SUMMARY MICROECONOMICS LECTURE 1 - 6

Lecture 1: Introduction
1. Definition:
- Scarcity: limited nature of society’s resources.
- Economics: the study of how society manages its scarce resources.
2. Ten principles of economics
● Principles 1: ppl face tradeoffs:
- Efficiency: society - maximum benefit from its scarce resources
- Equality: benefits - uniformly distributed among society’s member
● Principles 2: The cost of sth is what you give up to get it.
- Opportunity cost: whatever must be given up to obtain other items
● Principle 3: Rational ppl think at the margin
- Rational ppl: systematically & purposefully do the best they can to achieve
their objectives
- Marginal changes: small incremental adjustments to a plan of action
- Rational decision-maker takes action only if marginal benefit > marginal cost
● Principle 4: ppl respond to incentives
- Incentive: sth that induces a person to act.
- Higher price: buyers - consume less
Sellers -produce more
- Public policy
Change costs or benefits
Change ppl’s behavior
● Principle 5: Trade can make everyone better off
- Trade: allows each person/country to specialize in the activities he/she does best
- Ppl/countries can buy a greater quantity of goods and services at a lower cost
● Principle 6: Markets are usually a good way to organize economic activity

Microeconomics and Macroeconomics:

- Mic: The study of how households and firms make
decisions And how they interact in the market
- Mac: The study of whole economics, includes inflation, unemployment, and
economic growth.
The production possibilities frontier (PPF)
- A graph
- Combinations of output that the economy can possibly
produce Positive and normative
- Positive: what the world is
- Normative: what the world should be or ought to
be Slope:
rise/run = delta y / delta x
Lecture 2: The market forces of supply and demand
● Market: a group of buyers and sellers of a particular good and service.
● Competitive market: many buyers and sellers, each has a negligible impact on
the market price
● Perfect competitive market:
- Goods offered for sale - exactly the same
- Buyers and sellers: no singel buyer or seller has any influence over the
market price, must accept the price determined on the market - price taker
● Demand:
- Quantity demanded: amount of a good buyers are willing and able to purchase
- Law of demand: When the price of the good rises
Quantity demanded of a good falls
- Demand schedule - a table: relationship between price of a good
- Quantity demanded
- Demand curve - a graph: nhu tren
- Shifts in demand:
+ Increase in demand: demand curve shifts right
+ Decrease in demand: demand curve shifts left
- Variables that can shift the demand curve:
+ Income: normal goods - increase in income -> increase in demand
Inferior goods - increase in demand -> decrease in
demand
+ Price of related goods: substitutes: an increase in price of one -> lead
to an increase in demand for other
Comlepments : an increase in the price of one ->
lead to a decrease in the demand for the other
+ Tastes
+ Expectation
+ Number of buyers
● Supply:
- Quantity supplied: amount of a good sellers are willohm and able to sell
- Law of supply: when the price of a good rises, quantity suppliedof a good rises
- Variables that can shift the supply curve:
+ Input price
+ Technology
+ Expectation about future
+ Number of seller
● Equilibrium - a situation
- Quantity supplied = quantity demanded
- equilibrium price: the price balances Qs and Qd
- Equilibrium quantity: Qs and Qd at the equilibrium price
- Surplus: Qs > Qd
- Shortage: Qd > Qs
Lecture 3: Elasticity and its application
● Elasticity: measure of responsiveness of Qd or Qs
● Price elasticity of demand:
- Measure of how much Qd of a good respond to a change in the price of that good
- Percentage change in Qd / percentage change in price
- Measure how willing consumers are to buy less of the good as its price rises
- Elastic demand: Qd responds subtainially to changes in the price
- Inelastic demand: Qd responds only slightly to changes in price
● Determinants of price elasticity of demand
- Availability of close substitutes
Goods with close substitutes -> more elastic demand
- Necessities vs luxuries
Necessities: inelastic demand
Luxuries: elastic demand
- Definition of the markets: narrowly defines markets - more elastic demand
- Time horizon: more elastic over longer time horizons
● Computing the price elasticity of demand:
- Percentage change in Qd / percentage change in price = p1/p2
- Use absolute value
● Midpoint method:
- 2 points (Q1,P1) and (Q2,P2)
- Price elasticity of demand
● Variety of demand curves:
- Demand is elastic: elasticity > 1
- Demand is inelastic: elasticity <1
- Demand has unit elasticity: elasticity = 1
- Demand is perfectly inelastic
Elasticity = 0
Demand curve - vertical
- Demand is perfectly elastic
Elasticity = infinity
Demand curve - horizontal
● Revenue:
- Amount paid by buyers
- Received by sellers of a good
- Computed as: price of the good times the quantity sold = P x Q
- Inelastic demand: incre in price -> incre in total rev
- Elastic demand: incre in price -> decre in total rev
● Income elasticity of demand: measure of how much the Qd of a good responds
to change in consumer’s income
Percentage change in Qd / percentage change in income
–Normal goods: positive income elasticity
 • Necessities: smaller income elasticities
• Luxuries: large income elasticities
– Inferior goods: negative income elasticities

● Cross-price elasticity of demand: measure of how much the quantity demanded of

one good responds to a change in the price of another good
percentage change in quantity demanded of the 1st good / percentage change in the
price of the second good
Substitutes: Positive cross-price elasticity
Complements: Negative cross-price elasticity
● Price elasticity of supply: Measure of how much the quantity demanded of one
good responds To a change in the price of another good
percentage change in Qs / percentage change in price
–Depends on the flexibility of sellers to change
the amount of the good they produce
● Price elasticity of supply
– Measure of how much the quantity supplied of a good responds
• To a change in the price of that good
– Percentage change in quantity supplied
• Divided by the percentage change in price
–Depends on the flexibility of sellers to change the amount of the good they produce

Lecture 4: Consumers, producers and the efficiency of markets

 ● Welfare economics: the study of how the allocation of resources affects
economic well-being
● Willingness to pay: the maximum amount that a buyer will pay for a good WTP
measures how much the buyer values the good
● Consumer Surplus:
CS = WTP – P

● Demand curve
At any quantity, the price given by the demand curve shows the willingness to pay of the
marginal buyer
The height of the demand curve reflects buyers’ willingness to pay
● Measuring Consumer Surplus with the Demand Curve: Area below the demand
curve and above the price
● Producer surplus:
Cost: the value of everything a seller must give up to produce a good
Producer Surplus:
PS = P – Cost to seller
Supply curve: the height of the supply curve reflects sellers’ costs.
PS = area below the price and above the supply curve
● Total surplus:
Total Surplus
CS = WTP –
P
PS = P – Cost to seller
TS = CS + PS = WTP - cost to seller
- Efficiency: the property of a resource allocation of maximizing the total surplus
received by all members of society
=> Get the most output from the least input
- Equality: the property of distributing economic prosperity uniformly among the
members of society
-

Lecture 5: Government intervention and the welfare economics

● Price control:
- The goverment/policy makers set the price controls
- Policymakers believe that the market price is unfair to sellers or buyers
- Price ceiling: a legal maximum price at which a good can be sold
Pc > Pe -> not binding
Pc < Pe -> shortage
- Price floor: a legal minimum on the price at which a good can be sold
Pf < Pe -> not binding
Pf > Pe -> surplus
● Taxes and effects on market outcome
- Tax incidence: the manner in which the burden of a tax is shared among
participants in a market
- Tax burden on sellers = Pe - Ps
Tax burden on buyers = Pb - Pe
- A tax burden falls more heavily on the side of the market that is less elastic.
- Tax Revenue
• T = the size of the tax
• Q = the quantity of the good sold
• T x Q = Tax Revenue
- Deadweight loss: The fall in total surplus that results from a market distortion
such as a tax.
- Taxes cause deadweight losses because they prevent buyers and sellers from
realizing some of the gains from trade.
- Tax incr -> DWL incr
- Tax incr -> tax rev incr then decr
0,5 x change in quantity x change in price

government revenue = quantity x tax rate

Lecture 6: The theory of consumer choice

● Budget contraint: Limit on the consumption bundles that a consumer can afford trade-
off between goods
- Slope of the budget constraint: Rate at which the consumer can trade one
good for the other
• Change in the vertical distance
• Divided by the change in the horizontal distance
- Relative price of the two goods
● Preferences: what the customer wants
- Indifference curve: Shows consumption bundles that give the consumer the
same level of satisfaction
– Combinations of goods on the same curve • Same satisfaction
- Slope of indifference curve
– Marginal rate of substitution
• Rate at which a consumer is willing to trade one good for another
- Not the same at all points
- Four properties of indifference curves
1. Higher indifference curves are preferred
to lower ones
– Higher indifference curves – more goods
2. Indifference curves are downward sloping
3. Indifference curves do not cross
4. Indifference curves are bowed inward

Two extreme examples of indifference curves

• Perfect substitutes
– Two goods with straight-line indifference curves
– Marginal rate of substitution – constant
• Perfect complements
– Two goods with right-angle indifference curves - L-shape
• E.g.: right shoe and left shoe bundle
- Optimum: Point where indifference curve and budget constraint touch
– Best combination of goods available to the consumer
– Slope of indifference curve
• Equals slope of budget constraint
• Marginal rate of substitution = relative price
- Higher income
– Consumer can afford more of both goods
– Shifts the budget constraint outward
–New optimum
- Normal good
–Good for which an increase in income raises the quantity demanded
• Inferior good
–Good for which an increase in income reduces the quantity demanded
Income effect
 – Change in consumption
– When a price change moves the consumer
• To a higher or lower indifference curve

• Substitution effect
– Change in consumption
– When a price change moves the consumer
• Along a given indifference curve
• To a point with a new marginal rate of
substitution

- Giffen good
- – An increase in the price of the good raises the
- quantity demanded
- • Income effect dominates the substitution effect
- • Demand curve – slopes upward
-