
S = MRC
qc
Wc
S
MRC
MRP
Q
Wage Rate
Qc
Wc
Wm
Qm
a
c
b
