Académique Documents
Professionnel Documents
Culture Documents
12:03 AM
Bush and Obama turned to ideas from the 1930s to provide policy guidance for 2008-9 financial
crisis/recession
British economist John Maynard Keynes created the field of macroeco in 1936
Analysis of the broad economy
Suggested the solution to the great depression which was increase gov spending and lower taxes
Real Gross Domestic Product is roughly $15 trillion for the US, largest in world
EU is second
Growth is so large that if you took 1% from growth rate each year from 80 years, we it would cut
econ in half
Real GDP vs Real GDP per capita, second is a better measure
Highly productive countries have the following characteristics:
Most are democracies
Most have high environmental standards
Most have cool climates
Most enjoy freedom of expression
Women's rights and freedoms are better protected
Most enjoy better health
Population is taller
Government is less corrupt
Income inequality is lower
Inflation is lower
Population is more literate
Most have fewer trade restrictions
Population growth is lower
Property rights are more secure
Jared Diamond suggested that weather and flora/fauna contributed to the high eco growth
It could take a whole century for a country with the right programs/policies to catch up to us
Currently many are concerned about outsourcing, globalization, and international trade
May help an underdeveloped country grow
Improvements in computing, transportation, and communications are all accelerating the development
process. Will help a developing country accelerate their eco growth.
Coremicroeconomics Page 1
5:25 PM
Microeconomics vs Macroeconomics
Microec deals with decision making by individuals, business firms, industries and governments
Ex: which OJ, which job, where for vacation
Macroec focuses on broader issues faced as a nation
Care for prices of all goods and services and inflation
Uses some microeco tools but has main focus on broad aggregate variables of the eco
Deals with business cycles, recession, depression, unemployment, and job creation rates
Economics is a social science
Overlap between the two, use supply and demand analysis to understand both indiv markets and
general econ
Efficiency vs Equity
Efficiency deals with how well resources are used and allocated
Production efficiency occurs when goods are produced at the lowest possible cost
Allocative efficiency occurs when individuals who desire a product the most get those goods and
services (measured by their willingness to pay)
Equity is the fairness of various issues and policies
Clash between efficiency and equity, economists leave equity up to politicians and philosophers
Coremicroeconomics Page 2
5:45 PM
Information is Important
Efficient b/c people make rational choices
Need information to make the choice
Laws are used to prevent people from getting unfair advantage over other stockholders
Ex: Martha Stewart convicted of lying about selling stock based on inside info
Originally thought that overall economy was a self-correcting mechanism if left to itself
Great depression proved wrong, solution was government intervention
Coremicroeconomics Page 4
6:58 PM
Coremicroeconomics Page 5
7:26 PM
Coremicroeconomics Page 6
7:19 PM
Coremicroeconomics Page 7
8:29 PM
Economic Systems
To answer the three questions, it depends on who owns the three factors of production (land, labor,
capital, and entrepreneurship)
Capitalist/Market, private individuals and firms own most of the resources
Producers and consumers are free to choose
Government just protects property rights, enforces contracts between private parties, providing
national public goods like national defense, and establishing and ensuring the appropriate operating
environment
US is not pure laissez-faire or "leave it alone", more of a mixed econ
Planned economies are systems where most of the productive resources are owned by the state and
eco decisions are made by central governments
Land
Land and all other natural resources that are used in production
Payment to land is rent
Labor
A factor of production includes both the mental and physical talents of people
Improve labor: training, eductation, apprenticeship programs
Labor paid in wages
Capital
All manufactured products that are used to produce other goods and services
Drill presses, blast furnaces, computers, trucks and automobiles
Capital earns interest
Entrepreneurial Ability
Entrepreneurs combine land, labor, and capital to produce goods and services, and they assume the
risks associated with running a business
Also manage
Earn profits
cost to society
Allocative efficiency occurs when the mix of goods and services produced is the most desired by society
Every economy faces constraints or limitations (land, labor, capital, and entrepreneurship)
Coremicroeconomics Page 9
8:49 PM
Production Possibilities
Production possibilities frontier shows different levels of production
What is attainable by the economy is on the line or left
Beyond is unattainable
Full Employment
On the line is maximum output or full employment
Opportunity Cost
Reallocating resources to change production pattern at a price, called opportunity cost
Coremicroeconomics Page 10
More realistic PPF is bowed out from the origin since opportunity costs rise as more factors are used to
produce increasing quantities of one product (can't just convert a truck into a plow)
Economic Growth
Shift the PPF to the right is growth
Can make assumptions, expanding resources or improved technologies
Ex: lightbulb
Expanding Resources
Capital and labor are principal resources that can be changed through government action
Land and entrepreneurial talent are important factors of production but can't be changed via gov
policies
Increasing Labor and Human Capital
Increase in population shifts PPF outward, could be births, immigration, or willingness to enter the
workforce
Labor factor can also be increased by improving worker skills (investment in human capital)
Capital Accumulation
Additional capital makes each unit of labor more productive and results in higher possible production
throughout the econ
Technological Change
Can shift the potential output in one direction for specific industries
Such as computer microchips
Coremicroeconomics Page 11
3:46 PM
Coremicroeconomics Page 12
Markets
Thursday, September 05, 2013
4:04 PM
A market is an institution that enables buyers and sellers to interact and transact with one another
Coremicroeconomics Page 13
Demand
Thursday, September 05, 2013
4:10 PM
A purchase is a "vote"
Easy to determine a want than a need
Wants or desires that are expressed through purchases are known as demands
Coremicroeconomics Page 14
Determinants of Demand
What affects demand
They are:
1: Tastes and preferences
2: income
3: prices of related goods
4: the number of buyers
5: expectations regarding future prices, income, and product availability
Income
As income rises, demand for most goods will increase
When income rises and demand for these goods increase, these are normal goods
Opposite is inferior good, a good for which an increase in income results in declining demand
(public transportation when you have a car ramen when you graduate from college)
Coremicroeconomics Page 15
Coremicroeconomics Page 16
Supply
Monday, September 09, 2013
10:57 PM
Shows the maximum quantity of computer games the producers will offer for sale over some defined
period of time.
Determinants of Supply
1: production technology
2: costs of resources
3: prices of other commodities
4: expectations
5: the number of sellers (producers) in the market
6: taxes and subsidies
Coremicroeconomics Page 17
Production Technology
If a factory is outfitted with newer, more advanced equipment then the firm can supply more of its
product at the same price or even at a lower price
A shift from S0 to S1
Advances in microprocessing and miniaturization brought a wide array of products to the market
Costs of Resources
Resource costs affect production costs and supply
Raw materials/labor +, production costs + and supply -
Expectations
Expect prices of goods to increase then increase production (supply to the right)
However, price cuts can also temporarily increase the supply of goods on the market as producers try to
sell off their inventories
Number of Sellers
Everything else held constant, if the number of sellers in a particular market increases, market supply of
their product increases
Change in quantity supplied results from price of the product changes, moving along the existing curve
Coremicroeconomics Page 19
Market Equilibrium
Tuesday, September 10, 2013
12:25 AM
Both are needed to determine prices and quantities of goods bought and sold
Equilibrium market forces are in balance when the quantities demanded by consumers just equal the
quantities supplied by producers
Amount of product willing and able to be purchased is matched by producers willing and able to
sell
Equilibrium price market equilibrium price is the price that results when the quantity demanded is just
equal to quantity supplied
Equilibrium quantity market equilibrium quantity is the output that results when quantity demanded is
just equal to the quantity supplied
b-a=surplus
d-c=shortage
When there is a surplus (occurs when the price is above the market equilibrium and quantity supplied
exceeds quantity demanded), or excess supply, most firms cut production while some reduce prices to
increase sales
When there is a shortage (occurs when the price is below the market equilibrium, and quantity
demanded exceeds quantity supplied), buyers will begin to bidding up, and firms will raid prices and
increase production until equilibrium is restored
Coremicroeconomics Page 20
Changes in Supply
Coremicroeconomics Page 21
Coremicroeconomics Page 22
12:36 AM
Coremicroeconomics Page 23
1:20 AM
Businesses provide consumers with the quantity of goods they want to purchase at the established
prices; no shortages or surpluses
Sometimes the government intervenes for political/social reasons and set limits
Keep things below or above market equilibrium
Price Ceilings
Price ceiling: A government-set maximum price that can be charged for a product or service.
A legal maximum
Price Floors
Price floor: A government-mandated minimum price that can be charged for a product or service
Product price cannot legally fall below this level
Coremicroeconomics Page 24
Agricultural price supports have been used to try to smooth out the income of farmers due to wild
fluctuations in annual variations in crop prices
Coremicroeconomics Page 25
1:40 AM
The typical market does not meet all of the criteria for a truly competitive market
Will have to temper analysis to fit specific conditions of the markets studied
Efficient markets are rationing devices, ensuring that those who value a product the most are the ones
who get it
Coremicroeconomics Page 26
3:05 PM
Coremicroeconomics Page 27
Coremicroeconomics Page 28
Chapter 5 - Elasticity
Tuesday, September 10, 2013
3:36 PM
Coremicroeconomics Page 29
Elasticity of Demand
Tuesday, September 10, 2013
3:49 PM
Example: Old price of gasoline was $2/gal and new price is $3/gal
Elastic
The absolute value of the price elasticity of demand is greater than 1. Elastic demands are very
responsive to changes in price. The percentage change in quantity demanded is greater than the
percentage change in price.
Perfectly elastic:
Coremicroeconomics Page 30
Many products with close substitutes face highly elastic demand curves
For example, raise the price of Charmin and sales quickly fall as people switch to Northern or Scott
(elasticity could range from 2.0 to 4.5)
Inelastic
Absolute value of the price elasticity of demand is less than 1. Inelastic demands are not very responsive
to changes in price. The percentage change in quantity demanded is less than the percentage change in
price.
Products that see little change in sales even when prices change dramatically
Medication for life-threatening illnesses, gasoline, tobacco, spices
Note: Demand for gasoline is inelastic, but elasticity for specific brands of gasoline is elastic
Unitary Elasticity
Absolute value of the price elasticity of demand is equal to 1. The percentage change in quantity
demanded is just equal to the percentage change in price.
Meaning that the percentage change in quantity demanded is precisely equal to the percentage change
in price
Coremicroeconomics Page 31
in price
Determinants of Elasticity
Four basic determinants of a product's elasticity of demand:
1: Availability of substitute products
2: The percentage of income or household budget spent on the product
3: The time period being examined
4: The difference between luxuries and necessities
Substitutability
The more close substitutes a product has, the easier it is for consumers to switch to a competing
product and the more elastic the demand
Beef and chicken, Coke, Pepsi and RC Cola
Few substitutes like insulin or tobacco, elasticity lower
Time Period
When consumers have to adjust their consumption patterns, the elasticity of demand becomes more
elastic. When little time, elasticity is more inelastic.
When gasoline prices rise suddenly, most consumers cannot immediately change their
transportation patterns so gasoline sales do not drop significantly
If they remain high, then consumer behavior may change
Coremicroeconomics Page 32
Coremicroeconomics Page 33
Elasticity measures the responsiveness of quantity sold to changes in price, which has an impact on the
total revenues of the firm
Total revenue(TR)= P X Q
Inelastic Demand
Consumers continue to buy a product even when its price goes up
Coremicroeconomics Page 34
Elastic Demand
Sales change dramatically due to small price changes
Advantage is that if say a restaurant has a buy one get one free special and other discounts, sales have
the potential to expand rapidly and increase revenue
Unitary Elasticity
Increase in price results in the same percentage reduction in quantity demanded
Total revenue is unaffected
Coremicroeconomics Page 36
Normal good: income elasticity is positive but less than one. As income rises, QD increases as well, but
not as fast as the rise in income
Income doubles, buy more sporting goods but not double
Luxury goods: income elasticity greater than 1. As income rises, QD grows faster than income
Mercedes, caviar, fine wine, and visits to EU spas are examples
Inferior goods: income elasticity is negative. As income rises, the QD for these fall
Include potatoes, beans, compact cars, and public transportation
Some firms produce all three types of goods to switch when economic conditions favor
Products A and B are substitutes if their cross elasticity of demand is positive (Eab>0)
Beef price increase, substitute with chicken
Products A and B are complements if their cross elasticity of demand is negative (Eab<0)
Goods and services which are consumed together such as gasoline and large SUVs
Price of gas rises, QD for SUVs declines
If two goods are not related, then cross elasticity of demand is 0 or near 0
Coremicroeconomics Page 37
Elasticity of Supply
Monday, September 16, 2013
7:52 PM
Price of elasticity of supply (Es) measures the responsiveness of quantity supplied to changes in the price
of the product.
An elastic supply curve has elasticity greater than 1, and inelastic, less than 1
Time is the most important determinant of the elasticity of supply
Elastic supply: Percentage change in Qs is greater than the percentage change in price
Inelastic supply: Percentage change in Qs is less than the percentage change in price
Unitary elastic supply: The percentage change in Qs is equal to the percentage change in price
S1 is an inelastic supply, when price changes and the percentage change in quantity supplied is smaller
than the percentage change in price
S2 is unitary elastic supply curve, % change output = % change price
S3 is elastic, % change output > % change price
Time period so short that the output and the number of firms are fixed.
Firms have not time to change their production levels in response to changes in product price.
Agricultural products at harvest time face market periods.
Products that become instant hits face market periods (lag between when the firm has a hit and when
the inventory can be replaced)
Coremicroeconomics Page 39
10:42 PM
Demand analysis rests on an important assumption: People are rational decision makers
We have to choose. Finite quantity of resources at our command.
Utility theory or utilitarianism: Theory holds that rational consumers will allocate their limited incomes
so as to maximize their happiness or satisfaction.
Higher incomes should lead to more choices and greater happiness in theory
Coremicroeconomics Page 40
10:48 PM
Coremicroeconomics Page 41
Maximizing Utility
When consumption of additional units of two products provide equal satisfaction, they are indifferent to
which one they choose
You should allocate your budget so that marginal utilities per dollar are equal for the last units of the
products consumed
Utility maximizing rule: MU=marginal utility and P=price
Where the marginal utility per dollar is equal for all products
Coremicroeconomics Page 42
12:36 AM
Consumer Surplus
Coremicroeconomics Page 43
Coremicroeconomics Page 44
Health Reading
Tuesday, October 01, 2013
2:16 AM
Coremicroeconomics Page 46
Coremicroeconomics Page 49
Coremicroeconomics Page 50
1:14 AM
Substitution Effect
Substitution effect: Higher wages mean that the value of work has increased, and the opportunity costs
of leisure are higher, so work is substituted for leisure
Sub effect for consumer products is negative (price falls and consumption rises) while it is always
positive for labor (wages rise and the supply of labor increases)
Income Effect
Income effect: Higher wages mean you can maintain the same standard of living by working fewer
hours. The impact on labor supply is generally negative.
Higher wages may lead to fewer hours worked. This is why the graph above is backward bending.
Higher wages mean higher income and makes leisure look more attractive.
Coremicroeconomics Page 51
Demographic Changes
Includes changes in population, immigrations patterns, and labor force participation rates Anything
that alters # people qualified for work
Other demographic changes have shifted curve by modifying the labor-leisure preferences among
workers like health improvements (lengthens life)
Nonwage Income
Changes in income from other sources than working will change the supply of labor
Nonwage rises, supplied hours declines
Market labor supply curves normally positively sloped, even though individual's labor supply curve may
be backward bending
Coremicroeconomics Page 52
7:25 PM
Coremicroeconomics Page 53
8:15 PM
Firms
Firm: An economic institution that transforms resources (factors of production) into outputs for
consumers
Often begin as family enterprises or small partnerships, then evolve into corporations
Before making goods, must determine a market need
Must decide what quantity of output to produce, how to produce it, and what inputs to employ
Last two depend on production technology the firm selects
Entrepreneurs
Someone must assume the risk of raising the required capital, assembling workers and raw materials,
producing the product, and offering it for sale to provide a service or product
In the US, 12% from 18 to 64 classify themselves as entrepreneurs, half in Europe, 2% or less in Japan
Three basic business structures:
Sole proprietorship (one owner)
Partnerships (two or more owners)
Corporations (many stockholders)
20% of American businesses are corporations, but sell nearly 90% of all products and services in the US
Sole Proprietors
Sole Proprietor: Represent the most basic form of business organization, wehre there is a one owner
who supervises and manages the business and is subject to unlimited liability
Easy to establish and manage, less paperwork
Limited in ability to raise capital and usually all management responsibilities fall on this person
Own a pizza place and someone slips, get sued and probably don't have enough insurance
Partnerships
Partnership: Similar to a sole proprietorship, but involves more than one owner who shares
management of the business. Also subject to unlimited liability for all of the business.
Usually requires signing a legal partnership document.
Easier to raise capital and spread management responsibilities
Responsible for your partner if he leaves for vacation
Death of a partner will dissolve a partnership unless other arrangements have been made ahead of time
Corporations
Corporation: A business structure that has most of the legal rights of individuals, and in addition, the
corporation can issue stock to raise capital. Stockholders' liability is limited to the value of their stock.
They possess most of the legal rights of individuals
As a result, they have the advantage that they can raise large amounts of capital due to limited liability
Profits
Entrepreneurs and firms have a goal to make a profit
Profit: Equal to the difference between the total revenue and total cost
Total revenue: The amount of money a firm receives from the sales of its products. It is equal to the
price per unit times the number of units sold
TR = p x q
Total Cost: Includes both out-of-pocket expenses and opportunity costs
Economists assume that firms proceed rationally and have the maximization
Economic Costs
Economists separate costs into explicit costs, or out of pocket expenses, and implicit costs, or
Coremicroeconomics Page 54
Economists separate costs into explicit costs, or out of pocket expenses, and implicit costs, or
opportunity costs
Economic costs: the sum of explicit and implicit costs
Explicit costs: expenses paid directly to some other economic entity. Include wages, lease payments,
expenditures for raw materials, taxes, utilities, and so on.
Can determine this by summing all of the checks it has written.
Implicit costs: All of the opportunity costs of using resources that belong to the firm. Include
depreciation, depletion of business assets, and opportunity costs of the firm's capital employed in the
business.
Sunk Costs
Sunk costs: costs that have been incurred and cannot be recovered, including, for example, funds spent
on existing technology that have become obsolete and past advertising that has run in the media
(tuition, previous bets on a poker hand)
They are gone and should be ignored in future business decisions
Coremicroeconomics Page 56
5:07 PM
Total Product
Coremicroeconomics Page 57
When marginal product exceeds average product--when a new worker adds more to output than the
average of the previous workers--hiring an additional worker increases average productivity
Eventually you face diminishing marginal returns, where an additional worker adds to total output but at
a diminishing rate (past point a)
Negative marginal returns occur when adding a worker that actually leads to less total output than with
the previous worker hired, rational firms generally won't do this
Coremicroeconomics Page 58
Costs of Production
Monday, October 07, 2013
5:31 PM
Short-Run Costs
Production costs are determined by the productivity of workers
For example, 10 pizzas produced an hour and the worker is paid $8/hr, then each pizza costs 80
cents, the cost of labor
But ignoring other costs would neglect business expenses known as overhead
In the long run, all costs are variable, so TFC = 0 since given enough time, a firm can expand or close its
plan, enter or leave an industry
Average Costs
Sometimes a firm wants to get a breakdown of how much labor, raw material, plant overhead, and sales
costs are imbedded in each unit of the product
Cost per unit of output (average cost), average fixed cost, and average variable cost is fine
Average fixed cost (AFC): Equal to total fixed cost divided by output (TFC/Q)
Average amount of overhead for each unit of output
Average variable cost (AVC): Equal to the total variable cost divided by the output (TVC/Q)
The labor and raw materials expenses that go into each unit of output
Adding AFC and AVC results in average total cost (ATC).
Marginal Cost
Because of increasing and decreasing returns associated with typical production processes, average
costs vary with the level of output
Marginal Cost: The change in total costs arising from the production of additional units of output (
Since fixed costs do not change with output, marginal costs are the change in variable costs associated
with additional production(
Coremicroeconomics Page 59
L = Labor
Q = Output
MP = Marginal Product (Difference in output at each level)
AP = Average Product (Amount of Output per Labor)
TFC = Total Fixed Cost (Generally can't be changed in SR, like rent on a barn)
TVC = Total Variable Cost (Changed in the SR, cost/wage for workers)
TC = Total Cost (TFC+TVC)
ATC = Average Total Cost (Same as above but per unit of output/Q)
AVC = Average Variable Cost
AFC = Average Fixed Cost
MC = Marginal Cost (The cost of producing one more unit of output)
Coremicroeconomics Page 60
When the cost to produce another unit is less than the average of the previous units produced, average
costs will fall.
When the cost to produce another unit exceeds the average cost for all previous output, average costs
will rise.
Long-Run Costs
Firms can adjust all factor inputs to meet the needs of the market
Coremicroeconomics Page 61
Green represents the lowest cost to produce any given output in the long run and represents the LRATC
curve
This is because as a firm grows in size, economies of scale result from such items as specialization of
labor and management, better use of capital, and increased possibilities for making several products
that utilize complementary production techniques
Larger firms can afford to purchse larger, more specialized capital equipment whereas smaller firms
mush often rely on more labor-intensive methods
Many industries with a wide range of output where ATC are relatively constant
Examples include upscale restaurants, fast-food, and automotive service operations
Have steady average costs because the cost to replicate their business is relatively constant
Constant returns to scale: A range of output where average total costs are relatively constant
As firms continue to grow, they eventually encounter diseconomies of scale, where a range of output
where ATC tend to increase. Firms often become so big that management becomes bureaucratic and
unable to efficiently control its operations
Economies of Scope
Economies of scope: by producing a number of products that are interdependent, firms are able to
produce and market these goods at lower costs
Firms can produce another product when the production processes are interdependent essentially
Role of Technology
Technology plays a role in altering the LRATC curve
Modern communications and computers have permitted firms to become huge before diseconomies are
reached
Coremicroeconomics Page 63
Coremicroeconomics Page 64
Chapter 8 - Competition
Monday, October 07, 2013
6:53 PM
Competition means more than just competing against one or two other firms
With so many businesses, a single firm's behavior is irrelevant to its competitors
Firms in this competitive climate lack discretion over pricing and must perform efficiently
Coremicroeconomics Page 65
7:41 PM
Market Structure Analysis: By observing a few industry characteristics such as number of firms in the
industry or the level of barriers to entry, economists can use this information to predict pricing and
output behavior of the firm in the industry
Four factors determining the intensity of competition in an industry:
Number of firms in the industry
Many firms or a large firm like Wal-Mart that can control prices
Nature of the industry's product
Homogeneous product like salt where no consumer will pay a premium or leather hand
backs where consumers can pick
Barriers to entry
Low start-up and maintenance costs or a lot (a plant)?
Extent to which individual firms can control prices
Monopolistic Competition
Many buyers and sellers
Differentiated products
No barriers to market entry or exit
No long-run economic profits
Some control over price
Oligopoly
Fewer firms (such as the auto industry0
Mutually interdependent decisions
Substantial barriers to market entry
Potential for long-run economic profits
Shared market power and considerable control over price
Monopoly
One firm
No close substitutes for product
Nearly insuperable barriers to entry
Potential for long-run economic profit
Substantial market power and control over price
Coremicroeconomics Page 67
7:55 PM
Marginal Revenue
Marginal revenue: The change in total revenue from selling an additional unit of output. Since
competitive firms are price takers, P = MR for competitive firms
In a competitive market, price will not change, so MR is just equal to the price
Profit Maximizing Rule: Firms maximize profit by producing output where MR=MC. No other level of
output produces higher profits
Economic Profits
Coremicroeconomics Page 68
Normal Profits
Shutdown occurs when revenue drops to a level equal to variable costs. Can pay employees but not
overhead
Coremicroeconomics Page 70
Shutdown point: When price in the short run falls below the minimum point on the AVC curve, the firm
will minimize losses by closing its doors and stopping production. Since P<AVC, the firm's variable costs
are not covered, so by shutting the plant, losses are reduced to fixed costs only.
Coremicroeconomics Page 71
Short-run supply curve: The marginal cost curve above the minimum point on the average variable cost
curve
Simply the horizontal summation of the supply curves of the industry's individual firms
Coremicroeconomics Page 72
8:25 PM
Coremicroeconomics Page 73
Competition means that consumers get what they want since price reflects their desires at the lowest
possible
Both consumer surplus and producer surplus is maximized
Exhibits productive efficiency: goods and services are sold to consumers at their lowest resource
(opportunity) cost
Second, allocative efficiency: the mix of goods and services produced are just what society desires. The
price that consumers pay is equal to the marginal cost and is equal to the least average total cost
Panel A:
Shows when demand increases in the short run (a -> b)
Firms then enter the industries in the long run, resulting in upward pressure on industry inputs (b -> c)
Panel B:
Faces no economies or diseconomies, constant
Constant cost industry: An industry that in the long run, faces roughly the same prices and costs as
industry output expands. Some industries can virtually clone their operations in other areas without
putting undue pressure on resources prices, resulting in constant operating costs as they expand in the
long run
Examples: semiconductor industry, demand increases,
Panel C:
Expansions leads to external economies and so there are lower prices and higher output
Decreasing cost industry: An industry that in the long run, faces lower prices and costs as industry
output expands. Some industries enjoy economies of scale as they expand in the long run, typically the
result of technological advances
Coremicroeconomics Page 74
Coremicroeconomics Page 75
9:10 PM
Coremicroeconomics Page 76
Monopoly Markets
Saturday, October 12, 2013
9:13 PM
Monopoly: A one-firm industry with no close product substitutes and with substantial barriers to entry
The market has just one seller, one firm is the industry
No close substitutes exist for the monopolist's product
Significant barriers to entry so no competition even in the long run
Monopolists are instead price makers unlike price takers for the competitive firms
Economies of Scale
Economies of scale: As the firm expands in size, average total costs decline
Can become so large that demand supports only one firm
One firm can earn economic profits by producing between Q0 and Q1 at D0. However, if there were two
firms, demand for each would be at D2, and neither firm can remain in business without suffering losses
Referred to as a natural monopoly
Intel is an example of one, 9 billion in annual sales to support a plant that costs 1 billion to
open+research+development+marketing
Utilities as well since it's inefficient to have several different serving
Panel A shows d = MR = P, at the price of 10, it can sell all it wants, for each unit sold, revenue increases
by 10
Panel B shows the demand curve for a monopolist
Constitutes the entire industry, so it has a downward sloping demand curve
Sell more output, sell for less price
Coremicroeconomics Page 80
12:16 AM
When firms have some monopoly power, they will try to charge different customers different prices,
called price discrimination
Used to increase profit
Price Discrimination
Senior citizens might pay less for a movie ticket than you do
For successful price discrimination:
Sellers much have some monopoly (or market) power or some control over price
Sellers mush be able to separate the market into different consumer groups based on their
elasticities of demand
Sellers must be able to prevent arbitrage; that is, it must be impossible or prohibitively expensive
for low-price buyers to resell to higher-price buyers
Three types of price discrimination:
Perfect or first-degree: Charging each customer the maximum price each is willing to pay
Second-degree: Charging different customers different prices based on the quantities of the
product they purchase
High initial price
Third-degree: Charging different groups of people different prices
Occurs with airline, bus, and theater tickets
Coremicroeconomics Page 81
Because consumers are charged between Qo and Q1, it is equal to the area shaded above.
This type of price discrimination allows two segments of a market with different demand elasticities to
be satisfied, maximize profits
Coremicroeconomics Page 82
9:41 PM
Coremicroeconomics Page 83
Monopolistic Competition
Saturday, October 19, 2013
9:47 PM
Until 1920s, competition and monopoly were the only models of market structure that economists had
in their toolbox
If economies were large relative to the market, one of a few firms would expand and eventually take
over the market
Chamberlain and Robinson discover "imperfect" markets
Monopolistic Competition: nearer to the competitive end of the spectrum and is defined by:
A large number of small firms. Like Competition, have an insignificantly small market share.
Individually, they cannot appreciably affect the market, and ignore the reactions of their rivals.
Independent of a competitor's reactions
Entry and exit is easy
Products are different unlike competition. Each firm produces something that is different from its
competitors or something that is perceived to be different by consumers. "Product
differentiation"
Product differentiation: One firm's product is distinguished from another's through advertising,
innovation, location, and so on.
Intended to increase demand of reduce the elasticity of demand and generate loyalty to the
product or service
Many ads move to internet instead of TV/conventional media because more effective
Methods allow product differentiation and so have control over price to some extent
Profit maximizing decisions will be a little different
Coremicroeconomics Page 85
Long-run equilibrium is at point b for competitive firms and a for monopolistically competitive firms.
Equilibrium price is a little higher, and output is a little lower for the monopolistically competitive firm.
These represent the real costs we, as consumers, pay for product differentiation
Gives some justification for the costs
Key is to differentiate the product to obtain a higher price, but price advantage evaporates over the long
run for monopolistically competitive firms
Coremicroeconomics Page 86
Oligopoly
Saturday, October 19, 2013
10:34 PM
Oligopoly: A market with just a few firms dominating the industry where
1) Each firm recognizes that it must consider its competitors reactions when making its own
decisions (mutual interdependence)
2) There are significant barriers to entry into the market
Could be selling a homogeneous product (gasoline, sugar) or differentiated product (automobiles,
pharmaceuticals)
Could be an industry with a dominant firm and a few smaller firms (microcomputer OSes, cell phones),
or could be a few similarly sized firms (automobiles and tobacco)
Defining Oligopoly
Assumptions:
There are only a few dominant firms in the industry
Each firm recognizes that it must take into account the behavior of its competitors when it makes
decisions, referred to as mutual interdependence
Significant barriers to entry into the market
Only a few firms so actions of one will affect the ability of others to successfully sell or price their output
One firm changes specs of product or increases advert budget, then the other will respond
Example: New driver assist system in Mercedes, consider whether or not Lexus will immediately
offer it as well
Few firms means entry scale is often huge, brand preferences are strong
Coremicroeconomics Page 87
Game Theory
Saturday, October 19, 2013
11:01 PM
Game theory: An approach to analyzing oligopoly behavior using mathematics and simulation by making
different assumptions about the players, time involved, level of information, strategies, and other
aspects of the game
Developed from analysis of imperfect competition.
Antoine Cournot looked at doupolist and analyzed how one firm would react to output changes from its
rival
Model of mutual interdependence was the precursor to game theory
Modern game theory from John von Neumann, sophistocated mathematical and simulation science
Types of Games
Characteristics:
Cooperation: Permit players to collude on prices, output, or other variables, like OPEC
Noncooperative games are opposite, no communication and collusion
Players: Simple games only involve two players, many modern simulation games involve
multiplayer environments
Time: In static games, all players choose their strategies at the same time. Dynamic games involve
sequential decision making.
Ex: One firm sets a price and the other responds to this price
Information: Could have complete (perfect) information or incomplete (imperfect) information.
Firms often have good information about themselves but not equal for the other
Asymmetric is also possible (Used cars, sellers>buyers)
Strategies: Many games have discrete strategies where players choose from a few choices such as
"advertise or do no advertise", "confess or do not confess", "enter the industry or do not".
Continuous strategies typify business-constant-pricing decisions where firms often have a large
number of prices and products that are subjected to various (and sometimes random) events
Repetition: Whether the game is one-off decision or will be repeated introduces another level of
complexity. In a one-off game, players only have to consider the payoffs (impacts) on that one
decision. In repeated games, players can react to the other player's past strategies
Profit-Loss: In a zero-sum game (poker, duels, most sports), each winner is essentially paired with
a loser. If non-zero-sum, both players stand to benefit
Must make a decision but the prisoners don't know what the other has done
Both will logically confess despite the fact both would be better off if neither did. Think that the other
will confess and get off.
Result is due to the structure of payoffs
Coremicroeconomics Page 88
Nash Equilibrium
John von Neumann's focus was on two-person zero-sum games
Amount won=Amount lost
Nash equilibrium: An important proof that an n-person game where each player chooses his optimal
strategy, given that all players have done the same, has a solution. This was important because
economists now knew that even complex models (or games) had an equilibrium, or solution
Static Games
One-off games (not repeated) where decisions by the players are made simultaneously and are
irreversible
Could be an extension of Prisoner's Dilemma
Dueling advertising campaigns, decisions about R&D, or price changes
Price Discounting:
Both firms see that they will stand to earn more by lowering price, but if both lower price, then they
both lose a bit
They will logically decide to lower in anticipation for the other to lower
Advertising:
Dynamic Games
Sequential or repeated games where the players can adjust their actions based on the decisions of other
players in the past.
Most markets are dynamic, firms are constantly trying new prices and other sales techniques to increase
profits
Price Discounting:
Now the decision is a sequential process
Each player has perfect knowledge and knows the payoff, will wait for the other firm to alter price
Profits remain at 100,000, neither inclined to lower price
Advertising:
Dynamic and sequential
Lowe's and Home Depot tend to be located near each other
Advertise only at specific times of the years
Both tend to focus on competing on the basis of service and somewhat on price
Both come to the conclusion that spending huge on advertising does not pay
Coremicroeconomics Page 89
Both come to the conclusion that spending huge on advertising does not pay
Predatory Pricing
Selling below cost to customers in the short run, hoping to eliminate competitors so that prices can be
raised in the longer run to earn economic profits
Can happen when firms with monopoly power in a market can use price wars or threaten their use to
keep firms from entering the market
Grim Trigger
An oligopoly is earning profits. All of a sudden, the other firm lowers its price, maybe because it's in
financial trouble and wants to increase sales right away
Under this rule, other firms permanently lower prices making the financial condition of the original firm
who reduced prices even more severe
"Any decision by your opponent to defect (choose an unfavorable outcome) is met by a permanent
retaliatory decision forever"
Subject to misreading, competition lowered price to attempt to gain market share at your expense or
market softened for the product in general?
Quickly leads to Prisoner's Dilemma
Avoid this problem by developing the next strategy
Tit-for-Tat
Simple strategies that repeat the prior move of competitors. If your opponent lowers price, you do the
same. This approach has the efficient quality that it rewards cooperation and punishes unfavorable
strategies (defections)
Coremicroeconomics Page 90
12:38 AM
Coremicroeconomics Page 91
8:44 PM
Regulation in Practice
Regulation accepted as lesser of two evils
Immense difficulty to find a point like b because it's inexact
Must often turn to rate of return or price cap regulation
Rate of return regulation: Permits product pricing that allows the firm to earn a normal return on capital
Coremicroeconomics Page 92
Rate of return regulation: Permits product pricing that allows the firm to earn a normal return on capital
invested in the firm
Increases the regulations on acceptable items that can be included in costs/capital expenditures
Firms want to include more expenses, regulators want to include fewer
Alternatively, Price caps: Maximum price at which a regulated firm can sell its product. They are often
flexible enough to allow for changing cost conditions.
Can be adjusted due to changing cost conditions, including labor costs, productivity, technology,
and raw material prices
Can be disastrous if regulated firm's output is not self-produced but purchased on the open
market
California energy market, whole sale prices for energy went through the roof, price caps
prevented private utilities from raising the retail price of electricity
Regulation imposes costs on the market, costs are less than the costs of private monopolies
Coremicroeconomics Page 93
Antitrust Policy
Sunday, October 27, 2013
9:14 PM
Competition is the market structure that offers consumers the greatest product selection at the lowers
prices
Monopolies have potential to restrict output and increase prices
Antitrust law: Laws designed to maintain competition and prevent monopolies from developing
Antitrust policy has targeted monopolies as threats to economic efficiency
Forbids tying contracts, agreements whereby the sale of one product is contingent upon the purchase of
another product
Illegal to acquire a competing company's stock and have interlocking directorates (directors sitting on
boards of competing companies)
Concentration Ratios
Concentration Ratios: the share of industry shipments or sales accounted for by the top four or eight
firms
The n-firm concentration ratio is the share of industry sales accounted for by the industry's n largest
firms, usually 4/8
Two top four firms:
65,10,5,5
25,20,20,20
Both have the same concentration ratio, but do not exhibit the same level of monopoly power, 65
controlled by one firm
Not overly informative without more info, but can point out extreme contrasts
Herfindahl-Hirshman Index
Herfindahl-Hirshman Index: A way of measuring industry concentration, equal to the sum of the squares
of market shares for all firms in the industry
HHI = (s1)2 + (S2)2 + (S3)2 + + (Sn)2
S is a percentage of market shares of each firm in the industry
HHI is the sum of the squares of each market share
HHI is consistent with out intuitive notion of market power. Industry with several competitors of roughly
equal size will be more competitive than an industry in which one firm controls a substantial share of
the market
Coremicroeconomics Page 95
Contestable Markets
Contestable markets: Markets that look monopolistic but where entry costs are so low that the sheer
threat of entry keeps prices low
Linux, Mac OS X, and Unix probably keep Microsoft from significantly overcharging for Windows
Coremicroeconomics Page 96
6:25 AM
Coremicroeconomics Page 97
6:25 AM
Demand of Labor: Derived from the demand for the firm's product and the productivity of labor
Decline in product demand will lead to lower market prices, reducing VMPL and vice versa
Will shift labor demand to the left if decline
Anything that changes the price of the product in competitive markets will shift firm's demand for labor
Changes in Productivity
Usually increases, but can come about from improving technology or because a firm uses more capital
or land
As MPPL rises, demand for marginal worker rises, willing to pay higher wages for same size or expand
workforce at the same rate
Capital-intensive industries often employ fewer workers, but usually high-skill high-wage
Same as price elasticity of demand for products except use wage instead of price of product
Measures how responsive quantity of labor demanded is to changes in wages
|EL|< 1, Inelastic
|EL|> 1, Elastic
The time firms have to adjust to changing wages will affect elasticity
Short run, demand more inelastic because labor is the only truly variable factor (Will hire more or less
despite changes in wages)
Long run, elasticity of demand for labor tends to be more elastic because all production factors can be
adjusted
Market supply for labor is the horizontal sum of individual labor supply curves
Not for demand though
When wages fall, it affects all firms
All want to hire more labor and produce more output
Figure above shows that at a wage rate of 100, market labor is 300 workers, individual firms hire six
workers
6:25 AM
6:22 AM
7:29 AM
Capital Markets
Capital includes all manufactured products that are used to produce goods and services.
Capital markets are those markets which firms obtain financial resources to purchase capital goods.
Resources can come from savings of households and other firms.
Suppliers of funds and demanders of these funds interact through loanable funds market
Each individual firm determines how many workers to employ, and the loanable funds market
determines interest rates, leaving individual firms to calculate how much they should borrow
Demand and supply curve of loanable funds
Demand, downward, price of funds decline, as interest rates go down, then quantity of funds demanded
rises
Supply, upward, willing to supply more when price (interest rate) is higher
Investment
Once market determines an equilibrium rate of interest, an individual firm like in panel B will take rate
of interest, or cost of capital, and determine how much to invest
Marginal revenue product of capital (MRPK) is downward sloping, showing that returns a firm earns on
investments diminish as more capital is invested
Invest until cost of capital is equal to marginal revenue product of capital
Show that payments in the future are worth a lower dollar amount today
Use Present Value Analysis to determine if potential investments are worth while
Assume machine yields a stream of income exceeding operating costs over a given period
Present value of this income is compared to the cost of the machine
Machine's net present value (NPV) is equal to the difference between the present value of the income
stream and the cost of the machine
NPV positive, invest; NPV negative, dont invest
Interest rates high, firms will find fewer investment opportunities where NPV is positive since higher
discount rate reduces the value of income streams for investments
As interest rates fall, more investment is undertaken by firms
Land
Natural resources that are inelastically supplied
Rent: The return to land as a factor of production. Sometimes called economic rent.
Some instances, supply of land is perfectly inelastic
Land isn't always perfectly fixed in supply. Land can be improved (irrigation in deserts, clear jungles,
drain swamps, etc)
Land is fixed at L0
Rent is dependent on how demand rises and falls
Entrepreneurship
Profits are rewards that entrepreneurs receive for
1) Combining land, labor, and capital to produce goods and services
2) Assuming the risks associated with producing these goods and services
Must combine and manage all inputs, make day to day production, finance, and marketing decisions,
innovate constantly, and bear the risks of failure and bankruptcy
4:36 PM
4:40 PM
Education is a good investment, but must be balanced against the cost of obtaining that education
Education as Investment
Demand for human capital investment slopes down and to the right, reflecting the diminishing returns
of more education and that more time in school leaves you less time to earn back its costs
Ph.D. or med degree often well into age 30s
Need more money to bring their rates of return up above college-educated workers
Supply of investable funds is positively sloped since students will use the lowest-cost funds first (mom
and dad, government subsidized funds, then private market funds)
The most important factor determining the supply of investable funds for students consists of family
resources
Reduction in federally subsidized lower interest students will shift the supply curve left, lower
investments in human capital as a result
Demand for human capital is influenced by individual's abilities and learning capacity: more able the
person, the larger the expected benefits of human capital and investment
Discrimination in the labor market also plays a role
Expected earnings are affected by wage or occupational discrimination
People with reduced wage due to wage discrimination would have their demand curve shift to the left
because of reduced return on investment in human capital
On-the-job Training
Training done by employers, ranging from suggestions at work to sophisticated seminars
OJT can take many different forms
Often nothing more than instructions from a supervisor on how to help customers, operate a machine,
or retrieve items from inventory
Sometimes takes place in more formal setting away from job, like a college course
OJT costs approaches 80 billion a year, including training costs and the wages paid to employees during
training
OJT costs usually borne by employers, but workers may also bear some of the costs through reduced
wages through training period
OJT->more productive workers and competitive workers
OJT is general training, workers expected to accept reduced wages during the training period, and then
earn higher wages than without training once completed
Specific training is usually handled differently. Because training increases productivity only within the
firm providing the training, firm will usually absorb the cost of this training keeping wages constant until
completed where it then increases
Dual labor market hypothesis splits the labor market into primary and secondary sectors
Primary: High wages, good working conditions, job stability, chances of advances, equity and due
process in administration of work rules
Secondary: Low wages, fringe benefits, poor working conditions, high labor turnover, little chance
of advancement, and often arbitrary and capricious supervision
Job crowding hypothesis breaks occupations into predominantelt male and female jobs. Pressure
of male trade unions appears to be largely responsible for crowding women into a comparatively
few occupations which is universally recognized as a main factor in the depression of their wages
Insider-outsider theory maintains that workers are segregated into those who belong to unions
and those who are not employed or non-union workers
All above hypothesis predict that separate job markets emerge for different groups
Occupations may require the same skills and effort, but be calued differently by consumers
Occupational segregation may also arise from disparate degrees of labor force attachment
Female labor force participation is often interrupted when women take a break from working to
have children
Will affect choice of women and employer for specific training
For women who anticipate spells out of labor force, prefer general training--nursing, teaching,
retail sales, secretarial or administrative work-- may look attractive. Do not have long career
ladders, can leave job easily and return or find new emploter
Most of these do not have high wages though
Some are result of socialization
"Men's work" and "women's work"
Many women may prefer occupations that are complementary to parenting
Economic Discrimination
Tuesday, December 10, 2013
5:43 PM
Economic Discrimination: takes place whenever workers of equal ability and productivity are paid
different wages or are otherwise discriminated against in the workplace because of their race, color,
religion, gender, age, national origin, or disability
Two theories:
Rests on notion that bias is articulated in the discriminatory tastes of employers, workers, and
consumers
Segmented markets approach, maintains that labor markets are divided into segments based on
race, gender, or some other category (often referred to as the job crowding hypothesis or dual
labor market hypothesis)