Microeconomics

MICROECONOMICS
Course Content
Chapter 1: Introduction
Chapter 2: Demand, Supply, And Market Equilibrium
Chapter 3: Elasticity Of Supply and Demand
Chapter 4: Government Intervention in the Market
Chapter 5: The Theory of Consumer Choice

Course Content
Chapter 6:The Theory of Production
Chapter 7: The Theory of Cost
Chapter 8: Perfectly Competitive Markets
Chapter 9: Monopoly
Chapter 10: Monopolistic Competition And Oligopoly

CHAPTER ONE
1
Introduction
Content
◼ Scarcity rule, Trade-offs, and Opportunity cost
◼ What is economics?
◼ Types of Economic Systems
◼ Microeconomics and Macroeconomics
◼ Positive versus Normative Economics
◼ Circular Flow diagram

Scarcity rule
Trade-offs
All decisions involve trade-offs:
◼ Going to a party the night before your mid-term
exam leaves less time for studying.
◼ Having more money to buy stuff requires
working longer hours, which leaves less time

for leisure.
Opportunity cost
◼ The opportunity cost of an item is what you give
up to get that item.
◼ Examples:
The opportunity cost of going to university is not

only the money spent on the tuition, books, but also
the earnings given up to attend school.
Quick Quiz
◼ Describe an important trade-off you recently
faced.
◼ Give an example of some action that has both a
monetary and nonmonetary opportunity cost.

The Production Possibilities Frontier
PPF
◼ The Production Possibilities Frontier (PPF) is a

graph that shows all the different combinations of
output of two goods that can be produced using
available resources and technology.
◼ Points that lie on the PPF illustrate combinations
of output that are productively efficient.

PPF
◼ Suppose the economy only produces two items:

Wheat and Cloth
Combinations Wheat Cloth

A 25 0
B 22 9
C 17 17
D 10 24
E 0 30
PPF
Wheat
25 A
B
22
17 C
D
10
E
9 17 24 30 Cloth
PPF
◼ The PPF captures the concepts of:
➢ Scarcity
➢ Trade-offs
➢ Opportunity cost
◼ The slope of the PPF indicates the opportunity cost

of producing one good versus the other good.
What is economics?
The study of
how society
A social
manages its
science
scarce
resources
Basic economic questions
HOW to
produce?
Types of Economic Systems
Market Economy
• The interaction of supply and demand determines the quantity in
which goods and services are produced.
Command Economy
• The determination of what goods and services should be
produced, and in what quantity, is planned by the government.
Mixed Economy
• Certain sectors of the economy are left to private ownership and
free market mechanisms while other sectors have significant state
ownership and government planning.
Microeconomics versus Macroeconomics
MICROECONOMICS MACROECONOMICS
deals with the deals with

behavior of individual aggregate economic
economic units - variables,
consumers, firms, such as the level and
workers, and growth rate
investors - as well of national output,
as the markets that interest rates,
these units unemployment, and
comprise. inflation.
Positive versus Normative Economics
◼ Positive Economics describes relationships
of cause and effect. It is objective and scientific.
◼ Normative Economics examines questions of
what ought to be.

Circular Flow diagram
◼ Circular-flow diagram is a visual model of the

economy that shows how dollars flow through
markets among households and firms.
Circular Flow diagram
Revenue MARKET FOR GOODS Spending
AND SERVICES
❖ Firms sell
❖ Household buys
Goods and Goods and
services services
sold bought
FIRMS HOUSEHOLDS
• Produce and sell • Buy and consume
goods and services goods and services
• Hire and use • Own and sell factors
factors of production
of production
Factors of Labor, land,

MARKET FOR
production and capital
FACTORS OF
PRODUCTIONS
❖ Households sell
❖ Firms buy Income
Wages, rent, and profit
CHAPTER T W O
2
Demand, Supply and
Market Equilibrium
Content
◼ Demand
◼ Supply
◼ Market Equilibrium
◼ Changes in Market Equilibrium

Demand
◼ Demand is the quantity that buyers wish to
purchase at each conceivable price.
◼ Note the distinction between demand and the

quantity demanded
◼ Demand describes the behavior of buyers at
every price. At a particular price there is a

particular quantity demanded.
Demand
◼ Demand is the quantity that buyers wish to
purchase at each conceivable price.
◼ Note the distinction between demand and the

quantity demanded
◼ Demand describes the behavior of buyers at
every price. At a particular price there is a

particular quantity demanded.
Demand Function
◼ A function that shows the relationship

between the price of a good and the quantity
demanded.
◼ Demand Function
QD = f(P)
QD = aP + b (a < 0)
◼ Example: QD = - 4P + 12
Demand Schedule
Demand schedule of chocolate
P ($) QD (no. of bars)

0 12
1 8
2 4
3 0
Demand Curve
Price (P)
A graph of the relationship
3 between the price of a good
and the quantity demanded.
2
Quantity
4 8 12 Demanded (QD)
0
Because a lower price increases the quantity

demanded, the demand curve slopes downward.
Law of Demand
Price
falls
Other things equal, the quantity

demanded of a good falls when
the price of the good rises.
Quantity
rises
Supply
◼ Supply is the quantity of a good that sellers

wish to sell at each possible price.
◼ Note the distinction between supply and the

quantity supplied.
Supply Function
◼ A function that shows the relationship between

the price of a good and the quantity supplied.
◼ Supply Function
QS = f(P)
QS = c*P + d (c > 0)
◼ Example: QS = 3P + 5
Supply Schedule
Supply schedule of chocolate
P ($) QS (no. of bars)

0 5
1 8
2 11
3 14
Supply Curve
Price (P)
A graph of the relationship
3
between the price of a good
and the quantity supplied.
2
0 8 11 14 Quantity Supplied (QS)
Because a higher price increases the quantity

supplied, the supply curve slopes upward.
Law of Supply
Price
falls
Other things equal, the quantity

supplied of a good rises when
the price of the good rises.
Quantity
falls
Market Equilibrium
Price (P)
A situation in which the
3 market price has reached
the level at which quantity
2 supplied equals quantity
demanded
1
8 12 Quantity (Q)
0
At equilibrium: QS = QD
Market Equilibrium
P ($) QD QS
0 12 5
1 8 8
2 4 11
3 0 14
Surplus vs shortage
Price (P)
Surplus Surplus is a situation in
which quantity supplied
is greater than quantity
1 demanded (QS > QD)
0 8 Quantity (Q)
Surplus: QS > QD
Surplus vs shortage
Price (P)
Shortage is a situation in
which quantity demanded is
1 greater than quantity
supplied (QS < QD)
Shortage
0 8 Quantity (Q)
Shortage: QS < QD
Changes in Market Equilibrium
◼ A change in market equilibrium due to:

➢ Shift in Demand
➢ Shift in Supply
➢ Shift in both Demand and Supply
Shifts in Curves versus Movements along
Curves
◼ Changes in demand/supply make the entire

curves shift.
◼ Changes in quantity demanded/supplied cause

movements along curves.
Shift in Demand
◼ Increase in demand
◼ Any change that increases the quantity demanded
at every price
◼ Demand curve shifts right
◼ Decrease in demand
◼ Any change that decreases the quantity demanded
at every price
◼ Demand curve shifts left

Shift in Demand
◼ Income
◼ Prices of related goods
◼ Tastes
◼ Expectations
◼ Number of buyers
How about bus
rides if your
income rises?
Income
◼ Demand for a normal good is positively related

to income.
◼ An increase in income leads to an increase in demand
◼ Demand for an inferior good is negatively related
to income.
◼ An increase in income leads to a decrease in demand
Prices of related goods
◼ Substitutes, two goods

◼ An increase in the price of one
◼ Leads to an increase in the demand for the other
◼ Complements, two goods

◼ An increase in the price of one
◼ Leads to a decrease in the demand for the other

Taste
◼ Anything that causes a shift in tastes toward a

good will increase demand for that good.
◼ The emphasis on health and fitness has increased the
demand for jogging equipment, healthy foods and sports
facilities.
Expectation
◼ Expectations about the future may affect

demand for a good or service today.
◼ Example:
◼ Expect an increase in income

◼ Increase in current demand
◼ Expect higher prices

◼ Increase in current demand
Number of buyers
◼ Increase in number of buyers

increases quantity demanded at each price.
Shift in Supply
◼ Increase in supply
◼ Any change that increases the quantity supplied at
every price
◼ Supply curve shifts right
◼ Decrease in supply
◼ Any change that decreases the quantity supplied
at every price
◼ Supply curve shifts left

Shift in Supply
◼ Input prices
◼ Technology
◼ Expectations
◼ Number of sellers
◼ Government policies
Input prices
◼ Examples of input prices: wages, prices of

raw materials.
◼ A fall in input prices makes production

more profitable at each output price
◼ Firms supply a larger quantity at each price
◼ The S curve shifts to the right.

Technology
◼ Technology determines how much inputs are

required to produce a unit of output.
◼ Advance in technology has the same effect

as a fall in input prices, shifts S curve to the
right.
Expectation
◼ Suppose a firm expects the price of ice

cream to rise in the future.
◼ The firm may put some of its current

production into storage, and supply less to
the market today.
◼ This would shift the S curve to the left.

Number of sellers
◼ An increase in the number of sellers

increases the quantity supplied at each price,
shifts S curve to the right.
Government policies
◼ Government policies can affect the cost of

production and the supply curve through
taxes, regulations, and subsidies.
◼ Taxes raise the cost of production and decrease
supply.
◼ Subsidies reduce the cost of production and

increase supply.
Price
S
P1
P0
D D’
Q0 Q1 Quantity (Q)
New equilibrium following shift in demand

S’
Price
S
P2
P0
Q2 Q0 Quantity (Q)
New equilibrium following shift in supply

Three steps for analyzing changes in equilibrium:
1. Decide whether the event shifts the supply or
demand curve (or perhaps both).
2. Decide in which direction the curve shifts.
3. Use the supply and demand diagram to see

how the shift changes the equilibrium price and
quantity.
CHAPTER THREE
3
Elasticity of Supply
and Demand
Content
◼ The Price Elasticity of Demand
◼ The Cross-Price Elasticity of Demand
◼ The Income Elasticity of Demand
◼ The Price Elasticity of Supply

The Price Elasticity of Demand
◼ The price elasticity of demand measures the

sensitivity of quantity demanded to price
changes.
◼ Percentage change in quantity demanded of a

good resulting from a 1-percent increase in its
price.
◼ Computed as the percentage change in

quantity demanded divided by the percentage
change in price
%QD
ED =
%P
Q Q Q P
ED = = 
P P P Q
◼ EP < -1 or | EP | > 1 : Elasticity is greater than
1, Elastic Demand, Customers react strongly.
◼ EP > -1 or | EP | < 1 : Elasticity is less than 1,
Inelastic Demand, Customers react weakly.
◼ EP = -1 hay | EP | = 1 : Elasticity equals 1, Unit
Elastic Demand.
ED < -1 or | ED | > 1 :
Elastic Demand,
Customers react
strongly.
ED > -1 or | ED | < 1 :
Inelastic Demand,
Customers react
weakly.
ED = -1 or | ED | = 1 :
Unit Elastic Demand
Perfectly Elastic Demand:

Elasticity Equals Infinity
P
ED = ∞
P D
*
Q
Perfectly Inelastic Demand:

P Elasticity Equals 0
ED = 0
Q Q
*
The Price Elasticity of Demand and Total Revenue
TR: the amount paid by

buyers and received by P
sellers of a good,
computed as the price of A
P1
the good times the
TR
quantity sold
0 Q1 Q
TR = P×Q
The case of Elastic demand
Extra revenue from selling at higher price
P2
P1 P  TR 
P  TR 
Q2 Q1
Lost revenue from selling fewer units

The case of Inelastic demand
Extra revenue from selling at higher price
P2 %QX
E XY =
%PY
P1 E XY =
Q2 Q1
Lost revenue from selling fewer units
Determinants of the price elasticity of demand:
◼ The position of price on the demand curve.
◼ Availability of close substitutes.
◼ Necessities versus Luxuries.
◼ Time.
◼ Definition of the Market.

The Cross-Price Elasticity of Demand
◼ A measure of how much the quantity

demanded of one good responds to a
change in the price of another good
◼ Percentage change in the quantity

demanded of one good resulting from a 1-
percent increase in the price of another.

quantity demanded of the first good divided by
the percentage change in the price of the
second good
%QX
E XY =
%PY
QX QX QX PY
E XY = = 
PY PY PY QX
◼ EXY < 0: X and Y are complements.
◼ EXY > 0: X and Y are substitutes.
◼ EXY = 0: X and Y are unrelated goods

The Income Elasticity of Demand
◼ A measure of how much the quantity

demanded of a good responds to a change in
consumers’ income
◼ Percentage change in the quantity

demanded resulting from a 1-percent
increase in income.
quantity demanded divided by the percentage

change in income.
%Q
EI =
%I
Q Q Q I
EI = = 
I I I Q
◼ EI > 0: normal goods

? Normal goods have positive or negative
income elasticities?
◼ EI < 0: inferior goods

? Inferior goods have positive or negative
income elasticities?
The Price Elasticity of Supply
◼ A 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

resulting from a 1-percent increase in price.

quantity supplied divided by the percentage
change in price
%QS
ES =
%P
Q Q Q P
ES = = 
P P P Q
◼ ES > 1: Elasticity Is Greater Than 1, Elastic Supply.
◼ ES < 1: Elasticity Is Less Than 1, Inelastic Supply.
◼ ES = 1: Elasticity Equals 1, Unit Elastic Supply.
◼ ES = 0: Elasticity Equals 0, Perfectly Inelastic Supply.
◼ ES = ∞: Elasticity Equals Infinity, Perfectly Elastic Supply.

Perfectly Inelastic Supply Perfectly Elastic Supply

P P
S EP = 0 EP = ∞
P S
Q Q Q
Determinants of the price elasticity of supply:
◼ Time
◼ Ability to reserve goods.

CHAPTER FOUR
4
Government Intervention
Content
◼ Consumer Surplus and Producer Surplus
◼ Price Ceiling and Price Floor
◼ Tax and Subsidy

Consumer Surplus
Consumer surplus the amount a buyer is willing to pay

for a good minus the amount the buyer actually pays for it.
PA A
CS
P0 E
D0
Q0 Q
Producer Surplus
Producer surplus the amount a seller is paid for a

good minus the seller’s cost of providing it.
P
S
P0
E
PS
PB
B
Q0 Q
Price ceiling
P
S
Price ceiling a
E
legal maximum on P0
the price at which Pmax
Shortage D
a good can be sold
0
Q1 Q0 Q2 Q
5
Price ceiling
P S
Effect of price
controls when
P demand is inelastic?
A B E0
P10
C D
Pmax
D
Q1 Q0 Q2 Q
Price floor
P
Price floor is a
Surplus S
legal minimum on Pmin
E
the price at which P0
a good can be sold
D
0 Q1 Q0 Q2 Q
7
Price ceiling and Price floor
Price ceiling Price floor

Buyers Sellers
Lower than market Higher than market

price price
Causing deadweight Causing deadweight
loss loss
Ceiling price for Price floor for
Electricity and water minimum wage
Tax
◼ The government use taxes to raise revenue for public

projects: roads, public schools, national defense
◼ When the government levies a tax on a good, who

actually bears the burden of the tax?
◼ Tax incidence: the manner in which the burden of a

tax is shared among participants in a market.
A tax on sellers
P
S’
Price buyers pay
S
Tax shared by T
buyers P1 E’
P0 E
T
Tax shared by
sellers P2
D
Price sellers receive
Q2 Q1 Q0 Q 10
a. ThuếA tax on buyers
P
Price buyers pay
S
Tax shared by P2
buyers
P0 T
E
Tax shared by
sellers P1 E’ T
D

D’
Q1 Q0 Q 11
Elasticity and tax incidence
P Supply is more elastic than demand
S
Price buyers pay
The
Tax incidence
of the tax
Price without tax falls more
heavily on
Price sellers receive D consumers
Q
P Demand is more elastic than supply
Price buyers pay S

Price without tax
Tax
Price sellers receive D

The incidence of the
tax falls more heavily
on producers
Q
P Perfectly elastic demand
S1
S0
E1
P0 D Producers bear all
E0 the tax burden
Q1 Q0 Q
P Perfectly inelastic demand

D
S1
S0
E1
P1
Consumers bear all
P0 the tax burden
E0
Q0 Q
Subsidy

P S
PS1
Sellers’ share S1
of subsidy E0
P0 s
Buyers’ share A subsidy is
of subsidy E1 the opposite
PD
1 of a tax
Price buyers pay
D
Q0 Q1 Q
CHAPTER FIVE
5
The Theory of Consumer
Choice
Content
◼ Utility, Marginal Utility
◼ Indifference Curve
◼ Budget Constraint
◼ The Theory of Consumer Choice
◼ Individual Demand Curve and Market Demand

Curve
Consumer Behavior
Consumer behavior is best understood in three

distinct steps:
◼ Consumer Preferences
◼ Budget Constraints
◼ Consumer Choices
Utility
◼ A measure of happiness or satisfaction.
◼ Consumers obtain utility from consuming goods.

Utility is the final objective of consumption.
◼ Utility represents what a consumer achieves by

consuming a particular consumption bundle.
Utility
Luxury Good Essential goods

Ux UY
UYmax
Saturation
point
x y
Marginal Utility
◼ Marginal utility (MU) measures the additional

satisfaction obtained from consuming one
additional unit of a good.
◼ MUx = ∆TUX/∆X
◼ MUx = dTU/dX (the first derivative of TU)
◼ Example: TU = X(Y-2) => MUX, MUY=?

Marginal Utility
Example
X TUX MUX
0 0 -
1 15 15
2 26 11
3 34 8
4 40 6
5 45 5
Marginal Utility
◼ Example
X TUX MUX
1 15 15
2 26 11
3 34 8
4 40 6
5 45 5
Diminishing Marginal Utility
◼ Diminishing Marginal Utility: as more of a

good is consumed, the consumption of
additional amounts will yield smaller additions
to utility.
Consumer preferences
Some basic assumptions about preferences:
◼ Completeness
◼ Transitivity
◼ More is better than less

Market Units of Food Units of

Baskets Clothing
A 20 30
B 10 40
C 10 20
D 50 20
E 40 40
Clothing Which
B basket is
40 E preferred?
30
C A
D
20 C
10
10 20 30 40 50 Food
Indifference curve
Y An indifference curve
B
40 E represents all
combinations of
30
A market baskets that
20 C D
U provide a consumer
1
1 with the same level
0 of satisfaction.
10 2 3 4 5 X
0 0 0 0
Indifference curve
Properties of Indifference curve:
◼ Higher indifference curves are preferred to
lower ones
◼ Indifference curve is downward sloping
◼ Indifference curves cannot intersect
◼ Indifference curve is bowed inward.

Indifference map
Basket A> Basket B> Basket C

Y
A U3
C B U2
U1
X
The Marginal Rate of Substitution
◼ Maximum amount of a good that a consumer

is willing to give up in order to obtain one
additional unit of another good.
◼ The MRS of X for Y is the maximum amount

of Y that a person is willing to give up to obtain
one additional unit of X.
◼ MRS is determined by the slope of the

indifference curve.
MRSxy = - ∆Y/∆X
◼ The MRS diminishes along the curve => an

indifference curve is bowed inward (convex).
Baskets X Y
A 2 20
B 4 12
C 6 8
D 8 6
E 10 5
25 y
20
A MRSxy = - ∆y/∆x
15
B
10 C D
5 E
0
x
0 2 4 6 8 10 12
Perfect Substitutes and Perfect
Complements
y
4 Perfect Substitutes
MRSxy = constant
3
1 U4
U2 U3
U1
1 2 3 4 x
y Perfect Complements
4 MRSxy = 0 or infinite
3 U3
U2
2
U1
1
1 2 3 4 x
Budget Constraints
◼ Budget constraints: Limit on the consumption
bundles that a consumer can afford.
◼ Budget line: All combinations of goods for
which the total amount of money spent is equal

to income.
Budget Constraints
◼ Budget Constraints Equation:

x.Px + y.Py = I
Or:
I Px
y = - * x
PY PY
I Py
Or: x =
Px
- * y
Px
Budget Constraints
y
70 Equation:
60 A 2x + y = 60
50 Px = 2 and Py = 1
B
40
30
C
20
10
D x
0
0 10 20 30 40
The Effects of Changes in Income
and Prices
◼ The budget line shifts when:
➢ Income changes
➢ Price changes
Income changes
y
70
60
50
40
30
20 B3
B1 I = 60
10 B2 I = 40
0 x
0 5 10 15 20
Income changes
◼ When income increases (decreases), the

budget line shifts outward (inward) compared
to the original budget line.
◼ A change in income alters the vertical

intercept of the budget line but does not
change the slope.
Price changes
y
70
60
50
40
30
20
10
0 x
0 10 20 30 40
Px=1 Px=2 Px=3
Price changes
◼ When the price of a good increases

(decreases), the budget line rotates inward
(outward).
◼ What happens if the prices of both food and

clothing change, but in a way that leaves the
ratio of the two prices unchanged?
Consumer Choice
◼ We assume that consumers make this

choice in a rational way - that they choose
goods to maximize the satisfaction they can
achieve, given the limited budget available to
them.
Consumer Choice
◼ The maximizing market basket must satisfy two

conditions:
➢ It must be located on the budget line.
➢ It must give the consumer the most preferred

combination of goods and services.
Consumer’s Optimal Choice
y
70
60 A
U1
50
B U2
40
30 U3
20 C
10
D x
0
0 10 20 30 40
◼ Optimal combination:
➢ The budget line and indifference curve U 2
are tangent.
➢ At B, the point of maximization, the slope
of the indifference curve equals the slope

of the budget line.
Optimal combination:
◼ The slope of the indifference curve = The
slope of the budget line.
∆Y/∆X = - Px / Py
MRSxy = -∆Y/∆X
Thus MRSxy = Px/Py

With any two points on the same indifference

curve:
MUx*∆X + MUy*∆Y = 0
Or MUx/MUy = -∆Y/∆X
MRSxy = -∆Y/∆X
Thus MRSxy = MUx/MUy

◼ The optimal condition can be written as:

MUx/MUy = Px/Py
Or MUx/Px = MUy/Py
Application: Deriving Individual
Demand Curve
◼ The theory of consumer choice provides the
theoretical foundation for the consumer’s
demand curve.
◼ We can view a consumer’s demand curve as
a summary of the optimal decisions that arise

from his budget constraint and indifference
curves.
Application: Deriving Individual
Demand Curve
Y
E1
Y1
Y2 U1
E2
U2
PX X2 X1 X
PX2
PX1
(d)
X
X2 X1
CHAPTER SIX
6
The Theory of Production
Content
◼ The production decisions of firms
◼ Production with One Variable Input (Labor)
◼ Production with Two Variable Inputs
◼ Returns to Scale
What do firms do?
◼ Firms take inputs and turn them into outputs

(or products).
◼ Inputs, or factors of production, include

anything that the firm must use as part of the
production process.
The production decisions of firms
The production decisions of firms include 3 steps:
1. Production Technology
2. Cost Constraints
3. Input Choices
The production function
◼ A production function indicates the highest

output that a firm can produce for every
specified combination of inputs.
◼ The Production Function
Q = f(x1, x2,……….xn)
◼ Cobb-Douglas production function
Q = f(K,L) = aKαLβ
Short run and long run
◼ Short Run:
Period of time in which quantities of one or

more production factors cannot be changed.
◼ Long Run:
Amount of time needed to make all production

inputs variable.
Production with one variable input
(labor)
◼ The average product of labor (APL):
APL = Q/L
◼ The marginal product of labor (MPL):
MPL = ∆Q/∆L
◼ The law of diminishing marginal returns: as the use
of an input increases with other inputs fixed, the

resulting additions to output will eventually decrease.
Labor Capital Quantity APL MPL
0 20 0 --- ---
1 20 50 50 50
2 20 90 45 40
3 20 120 40 30
4 20 140 35 20
5 20 150 30 10
6 20 155 25.8 5
Q(L)
▪ MPL > APL → APL increasing

▪ MPL < APL → APL decreasing
APL
▪ MPL = APL → APL maximum
MPL
E
The average product APL
The marginal product MPL
L
Production with two variable inputs
K L 1 2 3 4 5
1 20 40 55 65 75
2 40 60 75 85 90
3 55 75 90 100 105
4 65 85 100 110 115
5 75 90 105 115 120

Production with two variable inputs
E
Isoquant Maps
5
3
A B C
Q3=90
1 D Q2=75
Q1=55
1 2 3 4 5
L
Isoquants
◼ A curve that shows all the possible

combinations of inputs that yield the same
output.
◼ The slope of an isoquant is the marginal rate

of technical substitution (MRTS).
Isoquants
◼ Marginal rate of technical substitution (MRTS)

is the amount by which the input of capital can
be reduced when one extra unit of labor is
used, so that output remains constant.
MRTSLK = - K/L
Isoquants when inputs are perfect
substitutes
y
Inputs are perfect substitutes
A
C
Q1 Q2 Q3
x
Isoquants when inputs are perfect
complements
y
Inputs are perfect
complements
C Q3
B Q2
A Q1
x
The Isocost Line
◼ An isocost line shows all possible

combinations of labor and capital that can be
purchased for a given total cost.
◼ The isocost line has a slope of

∆K/∆L = -w/r
The Isocost Line
K
C3/r
C2/r
C1/r
C2 C3
-w/ r
C1
C1/ w C2/ w C3/ w L

Producing a maximum output at a
given cost
k3
Q3
k1 A
Q2 = Qmax
Q1
k2
l3 l1 l2
L
Producing a given output at a
minimum cost
k3
A
k1
k2
C2 = Cmin
C C3
l3 l1 1 l2 L
Optimal combination of labor and
capital
◼ Optimal combination:
➢ The isocost line and the isoquant are
tangent.
➢ The slope of the isocost line equals the
slope of the isoquant.

capital
◼ Optimal combination
∆K/∆L = - w/r
MRTSLK = - ∆K/∆L
◼ Thus, the inputs are combined optimally at:
MRTSLK = w/r
capital
MPL(∆L) + MPK(∆K) = 0
Or MPL/MPK = - ∆K/∆L
Due to MRTSLK = - ∆K/∆L
Therefore MRTSLK = MPL/MPK

capital
When inputs are combined optimally
MRTSLK = w/r
Due to MRTSLK = MPL/MPK
Thus MPL/MPK = w/r
Or MPL/w = MPK/r
Returns to Scale
◼ Increasing returns to scale: Situation in which

output more than doubles when all inputs are
doubled.
◼ Constant returns to scale: Situation in which

output doubles when all inputs are doubled.
◼ Decreasing returns to scale: Situation in
which output less than doubles when all

inputs are doubled.
CHAPTER SEVEN
7
The Theory of Cost
Content
◼ Economic Cost versus Accounting Cost
◼ Cost in the Short Run and in the Long Run
◼ Production with Two Outputs – Economies of

Scope
Economic Cost versus Accounting
Cost
◼ Accounting Cost:
➢ The cost that financial accountants

measure.
➢ Actual expenses plus depreciation charges
for capital equipment.
◼ Economic Cost: Cost to a firm of utilizing

economic resources in production.
Opportunity Cost
◼ Cost associated with opportunities forgone

when a firm’s resources are not put to their
best alternative use.
◼ Economic cost = Opportunity cost

Opportunity Cost
A firm owns a
building => pays no
rent for office space
The cost of
office space is
zero???
Accountant Economist
AGREE DISAGREE
Sunk cost
◼ Expenditure that has been made and cannot

be recovered.
◼ The sunk cost should not influence a firm’s

decisions
Sunk cost
Example: the purchase of specialized

equipment that can be used to do only what it
was originally designed for and cannot be
converted for alternative use.
The expenditure on this equipment is a sunk

cost. Because it has no alternative use, its
opportunity cost is zero.
Cost in the Short Run
◼ Total cost (TC) includes total variable costs

(TVC) and total fixed costs (TFC)
◼ TC = TVC + TFC
◼ Fixed costs: costs that do not vary with the

quantity of output produced.
◼ Variable costs: costs that vary with the

quantity of output produced
Average Costs
◼ Average Fixed Cost: AFC = TFC/Q
◼ Average Variable Cost: AVC = TVC/Q
◼ Average Total Cost:
ATC = TC/Q = AFC + AVC

Marginal cost
◼ Marginal cost (MC) is the increase in cost

that results from producing one extra unit of
output.
TC TVC
MC = =
Q Q
dTC dTVC
MC = =
dQ dQ
Marginal cost
◼ A firm in the perfectly competitive market has

a short-run total cost function:
TC = 2Q3 – 5Q2 + 3Q +10.
What is the marginal cost (MC)?

Q TFC TVC TC MC AFC AVC AC

0 50 0 50 --- --- --- ---
1 50 50 100 50 50 50 100
2 50 78 128 28 25 39 64
3 50 98 148 20 16.7 32.7 49.3
4 50 112 162 14 12.5 28 40.5
5 50 130 180 18 10 26 36
6 50 150 200 20 8.3 25 33.3
7 50 175 225 25 7.1 25 32.1
8 50 204 254 29 6.3 25.5 31.8
9 50 242 292 38 5.6 26.9 32.4
10 50 300 350 58 5 30 35
11 50 385 435 85 4.5 35 39.5
Cost
Total Fixed Cost TC

Total Cost TVC
Total Variable Cost
TFC
Q
Cost
MC
AC
AVC
ACmin
AFC
Q Q
• MC and AC:
• MC < AC ➔ AC decreasing
• MC = AC ➔ AC minimum
• MC > AC ➔ AC increasing
• MC and AVC:
• MC < AVC ➔ AVC decreasing

• MC = AVC ➔ AVC minimum
• MC > AVC ➔ AVC increasing
Cost in the Long Run
◼ Long-run Average Cost curve (LAC): Curve

relating average cost of production to output
when all inputs, including capital, are
variable.
◼ Long-run Marginal Cost curve (LMC): Curve
showing the change in long-run total cost as

output is increased incrementally by 1 unit.
Long-run average and marginal cost
$
LMC
LAC
Q
Economies and Diseconomies of
Scale
◼ Economies of scale: Situation in which output

can be doubled for less than a doubling of
cost.
◼ Diseconomies of scale: Situation in which a
doubling of output requires more than a

doubling of cost.
The Relationship between
Short-Run and Long-Run Cost
$ SAC3
SAC1
SAC2 LAC
SMC1
SMC3
LMC
SMC2
Q
Production with Two Outputs –
Economies of Scope
◼ Car manufacturer – cars and coaches
◼ Sheep Farmer – wool and lamb
◼ University - teaching and research

Economies of Scope
◼ Economies of scope: Situation in which joint
output of a single firm is greater than output
that could be achieved by two different firms
when each produces a single product.
◼ Diseconomies of scope: Situation in which joint

output of a single firm is less than could be
achieved by separate firms when each
produces a single product.
Economies of Scope
The product transformation curve describes the

different combinations of two outputs that can
be produced with a fixed amount of production
inputs.
Economies of Scope
Number Q1 describes low-level

of output, Q2 describes high-
coaches
Q2 level output whose labor
and capital increase n times.
Q1
Number of car
Economies of Scope
◼ The product transformation curve have a
negative slope
◼ The product transformation curve is bowed
outward (or concave) => economies of scope

in production
Economies of Scope
◼ There is no direct relationship between

economies of scale and economies of scope:
➢ There may exist economies of scope and
diseconomies of scale
➢ There may exist diseconomies of scope
and economies of scale

Economies of Scope
◼ Degree of economies of scope (SC):

Percentage of cost savings resulting when two
or more products are produced jointly rather
than individually.
C(Q1 ) + C(Q1) – C(Q1,Q2)
SC =
C(Q1,Q2)
Economies of Scope
◼ SC > 0 => the joint cost is less than the sum of
the individual costs and there exists economies
of scope
◼ SC < 0 => the joint cost is more than the sum of
the individual costs and there exists

diseconomies of scope
◼ The larger the value of SC, the greater the
economies of scope.
CHAPTER EIGHT
8
Perfectly Competitive
Markets
Content
◼ Characteristics
◼ Demand Curve, Total Revenue and Marginal

Revenue
◼ Profit Maximization and Loss minimization
◼ Short-Run Supply Curve
◼ Long-Run Profit Maximization
◼ Long-Run Supply Curve

Characteristics
◼ There are many buyers and many sellers

(price takers)
◼ The goods offered by the various sellers are

largely the same
◼ Firms can freely enter or exit the market.

Demand Curve
P A firm P Industry (Market)

S
d, MR, AR
P P
q Q Q
Marginal Revenue
◼ Marginal revenue is the change in total revenue

from the sale of each additional unit of output.
◼ MR = ∆TR/∆Q = dTR/dQ
◼ A competitive firm MR = P
◼ MR, d and AR overlap

TR, AR, MR
Q P TR AR MR
1 6 6 6
2 6 12 6 6
3 6 18 6 6
4 6 24 6 6
5 6 30 6 6
6 6 36 6 6
7 6 42 6 6
8 6 48 6 6
Profit Maximization by a
Competitive Firm
◼ Profit maximizing condition: max  MC = MR
◼ Competitive firm: MR = P
◼ A perfectly competitive firm should choose its

output so that marginal cost equals price
max  MC = MR = P
◼ 3 cases : P > AC, P = AC, P < AC

Profit Maximization
P,C MC
P0 > ACmin
AC
P0
D A MR At Q* : MC = MR = P
AVC
TR = P0. Q* = S(ODAQ*)
C
B
TC = AC.Q* = S(OCBQ*)
=TR–TC= S(CDAB)> 0
0 Q* Q
8
Break-even
P,C Break-even MC
P1 = ACmin
AC
At Q1: MR1 = MC = P1
AVC TR = P1. Q1 = S(OP1MQ1)
M
C1  P1 TC = AC.Q1 = S(OC1MQ1)
MR1
=TR –TC = 0
0 Q1 Q
9
Loss minimization
◼ P < ACmin
◼ Options:
➢ Continue producing (P > AVCmin)
➢ Shutdown (P ≤ AVCmin )
Loss minimization
P2 > AVCmin
P,C MC At Q2: MR2=MC=P2
AC
TR = P2. Q2 = S(OP2EQ2)
TC = AC. Q2 = S(OC2GQ2)
  = TR – TC = - S(P2C2GE)
AVC
G
Continue producing or not???
C2 VC = S(OVFQ2)
P2 E TC
V MR2 FC = S(VC2GF)
F
S (P2C2GE) < S(VC2GF)
 Loss < TFC
0 Q2 Q
Continue producing
11
Loss minimization
P3 ≤ AVCmin
P,C MC
At Q3: MR3=MC=P3
AC TR = P3. Q3 = S(OP3NQ3)
TC= AC. Q3 = S(OC3MQ3)
AVC   = TR – TC = - S(P3C3MN)
M Continue producing or not???
C3
VC = S(OP3NQ3)
TC
MR3
P3 FC = S(P3C3MN)
N
 Loss =TFC
0 Q3 Q  Shut down
Shut down 12
Choosing Output in the Short Run
◼ A firm's production decisions:

➢ Profit Maximization (Loss minimization)
condition: MC = MR = P
➢ If P > ACmin : Positive profit
➢ If P = ACmin : Break-even
➢ If AVCmin < P < ACmin : Continue producing,

loss
➢ If P ≤ AVCmin: Shut down
A Competitive Firm’s Short-Run
Supply Curve
Short-run supply curve:
P MC above AVC
MC AC
P1
AVC
P2=ACmin
P3
P4=AVCmin
P5
q5 q4 q3 q2 q1 q
The Short-Run Market Supply Curve
The short-run market supply curve shows the

amount of output that the industry will produce
in the short run for every possible price.
The Short-Run Market Supply
Curve
P
S1
S2
S
3
The short-run industry supply
2 curve is the summation of the
supply curves of the individual
1
firms.
4 8 12 16 20 24 Q
Long-Run Profit Maximization
P
SMC LMC
LAC
A SAC
E
D P = MR
C B
Long-run profit
G F
maximization: long-run
marginal cost equals
the price.
q1 q0 q2 q
Long-run competitive equilibrium
P Firm P Industry (Market)
LMC S1
P2 P2 S2
LAC
P1 P1
D
q1 = q0 q2 q Q1 Q2 Q
Long-run competitive equilibrium
◼ SMC = LMC = MR = P
◼ P = SAC = LAC
➢ No motivation to enter or exist the industry
➢ Zero economic profit

The Industry’s Long-Run Supply
Curve
◼ Assumptions:
➢ All firms have access to the available

production technology.
➢ Output is increased by using more inputs,
not by invention.
➢ The conditions underlying the market for

inputs to production do not change when the
industry expands or contracts.
The Industry’s Long-Run Supply
Curve
◼ Constant-Cost Industry: Industry whose long-

run supply curve is horizontal.
◼ Increasing-Cost Industry: Industry whose long-
run supply curve is upward sloping.
◼ Decreasing-cost industry: Industry whose long-

run supply curve is downward sloping.
Constant-Cost Industry

MC S1
B S2
P2 P2
AC C SL
P1 P1 A
D
2
D1
q1 q2 q Q1 Q2 Q3 Q
Increasing-Cost Industry
S1
SMC2 SMC LAC2
1
LAC1 B S2
P2 P2
C SL
P3 P3
P1 P1
A
D
2
D1
q1 q2 q Q1 Q2 Q3 Q
Decreasing-cost industry
S1
SMC1 SMC2 LAC1 B
P2 P S2
LAC2 2
P3 P3
P1 P1
A C SL
D
2
D1
q1 q2 q Q1 Q2 Q3 Q
1. The following table reports the data on total costs of a
competitive firm. We know that the market price is P =
44. Find the marginal cost curve. In a graph, plot the
marginal revenue and marginal cost curves and show
the amount of output that the firm should produce.
Q 1 2 3 4 5 6 7 8 9
TC 4 16 36 64 100 144 196 256 324

2. Suppose you are the manager of a watchmaking firm
operating in a competitive market. Your cost of

production is given by TC = 200 + 2Q 2 , where Q is the
level of output and TC is total cost.
a. If the price of watches is $100, how many watches
should you produce to maximize profit?
b. What will the profit level be?

3. Suppose that a competitive firm has a total
cost function TC = 450 + 15Q + 2Q2
If the market price is P = $115 per unit, find the

level of output produced by the firm and the
level of profit.
CHAPTER NINE
9
Monopoly
Content
◼ Characteristics
◼ Why monopolies arise
◼ Total revenue, marginal revenue and average
revenue
◼ The multiplant Firm
◼ Price Discrimination
◼ Monopoly Power
Characteristics
◼ There are one sole seller and many buyers
◼ The product does not have close substitutes
◼ There are barriers to entry.

Why monopolies arise
◼ Barriers to entry:
➢ Monopoly resources: A key resource required for
production is owned by a single firm.
➢ Government regulation: The government gives a
single firm the exclusive right to produce some good

or service
➢ The production process: A single firm can produce

output at a lower cost than can a larger number of
producers
Monopoly vs. Competition: Demand
Curves
In a competitive market, the
market demand curve slopes A competitive firm’s
demand curve
downward, but the demand P
curve for any individual firm’s
product is horizontal at the
market price. D
The firm can increase Q
without lowering P, so MR = P
Q
for the competitive firm.
Monopoly vs. Competition: Demand
Curves
A monopolist is the only A monopolist’s

demand curve
seller, so it faces the P
market demand curve.
To sell a larger Q,
the firm must reduce P.
D
Thus, MR ≠ P.
Q
Total revenue, marginal revenue
and average revenue
Total Marginal Average

Price Quantity
Revenue Revenue Revenue
P Q
TR MR AR
10 1 10 10 10
9 2 18 8 9
8 3 24 6 8
7 4 28 4 7
6 5 30 2 6
5 6 30 0 5
4 7 28 -2 4
Marginal revenue and average
revenue
P The monopolist’s average

revenue is precisely the
market demand curve.
Average Revenue (Demand)
Marginal revenue
Q
Marginal revenue and average
revenue
◼ Comment:
➢ Decreasing prices help increase sales
➢ MR < P
➢ Compare to the perfect competitive market?

Profit Maximization
◼ A monopolist maximizes profit by producing

the quantity where MR = MC.
◼ Once the monopolist identifies this quantity,

it sets the highest price consumers are willing
to pay for that quantity.
◼ It finds this price from the D curve.

Profit Maximization
MC
➢ The profit-maximizing
output Q*: MR = MC. P
➢ Find P from the
demand curve at this D

quantity Q*. MR
Q* Q
Profit-maximizing output
Profit Maximization
P
MC
P1 AC
P*
P2
D = AR
MR
Q1 Q* Q2 Q
Profit Maximization
◼ Q < Q*: MR > MC => Increasing output helps

increase profits
◼ Q > Q*: MR < MC => Decreasing output helps
increase profits
◼ Q = Q*: MR = MC => Maximum profit

The Monopolist’s Profit
The monopolist’s
P
profit:
MC
(P – AC) x Q
P
AC
AC
D
MR
Q* Q
Pricing regulation
TR (Q  P ) P  Q Q  P
MR = = = +
Q Q Q Q
P  Q P   1 
MR = P + Q  = P 1 +   = P 1 + 
Q  P Q   E D 
Profit maximization: MR = MC
 1  P − MC 1 MC
P 1 +  = MC  =− or P =
 ED  P ED 1
1+
ED
Monopoly: Perfect competition:

vs.
P > MC P = MC
Monopoly Power
◼ In the perfectly competitive market, firms

have no market power:
P = MC
◼ In the monopoly markets, firms have market
power:
P > MC
Monopoly Power
◼ Measuring Monopoly Power:

P − MC 1
L= =−
P ED
◼ The larger is L (0 < L < 1), the greater is the

degree of monopoly power.
◼ ED is now the elasticity of the firm’s demand
curve, not the market demand curve.
Shifts in Demand
P
MC Shifts in demand can
lead to changes in
P1 price with no change
P2 in output
D2
D1
MR2
MR1
Q1 = Q2 Q
Shifts in Demand
P
MC Shifts in demand
can lead to
P1
D2 changes in
output with no
change in price
MR2 D1
MR1
Q1 Q2 Q
Supply curve of Monopoly
◼ Shifts in demand usually cause changes in both
price and quantity.
◼ A competitive industry supplies a specific

quantity at every price.
◼ A monopoly might supply several different

quantities at the same price, or the same quantity
at different prices.
◼ Monopoly has no supply curve

The Multiplant Firm
◼ For multiplant firms, production takes place in

two or more different plants, thus operating
costs can differ.
◼ The firm's profit is maximized when:
➢ Marginal revenue equals marginal cost at

each plant.
The Multiplant Firm
Q1 and C1: the output and cost of production for

Plant 1
Q2 and C2: the output and cost of production for

Plant 2
Total ouput: QT = Q1 + Q2.

Then profit is: Π = PQT – C1(Q1) – C2(Q2)
The Multiplant Firm
The firm should increase output from each plant

until the incremental profit from the last unit
produced is zero.
Plant 1: ∆Π ∆(PQT) ∆C1

= - = 0
∆Q1 ∆Q1 ∆Q1
=> MR = MC1
MR = MC1=MC2
Similarly, MR = MC2
Production with two plants
MC1 MC2 MCT
P*
D = AR
MR*
MR
Q1 Q2 QT Q
Price Discrimination
Price discrimination: the business practice of

selling the same good at different prices to
different customers.
◼ First-Degree Price Discrimination
◼ Second-Degree Price Discrimination
◼ Third-Degree Price Discrimination

◼ First-Degree Price Discrimination: charging

each customer his or her reservation price
(maximum price that a customer is willing to
pay)
◼ Second-Degree Price Discrimination: charging

different prices per unit for different
quantities of the same good or service.
◼ Third-Degree Price Discrimination: dividing

consumers into two or more groups with
separate demand curves and charging
different prices to each group.
The Welfare Cost of Monopoly
Price Deadweight
▪ Competitive eq’m: MC
loss
At QE: P = MC PM
=> total surplus is PE
maximized.
D
▪ Monopoly eq’m:
MR
At QM: P > MC
QM QE Quantity
=> deadweight loss
The Welfare Cost of Monopoly
◼ Monopoly prices are higher than competitive

prices or marginal costs
◼ Monopoly outputs are lower than competitive

output
◼ Monopoly has an outstanding profit
◼ Monopoly power causes deadweight loss
=> Resources used inefficiently.

Objectives to control monopoly
◼ Reduce monopoly prices

◼ Increase monopoly outputs
◼ Adjust monopoly profit
◼ Reduce deadweight loss
=> Resources used more efficiently.
Measures to control monopoly
◼ Maximum Price Regulation

◼ Taxes
◼ Anti-monopoly Law (Competition Law)
Practice
◼ Only one firm produces and sells soccer balls in the
country of Wiknam, and as the story begins,
international trade in soccer balls is prohibited.
The following equations describe the monopolist’s
demand and total cost:
◼ Demand: P = 10 – Q
Total Cost: TC = 3 + Q + 0.5Q2
where Q is quantity and P is the price measured in
Wiknamian dollars.
◼ Q: How many soccer balls does the monopolist
produce? At what price are they sold? What is the
monopolist’s profit?
CHAPTER TEN
10
Monopolistic Competition
and Oligopoly
Content
◼ Monopolistic Competition
◼ Oligopoly
◼ Characteristics:
➢ There are many firms in the industry
➢ Free entry and exit
➢ Differentiated products but not perfect

substitutes
➢ There are different multiple prices.

◼ Monopolistic competition power depends on

the degree of product differentiation.
◼ Examples
➢ Taxi service
➢ Toothpaste
➢ Shampoo…
Equilibrium
Short Run P
Long Run
P MC MC
AC
AC
PSR PLR
DSR DLR
MRSR MRLR
Q QLR Q
QSR
Equilibrium
◼ Short Run
➢ The demand curve is downward sloping
➢ Demand is relatively elastic
➢ MR <P
➢ Maximum profit when MR = MC
➢ The firm has economic profit

Equilibrium
◼ Long run
➢ The profit induces entry by other firms.
➢ Each firm’s demand decreases.
➢ Firm’s sales and prices decrease.
➢ Output of the whole industry increases.
➢ No economic profit (P = AC).
➢ P> MC.
◼ Monopolistic competition creates higher

prices and lower output than perfect
competition.
◼ There exists deadweight loss.

Oligopoly
◼ Characteristics:
➢ Few firms in the industry
➢ Barriers to entry
➢ The products may or may not be differentiated
◼ Examples:
➢ Automotive industry, telecommunications

Oligopoly
◼ Barriers to entry:
➢ Nature: Scale economies, patents or

access to a technology, brands…
➢ Strategic actions: flood the market, drive

prices down if entry occurs…
Oligopoly
◼ Challenges in management:
➢ Strategic action
➢ Competitors’ reactions
◼ How will the opponent react if a business drops

its price?
The Equilibrium for an Oligopoly
◼ Firms in oligopoly must take into account the

competitor's response when making decisions
to choose output levels and selling prices.
◼ Nash equilibrium: a situation in which each
firm does the best it can given its competitors’

actions.
Game Theory
◼ Game theory: the study of how people
behave in strategic situations.
◼ Dominant strategy: a strategy that is best

for a player in a game regardless of the
strategies chosen by the other players.
Prisoners’ Dilemma Example
Nash equilibrium: A’s decision

Both confess
Confess Remain silent
A gets A gets
8 years 20 years
Confess
B B
B’s gets 8 years goes free
decision A goes free A gets
Remain 1 year
silent B B
gets 20 years gets 1 year
Confessing is the dominant strategy for both players.

The Cournot model
Assumptions:
◼ Two firms produce a homogeneous good
◼ Firms know the market demand curve and
costs of each other
◼ Each firm treats the output of its competitors
as fixed
◼ All firms decide simultaneously how much to

produce.
The Cournot model
P1
Firm 1’s profit-maximizing
output depends on how
D1(0)
much it thinks that Firm 2
MR1(0) will produce.
MC1
D1(50)
MR1(75) D1(75)
MR1(50)
12.5 25 50 Q1
Firm 1’s output decision
Reaction curves
Reaction curves
◼ Reaction curve shows the relationship

between a firm’s profit-maximizing output
and the amount it thinks its competitor will
produce.
◼ Q1 = f(Q2) and vice versa.

Example
Two firms facing the market demand curve:

P = 53 – Q, where Q is the total production of
both firms (i.e., Q = Q1 + Q2). Also, suppose
that both firms have constant marginal cost:
MC1 = MC2 = 5.
Use the Cournot model, draw the firms’

reaction curves and show the equilibrium.
The Stackelberg model
◼ Assumptions:
➢ One of the firms can set its output first
➢ Firm 1 sets its output first and then Firm 2, after
observing Firm 1’s output, makes its output

decision.
➢ In setting output, Firm 1 must therefore consider

how Firm 2 will react.
The Bertrand Model
◼ Homogeneous Products
◼ Competition occurs along price dimensions

instead of quantities
◼ Bertrand model is an oligopoly model in which

firms produce a homogeneous good, each firm
treats the price of its competitors as fixed, and
all firms decide simultaneously what price to
charge.
The kinked demand curve
MC’
A
P*
MC
B
D
Q* MR Q
Price Signaling and Price Leadership
◼ Price Signaling:
➢ Form of implicit collusion in which a firm
announces a price increase in the hope that
other firms will follow suit.
◼ Price Leadership:
➢ Pattern of pricing in which one firm regularly
announces price changes that other firms

then match.
Cartels
◼ Producers in a cartel explicitly agree to
cooperate in setting prices and output levels.
◼ Analysis of cartel pricing: OPEC, CIPEC

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Microeconomics

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MICROECONOMICS

Chapter 2: Demand, Supply, And Market Equilibrium

Chapter 3: Elasticity Of Supply and Demand

Chapter 4: Government Intervention in the Market

Chapter 5: The Theory of Consumer Choice

Chapter 6:The Theory of Production

Chapter 7: The Theory of Cost

Chapter 8: Perfectly Competitive Markets

Chapter 10: Monopolistic Competition And Oligopoly

◼ Scarcity rule, Trade-offs, and Opportunity cost

◼ Types of Economic Systems

◼ Microeconomics and Macroeconomics

◼ Positive versus Normative Economics

◼ Circular Flow diagram

All decisions involve trade-offs:

◼ Going to a party the night before your mid-term

exam leaves less time for studying.

◼ Having more money to buy stuff requires

working longer hours, which leaves less time

◼ The opportunity cost of an item is what you give

up to get that item.

The opportunity cost of going to university is not

◼ Describe an important trade-off you recently

◼ Give an example of some action that has both a

monetary and nonmonetary opportunity cost.

◼ The Production Possibilities Frontier (PPF) is a

◼ Points that lie on the PPF illustrate combinations

of output that are productively efficient.

◼ Suppose the economy only produces two items:

Combinations Wheat Cloth

◼ The PPF captures the concepts of:

◼ The slope of the PPF indicates the opportunity cost

deals with the deals with

◼ Positive Economics describes relationships

of cause and effect. It is objective and scientific.

◼ Normative Economics examines questions of

what ought to be.

◼ Circular-flow diagram is a visual model of the

Factors of Labor, land,

◼ Changes in Market Equilibrium

◼ Demand is the quantity that buyers wish to

purchase at each conceivable price.

◼ Note the distinction between demand and the

◼ Demand describes the behavior of buyers at

every price. At a particular price there is a

◼ Demand is the quantity that buyers wish to

purchase at each conceivable price.

◼ Note the distinction between demand and the

◼ Demand describes the behavior of buyers at

every price. At a particular price there is a

◼ A function that shows the relationship

Demand schedule of chocolate

P ($) QD (no. of bars)

Because a lower price increases the quantity

Other things equal, the quantity

◼ Supply is the quantity of a good that sellers

◼ Note the distinction between supply and the

◼ A function that shows the relationship between

Supply schedule of chocolate