Microeconomics (intermediate)
Intermediate microeconomics deck for adults. Covers consumer and producer theory, market structures, game theory, market failures, welfare, and behavioral economics at Varian / Pindyck-Rubinfeld level.
Ämne: Ekonomi · Nivå: Vuxen · 359 kort
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- Scarcity: human wants exceed available resources. This is the fundamental economic problem that forces every society to answer what to produce, how to produce it, and for whom.
- Opportunity cost: the value of the next-best forgone alternative when making a choice. Includes explicit costs (money paid) plus implicit costs (foregone benefits).
- Marginal analysis: rational agents compare marginal benefit (MB) with marginal cost (MC). They expand an activity as long as MB > MC and stop where MB = MC.
- Comparative advantage (Ricardo): a party has comparative advantage in a good if its opportunity cost of producing that good is lower than another party's. Trade based on comparative advantage — not absolute advantage — generates mutual gains.
- Production Possibility Frontier (PPF): graph of maximum output combinations given fixed resources and technology. Usually concave (bowed out) because of increasing opportunity cost from non-identical inputs. Points inside are inefficient; outside are infeasible.
- Positive vs normative economics: positive statements are descriptive and testable ('a minimum wage above equilibrium creates unemployment'); normative statements involve value judgments ('the minimum wage should be raised').
- Sunk cost: a cost already incurred that cannot be recovered. Rational decision-making ignores sunk costs and considers only forward-looking marginal costs and benefits.
- Law of demand: ceteris paribus, the quantity demanded of a good falls when its price rises. The demand curve slopes downward in price-quantity space.
- Law of supply: ceteris paribus, the quantity supplied of a good rises when its price rises. The supply curve slopes upward in price-quantity space.
- Movement along a curve vs shift of the curve: a price change moves you along the same curve; any other determinant change (income, tastes, input prices, technology, expectations) shifts the whole curve.
- Market equilibrium: the price-quantity pair where quantity demanded equals quantity supplied. Above eq. price → surplus; below eq. price → shortage. The market clears at equilibrium.
- Determinants of demand (shift factors): income, prices of related goods (substitutes/complements), tastes/preferences, expectations, number of buyers.
- Determinants of supply (shift factors): input prices, technology, prices of related goods in production, expectations, number of sellers, taxes/subsidies.
- Price elasticity of demand: E_p = (%ΔQ_d) / (%ΔP). Use the midpoint formula for arc elasticity: (Q2-Q1)/((Q1+Q2)/2) ÷ (P2-P1)/((P1+P2)/2). Always negative for normal goods; reported as |value|.
- Elasticity classification: |E| > 1 elastic, |E| = 1 unit elastic, |E| < 1 inelastic, |E| = 0 perfectly inelastic, |E| = ∞ perfectly elastic. Determinants: substitutes available, share of budget, time horizon, necessity vs luxury.
- Income elasticity (YED) = %ΔQ_d / %ΔI. YED > 0 normal; YED < 0 inferior; 0 < YED < 1 necessity; YED > 1 luxury.
- Cross-price elasticity = %ΔQ_d(A) / %ΔP(B). Positive → substitutes; negative → complements; zero → unrelated goods.
- Consumer surplus: the difference between what consumers are willing to pay and what they actually pay. Geometrically the area below the demand curve and above the market price up to the quantity consumed.
- Producer surplus: the difference between the price producers receive and their minimum acceptable price (marginal cost). Area above the supply curve and below the market price.
- Total revenue and elasticity: TR = P·Q. If demand is elastic, a price cut raises TR; if inelastic, a price cut lowers TR. At unit elasticity, TR is maximized.
- Utility function U(x,y): a numerical representation of preferences. Ordinal — only the ranking matters; any monotonic transformation represents the same preferences.
- Marginal utility (MU): the additional utility from one more unit of a good, ∂U/∂x. The 'law of diminishing marginal utility' (Gossen's First Law) states MU eventually falls as consumption rises.
- Indifference curve properties (standard preferences): (1) higher curves are preferred, (2) curves don't cross, (3) downward-sloping, (4) convex to the origin (diminishing MRS).
- Marginal rate of substitution: MRS = -dy/dx along an indifference curve = MU_x/MU_y. The rate at which the consumer is willing to trade y for x while keeping utility constant.
- Budget constraint: P_x·x + P_y·y = M. Slope of the budget line is -P_x/P_y. The constraint shifts with income (parallel) and rotates with relative price changes.
- Consumer optimum (interior): tangency of indifference curve and budget line → MRS = P_x/P_y, i.e. MU_x/P_x = MU_y/P_y (equal marginal utility per dollar across goods).
- Slutsky decomposition: the effect of a price change on demand = substitution effect (movement along the original indifference curve to the new relative price) + income effect (parallel shift to the new budget line).
- Giffen good: an inferior good with an income effect so strong it dominates the substitution effect — when its price rises, quantity demanded rises. Empirically rare; classic candidates include staple foods at subsistence.
- Production function Q = f(L, K): output as a function of labor L and capital K. Short run: at least one input fixed (usually K). Long run: all inputs variable.
- Marginal product of labor: MP_L = ∂Q/∂L. Average product: AP_L = Q/L. MP_L cuts AP_L at AP_L's maximum, by the same logic as MC/AC.
- Law of diminishing marginal returns: in the short run, as more variable input is added to a fixed input, MP eventually declines. Different from decreasing returns to scale (a long-run, all-inputs-scaled concept).
- Isoquant: combinations of inputs producing the same output. Slope = -MP_L/MP_K = -MRTS (marginal rate of technical substitution).
- Isocost: combinations of inputs costing the same: wL + rK = C. Slope = -w/r.
- Cost minimization: tangency MRTS = w/r, i.e. MP_L/w = MP_K/r (equal marginal product per dollar across inputs).
- Cost concepts: FC fixed (don't vary with Q), VC variable. TC = FC + VC. AFC = FC/Q, AVC = VC/Q, ATC = TC/Q = AFC + AVC. MC = dTC/dQ = dVC/dQ.
- MC crosses ATC and AVC at their minimum points. Intuition: while MC < AC, AC falls; while MC > AC, AC rises — so MC = AC exactly at AC's minimum.
- Returns to scale: scale all inputs by factor t > 1. If output rises by exactly t → constant returns; more than t → increasing returns; less than t → decreasing returns. For Cobb-Douglas Q = AL^α K^β, sum α+β determines: =1 CRS, >1 IRS, <1 DRS.
- Long-run average cost (LRAC) is the lower envelope of short-run average cost curves. Typical shape: U — first declining (economies of scale), then constant (minimum efficient scale), then rising (diseconomies of scale).
- Perfect competition characteristics: (1) many small buyers and sellers, (2) homogeneous product, (3) free entry and exit, (4) perfect information, (5) price-taking behavior.
- Perfectly competitive firm: faces horizontal demand at market price P. P = MR = AR. Profit-maximizing output where P = MC (on the rising portion of MC, above AVC).
- Short-run shutdown rule: produce if P ≥ AVC, shut down if P < AVC. At shutdown the firm loses FC either way; producing only makes sense if revenue covers variable cost.
- Long-run equilibrium in perfect competition: free entry and exit drive economic profit to zero. P = min ATC. Productive efficiency (lowest possible AC) and allocative efficiency (P = MC) both hold.
- Monopoly: a single seller of a product with no close substitutes and high barriers to entry. The monopolist's demand curve is the market demand curve; MR lies below it.
- Monopoly MR: for linear demand P = a − bQ, MR = a − 2bQ (twice the slope). MR < P because selling one more unit requires lowering price on all units sold.
- Monopoly profit max: choose Q where MR = MC, then read P off the demand curve at that Q. The result has P > MC, generating deadweight loss relative to perfect competition.
- Lerner index of market power: L = (P − MC)/P = 1/|E_d|. Zero under perfect competition; rises as elasticity falls. The monopolist always operates on the elastic portion of demand (|E_d| > 1).
- Price discrimination — three degrees. 1st degree (perfect): each unit at buyer's max WTP, extracts all consumer surplus. 2nd degree: pricing on quantity (block tariffs, two-part tariffs). 3rd degree: different prices across observable groups (student/senior discounts).
- 3rd-degree price discrimination rule: P_i (1 − 1/|E_i|) = MC. Charge higher prices in markets with less elastic demand.
- Monopolistic competition: many firms, differentiated products, free entry. Each firm has slight market power (downward-sloping demand). Long-run zero profit (P = ATC) but P > MC — excess capacity and product diversity.
- Cournot duopoly (quantity competition): each firm chooses Q taking the other's Q as given. Equilibrium output between perfect competition and monopoly. With identical firms and linear demand P = a − bQ, each firm produces (a − c)/(3b).