Ch1 Fundamental economic issue: human beings allocate limited MRSA = PA/PB Under perfect competition, AR = MR = P

resources→unlimited wants.(scarcity) Perfect elastic demand: the demand curve facing an individual firm.
– Microeconomics studies how individual economic units, which respond of price is infinite(橫) DPC = P
include individual consumers and producers, interact in individual i.e. any change in price ->quantity = 0
markets to deal with the problem of scarcity perfectly inelastic demand: any price->constant demand Accounting Profit = Total Revenue – Explicit Cost
• Example: Consumer choices, firm’s investment, individual labor Economic Profit = Total Revenue - (Explicit + Implicit) Cost
supply, and savings Inelastic: P-, TR-;Elastic: P-, TR^ Implicit cost: opportunity cost
– Macroeconomics looks at the resource allocation and the Less elastic: necessity/no or few substitutes/small part of income
economic environment of the whole society. More elastic: luxury/many substitutes/large part of income The (optimal) output can be obtained by equating marginal
• Example: Unemployment, Interest rates, Inflation, GDP revenue (MR) to marginal cost (MC)
EPy:(+)substitutes Py^ Qy(-) Qx(^); Profit-maximizing:
Epy:(-)complements Py^ Qy- Qx- Marginal approach: MC=MR at Q*
Total approach: profit(pai = TR-TC):the gap is biggest at Q*
Demand: Long-term>short-term:
takes time
All variable apart from short run(at least 1 fixed) capital
->consumer habits and closer
MP>(<)AP,AP^(-) MP=AP, AP is at the highest level
substitutes
MPL/w> MPk/r: labor substitute capital
MPL/w< MPk/r: capital substitute labor
Supply: long-term>short-term
->^production capacities Marginal utility:change x total

PPC/PPF->max. combinations (given resources and technology

level) any point: efficient production

Technology^/Input increases
Ch6 Theory of cost
Ch4 Theory of Consumer Long-run: make more profit: zero economic profit
Assumptions: 1. Completeness: A>B/B>A/A~B total cost curve (LRTC/LTC) 1.When the firm experiences a loss,
2. Transitivity: A>B,B>C, then A>C average (LRAC/LAC) – Option 1: It can continue to produce at a loss, or
3. Non-satiation(“more is better”):a>1, marginal (LRMC/LMC) – Option 2: It can shut down temporarily (not exiting)
aA>A • Option 1 incurs a loss; Option 2 incurs a fixed cost (TFC)
LAC • If Loss < TFC, then choose option 1; Loss > TFC, choose option 2
Utility Function: relationship quantities Ch5 Theory of Producer Economies of Scale: % increase its output>%increase total costs. Loss or TFC, which one is bigger?
consumed  utility • Increasing returns to scale-> special case of economies of When P1 > AVC, Loss < TFC; P1 > AVC;(ATC – P1) x Q* < (ATC-AVC) x
Isoquant Curve(map):
Indifference curves(negative slope)both scale.(decreasing LAC.) LAC = LTC/Q : when Q ^> than LTC^ Q* Loss < TFC
combinations(input A&B)are same
good A and good B. Diseconomies of scale ^ its output by a % < % in its total costs. When P1 < AVC, Loss > TFC; P1 < AVC;(ATC – P1) x Q* > (ATC – AVC)
level of output(a set of)
Marginal Rate of Technical • Decreasing returns to scale->special case of diseconomies of x Q* Loss > TFC
A specific consumption bundle must lie on one indifference curve scale.(^ LAC.) LAC= LTC / Q : when Q ^< LTC does P1=AVC =shutdown price
Suitable economic system: Substitution (MRTS)=K2-K1/L2-L1
only. X intersect LMC: the change in LTC as one more unit of output is produced If the firm makes profit, how to make more profit?
Command: authority(government)(central planning board) :The amount of capital can replaced
amount of B consumer is willing to give When existing firms are making positive economic profit,
CPB 收集消費者偏好&生產能力(units/quality) by labor
up to have A Short-run: cost curve (SRTC /TC);fixed cost curve (SRTFC/TFC) existing/old firms can expand ( to increase K1 to K2), that is to
Market: -g&s market ISOCOST Line
Perfect variable cost curve (SRTVC or TVC);average total cost curve (SRATC produce more, to sell more, and to make more profit
-factor markets(labor/capital/land/Entrepreneurship)
substitutes: or ATC);average fixed cost curve (SRAFC/AFC);average variable cost Old firm
Participants: -households(Consumers in g&s/Providers in factor) constant MRS curve (SRAVC/AVC);marginal cost curve (SRMC/MC) 2.Short-run supply curve
Firms(consumers in factor/provider in g&s)
X keep profit in long run
ATC = AVC+AFC; MC=w/MPL; AVC= w/WPL New firms will enter the market and compete with the old firms~
What? • Interaction in the goods and services market
MC & AVC can be derived form TVC profit 0(economic profit)
How? • Interaction in the factor markets
MC>AVC:AVC ^, MC curve intersects with AVC at the lowest level of Economic Profit = 0 ... But ... Normal Profit > 0
For whom? • Interaction in the factor markets. Perfect complements: consume in AVC
fixed proportion eg. 鏡片和鏡框 SRTC = SRTFC + SRTVC
Mixed: national defense and police protection(government)
Budget line: SRTFC shifts up when K1 rises to K2
market economy x efficiently allocate resources->Market Failure.
SRTVC shifts right when K1 rises to K2 Therefore, SRTC (= SRTFC +
Degree of government intervention 干預 varies a lot by country
Optimal SRTVC) shits up & right when K1 rises to K2 (from SRTC1 to SRTC2)
Ch2 Basic and supply curve consumption
Demand curve: relationship between Qd and own price(Px^Qd-) choice: tangent Ch7 Perfect Competition
Ceteris Paribus: all other factors being constant -many buyers and sellers
Movement along (Qd) &shift (demand) slope:downward-sloping inferior goods: -easy/free entry exit
-identical/homogeneous g&s 一樣/同類
Normal(Inferior) good: income^, demand^(-) -Know/perfect info.(eg. ech/prices)
-Giffen good x available alternatives(demand^, price^) eg.rice
Demand Curve(horizontal):x affect the market price even how
Supply curve: relationship between Qs and Px(Px^, Qs^) much it produces
Market: seller and buyer interact-> price setting &quantity
Market Equilibrium :Qd=Qs=Qe (market clearing) This means that despite the ECONOMIC
Pe(Equilibrium Price); profit of a firm is ZERO, the entrepreneur is
Qe(Equilibrium Quantity) still making a positive NORMAL profit,
Qs>Qd=surplus/excess supply therefore the entrepreneur will not exit the
Qd>Qs=shortage/excess market ... he/she will still produce the
demand good/service
Ch 8. Perfect Competition & Allocative
Eq changes over time, adj
Efficiency(QE) Manufacture the highest
from diseq to eq: gover. price controls the slope of the indifference curve = the slope of the budget line quality with highest value
Price ceiling: max. price(<Pe)->shortage eg. Rent control
Consumer Surplus is defined as:
Price floor: min. price(>Pe) eg. Min. wage
Maximum amount of “willing to pay”(expect
Ch3 Elasticity to receive) for a good minus amount actually pays for the good It
The “ - ” sign means Px, Qd move in opposite direction is net benefit that is obtained by consumer from his consumption
>1:Elastic(Luxuries) of a good
=1:Unitary Elastic <1: Demand Curve=Willingness to Pay=Marginal Benefit (MB) of
Inelastic(Inferior goods) Consumption
Elasticity related but not = Producer Surplus:
Price already very low->consumer x sensitive(inelastic)
Amount that a producer actually receives to sell the good minus -1 firm different prices Avoid price war: Oligopolies 1 & 2 cooperate and form a cartel
the minimum amount at which the seller is willing to sell a good. -restricted (barriers to entry) Ch10 Comparison of perfect competition & Monopoly • The cartel behaves like a monopoly in setting price and quantity
It is benefit to producer -no close substitutes of output
Sell goods as long as →Marginal cost can be covered -Imperfect info. The cartel has to find a satisfactory way to divide the total (cartel)
Supply Curve=Willingness to Sell=Marginal Cost (MC) of Barriers: A)Legal Barriers: license profit between the cartel members
Production (short-term) patent, copyright) ->negotiations among cartel members
In the short-run, B)Input/resources Barriers: scare input/resourse Failure:1. Internal: Incentive to cheat
• Producer surplus = (P – MC)*Q = TR – TVC C) Cost Barriers: Output^, LAC- (Natural) monopoly supplies the (cut price secretly) by some cartel
• Economic Profit = TR – TC = TR – (TVC+TFC) whole market at a lower cost than two or more (smaller) firms members
In the long-run, (with free entry & exit) Down-sloping-> market power 2. External: entry of new firms
• Producer surplus = (P – LMC)*Q = TR – LTC = 0 Market Power: ability to raise price without losing all customers
• Economic Profit = 0 /sales
Effective when MB(Marginal Benefit of consumption)=MC(marginal : price setter/maker :profit-max. price and output
cost of production )
Firm 1 cheats
Perfect competition vs monopolistic competition :reduce price->more output->more
X produce identical goods/services vs differentiated goods/services profit (firm 2’s profit drops)
Imperfect-> monopoly don’t know the highest price (but close substitutes) from existing firms. All firms are in the same
Even know, may not able to charge (cost of collecting customers’
Situation: selling the same product and have perfect information Game theory: (math)analyses the
payment by the monopoly is too high):charges two group of buyers
about production technology.vs the demand curve interdependence / interaction; As a
series of strategic actions &
and reactions (moves & countermoves)
Among a few players / oligopolies.
Ch13 Compare 4 types

and the cost curves of each firm are not

necessarily identical.
The monopoly aspect : monopoly has market
power & sets price by equating MC to MR) of
monopolistic competition is observed in the short
Ch11. Monopolistic Competition run

Profit=(P-ATC)*Q
Market-> initially inefficient, intervention can
Eliminate/reduce the deadweight loss.
• Price control
– MC pricing: putting a price ceiling at P = MC of the monopolist
• MR curve under policy = a horizontal line at MR price
(Max.)Society’s welfare = consumer surplus + producer
• can eliminate the DWL
surplus->perfectly-competitive
– AC pricing: putting a price ceiling at P = AC of the monopolist
at MC=MB, and QP.C. =Q E
Market Failure:P1>Ppc • Sometimes, PMC < AC, then putting a price ceiling at PMC makes
1.allocative efficiency x firms to exit
achieved ->set a ceiling at PAC, which is higher than PMC, but lower than
2.society’s welfare, total PM.
• It can reduce the size of DWL, but cannot eliminate it Marginal Revenue = P +
surplus
completerly dP/dQ * Q
3.Market failure(FAILS to
The competitive aspect :(in perfect competition, i.e.
produce the efficient Price Discrimination
quantity of its output) disappearance of economic profit due to entry of new firms) of
(Charging different monopolistic competition is observed in the long run
consumers the highest
Deadweight Social Ch12. Oligopoly
price)
Loss 無謂的社會損 • The monopolist can
失: NET LOSS of capture a greater
total surplus (that surplus by exercising
is, sum of producer Herfindahl-Hirschman Index (HHI)= sum of squared market shares
price discrimination.
& consumer of all firms in the market.
• Conditions for price
surplus) from discrimination
underproduction market power/ Ch1
(producing below consumer’s willingness to pay/prevent resale The fact that individual productive resources are NOT equally
QE) or – First-degree(perfect) price discrimination useful in all activities
overproduction • A firm charge the price of each unit at a price that is equal to the implies that a production possibilities curve will be bowed
(producing above consumer’s maximum willingness to pay outward.
QE) • There will be no deadweight loss in this case, but also zero
In this case of underproduction, consumer surplus. Ch3
Deadweight Social Loss = Total Surplus at P1 (producing below – Second-degree price discrimination (quantity discount) When the price of gasoline rises, people do not drive significantly
QE) – Total Surplus at perfectly competitive equilibrium (producing • It requires less information on consumer’s willingness to pay & less than beforein the short-run. If the price of gasoline stays high,
at QE ) may not improve market efficiency. people eventually replace their cars with more fuel-efficient/hybrid
Compute Welfare Effect of Government Intervention • In the extreme case, it converges into the first-degree price models.
• The effect of a price floor (previous case) discrimination As a result, B) the short-run demand for gasoline is less elastic
• The effect of a price ceiling – Third-degree price discrimination than the long-run demand
• The effect of a sales tax 征稅 • Categorize different consumers into different groups eg.student
collects a sales tax of $t per unit on good x from sellers->upward fare vs adult fare Ch4
shift in the market supply curve • Different groups will have different sensitivity to the price, thus Which of the following occur when a person maximizes utility?
subsidy 補貼 the monopolist can charge I. the marginal utility of each good bought is equal
provides a subsidy of $s per unit on good x to sellers. It results in a II. the highest level of utility is attained
downward of the market supply curve III. all of a person’s budget is spent
(P-MC)/P=-1/Ep
Ch9. Monopoly Monopoly power(Lerner index(L)(perfect com. P=0 Budget line: price and income
Imperfect Competition:Entry is restricted, barriers to entry Less price-sensitive, higher profit-max. markup
Ch 12 Oligopoly Ch9 Monopoly Ch 7

Ch 08

Ch10

Ch 11
 Ch5

Ch 6