Basic microeconomics

= means basic economics

=General terms

Scarcity—unlimited wants with limited resources

Normal goods—income ↑, demand ↑vs. inferior goods—income↑, demand ↓

Substitutes—price of one good ↑, demand of the other good ↑ vs. compliments—price of one good↑, demand of the other good ↓


Price ↑, Quantity ↓[\]

Downward because:

  1. Income effect
  2. Substitution effect
  3. Law of diminishing marginal returns

Reasons for shift. ∆ in:

  • prices of related goods or services
  • expectations
  • tastes
  • income
  • number of consumers


Price ↑, Quantity ↑[/]

Change in demand vs. quantity demanded

Reasons for shift. ∆ in:

  • prices of related goods or services
  • expectations
  • technology
  • input prices
  • number of producers


Expected future prices and demand

=Demand and supply graphs

Price doesn’t shift the graph, only results in shortage—not enough supply for demand or surplus—not enough demand for supply

4 options of single shifts:

  1. Demand ↑= Price ↑, Quantity ↑
  2. Demand ↓= Price ↓, Quantity ↓
  3. Supply ↑= Price ↓, Quantity ↑
  4. Supply ↓= Price ↑, Quantity ↓

Double shift: draw the graph. Whichever looks the same is indeterminate

Consumer and producer surplus—area under graph

=Production possibilities curve


Straight line—resources similar vs. curved line—need more of one

Shift—more resources, land, technology, trade. Trade allows for more consumption, not production.


Absolute—who produces more vs. comparative—

Terms of trade

=Government involvement

Private sector— vs. public sector

Circular flow model [model]

Factor payments—payments for factors of production (rent, wages, etc.)

Transfer payments—redistribution of income (social security, welfare, etc)

Subsidies—government payments to businesses

Price ceilings—max price. Binding if below equilibrium vs. price floors—min price. Binding of above equilibrium.

Deadweight loss—


Elasticity of demand coefficient= % ∆ in quantity/ % ∆ in price

High elasticity—quantity is sensitive to change in price. If price ↑, quantity demanded will ↓ significantly.

Perfectly elastic= [—] vs. perfectly inelastic =[|]Characteristics of elastic goods:

  • Many substitutes
  • Luxury goods
  • Elasticity coefficient > 1

Cross price elasticity of demand=% ∆ in quantity of product B/ % ∆ in price of product A. How sensitive demand for a product is to change in price of another product. + for substitutes, – for compliments

Income elasticity of demand=% ∆ in quantity/ % ∆ in income. + for normal goods, – inferior goods

=International trade

Price will ↓. Producer surplus will ↓, consumer surplus will↑. Tariffs can affect this.

Excise tax [screenshot]

Consumer choice

Products with different prices and different amounts of utility.

Marginal utility ($) x / price (per unit) of x = marginal utility price of y


Law of diminishing marginal returns—as variable resources are added to fixed resources, the additional output per worker will ↓

Fixed costs—don’t change with quantity produced vs. variable costs— do change as more or less product produced. Fixed + variable – total costs.

Short run costs of production

Marginal costs (MC), average total costs (MTC), average variable costs (AVC), average fixed costs (AFC) [graph]. Total cost = average [variable] costs x number of units

Long run costs of production

In long run, all resources are variable.

Long run average cost (LRAC) ↓ as mass production techniques are used. [screenshot]

Market structures

All types produce at MR=MC

Perfect competition

  • Low barrier to entry
  • Many small firms
  • Seller has no need to advertise
  • Identical products
  • Firms are price takers (they have no control over price)

Calculation of ATC, AFC if given a chart

Shutdown rule—if price < AVC. If loss is big enough, shutdown.

Economic profit—explicit and implicit costs (opportunity costs) vs. accounting profit—money. Will be positive.

Understand how short term turns into long run [screenshot]

Productive efficiency—producing at lowest possible cost. On graph, where price=minimum ATC vs. allocative efficiency—producing at society’s desired level. On graph, where price=marginal cost. Perfect competition has both.


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