Page 1 - Microeconomics

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OVERVIEW • CHANGE IN SUPPLY (Shift in the entire supply curve): Results CONSUMER CHOICE
• ECONOMICS: The study of how scarce from change in the cost of production, business taxes, expected future & PREFERENCE
resources are allocated among competing uses. price or quantity, change in the price of other produced goods, change in
• KEY ECONOMIC QUESTIONS INCLUDE: the number of sellers, change in planned sales at all prices, and change in UTILITY THEORY
technology.
1. What is produced? • UTILITY or TOTAL UTILITY (TU) is
2. How is it produced? MARKET EQUILIBRIUM P the satisfaction obtained by the consumer
3. Who gets what is produced? • EQUILIBRIUM: Occurs at price (Pe) S from consuming a good.
• PRODUCTION POSSIBILITY FRONTIER: where quantity demanded = quantity • MARGINAL UTILITY (MU) is the
The alternative combinations of final goods and supplied. At Pe, all sellers willing to sell Price Floor extra utility from an additional unit of
services that could be produced in a given time will be able to sell and all buyers willing Pe Equilibrium consumption.
period with all available and limited resources and to buy will be able to buy. Price Ceiling TOTAL UTILITY
technology. • PROPERTIES OF EQUILIBRIUM: Utility MU 2 U
1. Illustrates opportunity cost: Obtaining more 1. P > Pe, surplus D MU 1
production of one good requires a reduction in 2. P < Pe, shortage O Qe Quantity
the production (lost opportunity) of one or more 3. P = Pe, stable
other goods. • PRICE CONTROLS:
2. Law of increasing opportunity cost: Obtaining 1. Price ceiling: BELOW equilibrium = shortage, Q D > Q S
more of a good in equal amounts requires giving 2. Price floor: ABOVE equilibrium = surplus, Q D < Q S Q
up ever larger amounts of the alternative good. • CHANGES IN EQUILIBRIUM: Equilibrium price (Pe) and equilibrium • Marginal utility (MU) is the slope of the total
3. Inside frontier: Unemployed resources or quantity (Qe) will change whenever the regularly-shaped supply or utility curve. MU decreases as more quantity is
resources used inefficiently. demand curve shifts. consumed. This is the law of diminishing MU.
4. Expanding frontier: Occurs (a) when resources • LAW OF DIMINISHING MARGINAL
are increased and/or (b) due to technological UTILITY: Additional consumer satisfaction
advancements. SHIFTS IN THE SUPPLY & DEMAND from the last unit of consumption falls as
• HOW CHOICES ARE MADE: CURVES (IMPACT ON EQUILIBRIUM) more of the good is consumed.
1. Market mechanism: Supply and demand SUPPLY INCREASE SUPPLY DECREASE
determine the price; owners allocate resources S↑→P*↓, Q*↑ S↓→P*↑Q*↓ INDIFFERENCE CURVE (IC)
to obtain the highest monetary rewards. B U 1 = U 2
2. Command economy: Central authority S 0 S S 1 S Slope = – (MU A /MU B )
determines the price and allocates 1 0 U 1
resources to achieve goals. MU A
3. Mixed: An economy that uses both market P 0 * P 1 * U 2
and non-market signals to allocate goods ↓ ↓ IC A
and resources. MU B
• MACROECONOMICS: The study of economic P 1 * P 0 *
aggregates such as national production and the D D 0 • An indifference curve is a convex curve
that represents different bundles of goods
price level. 0
• MICROECONOMICS: The study of the Q 0 *→Q 1 * Q 1*←Q 0* that provide the SAME levels of utility.
behavior of consumers and producers operating DEMAND INCREASE DEMAND DECREASE INDIFFERENCE CURVE
in the individual markets of the economy. D↓→P*↓, Q*↓ MAPPING
D↑→P*↑, Q*↑ B
SUPPLY & DEMAND P 1 * S 0 S 0 U↑
DEMAND ↑ P 0* ↑
• DEMAND CURVE (SCHEDULE): A curve P 1*
(table) showing the quantities of a good a P *
0
consumer is willing and able to buy at alternative D D 0
prices. D 1 D 1
• LAW OF DEMAND: Increase in price (P) causes 0 Q 1 *←Q 0* A
decrease in quantity (Q) demanded. Q 0 *→Q 1 *
• CHANGE IN QUANTITY DEMANDED SIMULTANEOUS SHIFTS (IMPACT ON EQUILIBRIUM) • An indifference curve map shows a group
of indifference curves representing utilities
(Movement along the demand curve): Caused that increase in a northeasterly direction.
by a change in the price of the given good. P 2B Supply • Why indifference curves do not intersect:
• CHANGE IN DEMAND (Shift in the entire
demand curve): Results from changes in tastes,
income, personal taxes, prices of related goods 2A 1 2C A B
(substitutes or complements), expected future
price or quantity, number of buyers, or a change C
in planned consumption at all prices. 2D
SUPPLY Demand 1. Given two indifference curves that intersect,
• SUPPLY CURVE (SCHEDULE): A curve Q U B > U C since point B is above point C.
(table) showing the quantities of a good a * One variable clearly moves in a specific direction, the other variable 2. Since point A and C are on the same
seller is willing and able to sell at alternative is unclear. indifference curve, U A = U C .
prices at a given cost of production. At 2B and 2D, P* clearly increases or decreases, therefore 3. Since point A and B are on the same
• LAW OF SUPPLY: Increase in price (P) causes 2B→S↓D↑→P*↑Q*? indifference curve, U A = U B .
increase in quantity (Q) supplied. 2D→S↑D↓→P*↓Q*? 4. By transitivity, U B = U C which conflicts
• CHANGE IN QUANTITY SUPPLIED At 2A and 2C, Q* clearly increases or decreases, therefore with the initial assertion: U B > U C .
(Movement along the supply curve): Caused by 2A→S↓D↓→P*?Q*↓ Therefore, indifference curves cannot
a change in the price of the given good. 2C→S↑D↑→P*?Q*↑ intersect.
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