Notes on Microeconomics

  The theory of consumer choice People face tradeoffs - Buying more of one good leaves less income to buy other goods Budget constraint:  - The limit on the consumption bundles that a consumer can afford Example: - Hurley divides his income between two goods: fish and mangos. - A “consumption bundle” is a particular combination of the goods, e.g., 40 fish & 300 mangos A fall in the price of fish has two effects on Hurley’s optimal consumption of both goods -  Substitution effect     -  A fall in PF makes mangos more expensive relative to fish: Hurley buys fewer mangos and more fish - Income effect     -  A fall in PF boosts the purchasing power of Hurley’s income: buy more mangos and more fish The net effect on mangos is ambiguous

  Consumer Surplus Welfare Economics The study of how the allocation of resources affect economic well-being     - Benefits buyers and sellers receive from market transactions     - How society can make benefits as large as possible     - Equilibrium of supply and demand maximizes the total benefits Willingness to pay - Max amount a buyer will pay for a good - How much that buyer values the good Consumer surplus - Amount a buyer is willing to pay for a good minus amount the buyer actually pays - Willingness to pay minus price paid - Measures benefit buyers receive from participating in a market - Closely related to the supply curve - Derived from the costs of the suppliers - Closely related to demand curve Demand schedule - Derived from the willingness to pay of the possible buyers At any quantity, the price given by the demand curve - Shows the willingness to pay of the marginal buyer - Buyer would leave the market first if the price we...

  Elasticity and its application Elasticity = measure of the responsiveness of quantity demanded/supplied to a change in one of its determinants Price elasticity of demand - How much the quantity demanded of a good responds to a change in the price of that good - percentage change in quantity demanded divided by the percentage change in price - PED = |(Q2-Q1)/((P2-P1)| Elastic demand Quantity demanded responds substantially to price change Inelastic demand Quantity demanded responds only slightly to price change Determinants of PED - Availability of close substitutes (more substitutes = more elastic) - Necessities vs luxuries (necessities = inelastic, luxuries = elastic) - Definition of the market (narrowly defined markets = more elastic) - Time horizon (longer time horizon = more elastic) Computing PED - Percentage change in quantity demanded divided by percentage change in price - Midpoint method Variety of demand curves - Demand is elastic (PED > 1) - Demand is inelastic (PED...

 Markets and Competition Supply and Demand - Words economists use most often - The forces that make market economies work Market - A group of buyers and sellers of a particular good or service Buyers as a group = determine the demand Sellers as a group = determine the supply Markets take many forms - Highly organized - Less organized Competitive Market - Many buyers and sellers - Each has negligible impact on market price - Price and quantity are determined by all buyers and sellers Monopoly - The only seller in the market = seller sets the price Other markets - Between perfect competition and monopoly Demand Quantity demanded = amount of goods buyers are willing and able to purchase Law of demand - When the price of a good increases, the quantity demanded falls Individual demand = demand of individual for product Market demand = sum of all individual demand Shifts in the demand curve - Increase in demand = demand curve shifts to the right - Decrease in demand = demand curve shifts...