––
INTRODUCTION TO
ECONOMICS
- Part 2: Positive Microeconomics -
Good luck studying!
short manual:
- includes a graph
- includes a schema/diagram
- includes an introduction
- includes additional information that
is not in the main textbook updated: 23/12/2017
, CONTENTS
CHAPTER 4: ELASTICITIES OF DEMAND AND SUPPLY
4.1. The price responsiveness of demand ……………………..…………………………... 1
4.2. Total spending, fallacy of composition and short and long run ……………. 3
4.3. Cross-price elasticity and income elasticity of demand ……………………….. 4
4.4. Elasticity of supply ……………………..……………………..………………………………… 5
4.5. Important remarks ……………………..……………………..……………………………….. 6
CHAPTER 5: CONSUMER CHOICE AND DEMAND DECISIONS
5.1. Introduction to theory of consumer choice ……………………..………………….. 7
5.2. What consumer prefers: tastes and utility …………………………………………... 8
5.3. What consumer can afford: Budget constraint ……………………………………. 9
5.4. What consumer chooses: utility maximization …………………………………….. 10
5.5. Adjustment to income changes ……………………..……………………..…………….. 11
5.6. Adjustment to price changes
5.6.1. Basic principles ……………………..……………………..…………………………. 12
5.6.2. Substitution and income effects ……………………..………………………. 13
5.6.3. Cross-price demand elasticities ……………………..………………………… 15
5.7. Market demand curve ……………………..……………………..………………………….. 16
5.8. Substitutes and complements ……………………..……………………..………………. 16
5.9. Transfers in kind ……………………..……………………..……………………..……………. 17
CHAPTER 6: INTRODUCING SUPPLY DECISIONS
6.1. Business organisation ……………………..……………………..……………………………. 18
6.2. The firm’s accounts ………………..…..…………………..……………………..…………… 19
6.3. Profit maximization - always or not? ……………………..……………………………. 21
6.4. The firm’s supply decision ……………………..……………………..……………………… 22
6.5. Marginal cost and marginal revenue ……………………..……………………………. 23
6.6. Marginal cost and marginal revenue curves ……………………..………………….. 24
CHAPTER 7: COSTS AND SUPPLY
7.1. Input and output: production function ………..………………………………………. 25
7.2. Short-run production function ..………………..………………..……………………..… 26
7.3. Short-run costs ………………..………………………..………………………..………………. 27
7.4. Short-run firm’s output decision ………………..………………………..……………… 28
7.5. Long-run production function and long-run costs ………………..……………… 29
7.6. Returns to scale
7.6.1. Definition and reasons ………………..………………………..………………… 30
7.6.2. In practice ………………..………………………..………………………..…………. 32
7.7. Long-run firm’s output decision ………………..………………………..……………….. 33
,CHAPTER 8: PERFECT COMPETITION AND PURE MONOPOLY
8.0. Introduction to perfect competition and pure monopoly ……………………. 34
8.1. Perfect competition
8.1.1. Main features ………………..………………………..……………………………… 35
8.1.2. Output decision and supply curves ………………..………………………… 36
8.1.3. Comparative statics ………………..………………………..…………………….. 37
8.2. Pure monopoly
8.2.1. Main features ………………..………………………..………………………………. 38
8.2.2. Output decision ………………..………………………..………………………….. 39
8.2.3. Social cost ………………..………………………..………………………..…………. 40
8.2.4. No supply curve, price discrimination ………………..…………………... 41
8.2.5. Technical change ………………..………………………..………………………… 42
8.2.6. Natural monopoly ………………..………………………..……………………….. 43
CHAPTER 9: MARKET STRUCTURE AND IMPERFECT COMPETITION
9.0. Introduction to market structure ………………..………………………..…………….. 44
9.1. A general theory of market structure determination …………………………… 45
9.2. Globalisation and multinationals ………………..………………………..…………….. 46
9.3. Monopolistic competitition ………………..………………………..…………………….. 47
9.4. Oligopoly
9.4.1. Main features ………………..………………………..………………………..……. 49
9.4.2. Collusion ………………..………………………..………………………..…………… 50
9.4.3. Game theory ………………..………………………..………………………..……… 51
9.4.4. Cournot behaviour ………………..………………………..……………………… 52
9.4.5. Bertrand behaviour ………………..………………………..…………………….. 53
9.4.6. Mergers and competition policy ………………..………………………..…. 54
9.4.7. The Stackelberg model ………………..………………………..……………….. 55
9.4.8. Contestable markets ………………..………………………..…………………… 56
9.4.9. Innocent entry barriers and strategic entry deterrence ………….. 57
CHAPTER 10: THE LABOUR MARKET
10.0. Introduction to input markets ………………..………………………..…………………. 58
10.1. Demand of inputs in the long-run ………………..………………………..……………. 59
10.2. Demand of inputs in the short-run ………………..………………………..………….. 60
10.3. Industry demand curve for labour ………………..………………………..…………… 61
10.4. Individual supply of labour
10.4.1. Labour force and effects ………………..………………………..……………. 62
10.4.2. Participation rates ………………..………………………..…………………….. 63
10.5. Industry supply of labour ………………..………………………..…………………………. 64
10.6. Industry labour market equilibrium ………………..………………………..…………. 65
10.7. Labour market monopsony ………………..………………………..……………………… 66
10.8. Transfer earnings and economic rent ………………..………………………..………. 67
10.9. Reasons for short-run labour market disequilibrium (minimum wage,
trade unions, scale economies, insider-outsider, efficiency wages) …….. 68
10.10. Wage discrimination ………………..………………………..………………………..……… 72
, 4.1. The price responsiveness of demand
PRICE ELASTICITY OF DEMAND ARC ELASTICITY OF DEMAND
FORMULA FORMULA
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 ∆𝑄 ∆𝑃
𝑃𝐸𝐷 = 𝑃𝐸𝐷𝑎𝑟𝑐 = /
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑄𝑚𝑖𝑑 𝑃𝑚𝑖𝑑
APPLICATION: APPLICATION:
o we use it to measure how sensitive o to prevent asymmetry of PED
are consumers to price changes
CHARACTERISTICS:
CHARACTERISTICS:
o PEDarc is same if P either falls or rises
o if PED < -1
this applies to all demand curves
Qd is sensitive to P
o PEDarc is better than PED
o if -1 < PED < 0
but main conclusions about
Qd is insensitive to P
elasticities are the same
PRICE ELASTICITY OF DEMAND SLOPE OF DEMAND
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑃𝐸𝐷 = 𝑆𝑙𝑜𝑝𝑒 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
between two points on demand curve between two points on demand curve
CONSTANT SLOPE NON-CONSTANT SLOPE
linear demand curve non-linear demand curve
PED falls as we move down the curve PED varies as we move down curve
same size Q response regardless on different size Q response depending
whether we raise or lower the P on whether we raise or lower the P
- exceptions: - solution: use very small Δ in prices
horizontal (infinitely elastic) 𝒅𝑸 𝑷
𝑷𝑬𝑫 = ×
o ΔP = 0 PED = - ∞ 𝒅𝑷 𝑸
vertical (infinitely inelastic) equals to point elasticity of demand
𝑨
o ΔQ = 0 PED = 0 - exception: 𝑸𝒅 = , 𝑨 > 𝟎
𝑷
then whole demand curve is PED=-1
-1-
INTRODUCTION TO
ECONOMICS
- Part 2: Positive Microeconomics -
Good luck studying!
short manual:
- includes a graph
- includes a schema/diagram
- includes an introduction
- includes additional information that
is not in the main textbook updated: 23/12/2017
, CONTENTS
CHAPTER 4: ELASTICITIES OF DEMAND AND SUPPLY
4.1. The price responsiveness of demand ……………………..…………………………... 1
4.2. Total spending, fallacy of composition and short and long run ……………. 3
4.3. Cross-price elasticity and income elasticity of demand ……………………….. 4
4.4. Elasticity of supply ……………………..……………………..………………………………… 5
4.5. Important remarks ……………………..……………………..……………………………….. 6
CHAPTER 5: CONSUMER CHOICE AND DEMAND DECISIONS
5.1. Introduction to theory of consumer choice ……………………..………………….. 7
5.2. What consumer prefers: tastes and utility …………………………………………... 8
5.3. What consumer can afford: Budget constraint ……………………………………. 9
5.4. What consumer chooses: utility maximization …………………………………….. 10
5.5. Adjustment to income changes ……………………..……………………..…………….. 11
5.6. Adjustment to price changes
5.6.1. Basic principles ……………………..……………………..…………………………. 12
5.6.2. Substitution and income effects ……………………..………………………. 13
5.6.3. Cross-price demand elasticities ……………………..………………………… 15
5.7. Market demand curve ……………………..……………………..………………………….. 16
5.8. Substitutes and complements ……………………..……………………..………………. 16
5.9. Transfers in kind ……………………..……………………..……………………..……………. 17
CHAPTER 6: INTRODUCING SUPPLY DECISIONS
6.1. Business organisation ……………………..……………………..……………………………. 18
6.2. The firm’s accounts ………………..…..…………………..……………………..…………… 19
6.3. Profit maximization - always or not? ……………………..……………………………. 21
6.4. The firm’s supply decision ……………………..……………………..……………………… 22
6.5. Marginal cost and marginal revenue ……………………..……………………………. 23
6.6. Marginal cost and marginal revenue curves ……………………..………………….. 24
CHAPTER 7: COSTS AND SUPPLY
7.1. Input and output: production function ………..………………………………………. 25
7.2. Short-run production function ..………………..………………..……………………..… 26
7.3. Short-run costs ………………..………………………..………………………..………………. 27
7.4. Short-run firm’s output decision ………………..………………………..……………… 28
7.5. Long-run production function and long-run costs ………………..……………… 29
7.6. Returns to scale
7.6.1. Definition and reasons ………………..………………………..………………… 30
7.6.2. In practice ………………..………………………..………………………..…………. 32
7.7. Long-run firm’s output decision ………………..………………………..……………….. 33
,CHAPTER 8: PERFECT COMPETITION AND PURE MONOPOLY
8.0. Introduction to perfect competition and pure monopoly ……………………. 34
8.1. Perfect competition
8.1.1. Main features ………………..………………………..……………………………… 35
8.1.2. Output decision and supply curves ………………..………………………… 36
8.1.3. Comparative statics ………………..………………………..…………………….. 37
8.2. Pure monopoly
8.2.1. Main features ………………..………………………..………………………………. 38
8.2.2. Output decision ………………..………………………..………………………….. 39
8.2.3. Social cost ………………..………………………..………………………..…………. 40
8.2.4. No supply curve, price discrimination ………………..…………………... 41
8.2.5. Technical change ………………..………………………..………………………… 42
8.2.6. Natural monopoly ………………..………………………..……………………….. 43
CHAPTER 9: MARKET STRUCTURE AND IMPERFECT COMPETITION
9.0. Introduction to market structure ………………..………………………..…………….. 44
9.1. A general theory of market structure determination …………………………… 45
9.2. Globalisation and multinationals ………………..………………………..…………….. 46
9.3. Monopolistic competitition ………………..………………………..…………………….. 47
9.4. Oligopoly
9.4.1. Main features ………………..………………………..………………………..……. 49
9.4.2. Collusion ………………..………………………..………………………..…………… 50
9.4.3. Game theory ………………..………………………..………………………..……… 51
9.4.4. Cournot behaviour ………………..………………………..……………………… 52
9.4.5. Bertrand behaviour ………………..………………………..…………………….. 53
9.4.6. Mergers and competition policy ………………..………………………..…. 54
9.4.7. The Stackelberg model ………………..………………………..……………….. 55
9.4.8. Contestable markets ………………..………………………..…………………… 56
9.4.9. Innocent entry barriers and strategic entry deterrence ………….. 57
CHAPTER 10: THE LABOUR MARKET
10.0. Introduction to input markets ………………..………………………..…………………. 58
10.1. Demand of inputs in the long-run ………………..………………………..……………. 59
10.2. Demand of inputs in the short-run ………………..………………………..………….. 60
10.3. Industry demand curve for labour ………………..………………………..…………… 61
10.4. Individual supply of labour
10.4.1. Labour force and effects ………………..………………………..……………. 62
10.4.2. Participation rates ………………..………………………..…………………….. 63
10.5. Industry supply of labour ………………..………………………..…………………………. 64
10.6. Industry labour market equilibrium ………………..………………………..…………. 65
10.7. Labour market monopsony ………………..………………………..……………………… 66
10.8. Transfer earnings and economic rent ………………..………………………..………. 67
10.9. Reasons for short-run labour market disequilibrium (minimum wage,
trade unions, scale economies, insider-outsider, efficiency wages) …….. 68
10.10. Wage discrimination ………………..………………………..………………………..……… 72
, 4.1. The price responsiveness of demand
PRICE ELASTICITY OF DEMAND ARC ELASTICITY OF DEMAND
FORMULA FORMULA
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 ∆𝑄 ∆𝑃
𝑃𝐸𝐷 = 𝑃𝐸𝐷𝑎𝑟𝑐 = /
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑄𝑚𝑖𝑑 𝑃𝑚𝑖𝑑
APPLICATION: APPLICATION:
o we use it to measure how sensitive o to prevent asymmetry of PED
are consumers to price changes
CHARACTERISTICS:
CHARACTERISTICS:
o PEDarc is same if P either falls or rises
o if PED < -1
this applies to all demand curves
Qd is sensitive to P
o PEDarc is better than PED
o if -1 < PED < 0
but main conclusions about
Qd is insensitive to P
elasticities are the same
PRICE ELASTICITY OF DEMAND SLOPE OF DEMAND
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑃𝐸𝐷 = 𝑆𝑙𝑜𝑝𝑒 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
between two points on demand curve between two points on demand curve
CONSTANT SLOPE NON-CONSTANT SLOPE
linear demand curve non-linear demand curve
PED falls as we move down the curve PED varies as we move down curve
same size Q response regardless on different size Q response depending
whether we raise or lower the P on whether we raise or lower the P
- exceptions: - solution: use very small Δ in prices
horizontal (infinitely elastic) 𝒅𝑸 𝑷
𝑷𝑬𝑫 = ×
o ΔP = 0 PED = - ∞ 𝒅𝑷 𝑸
vertical (infinitely inelastic) equals to point elasticity of demand
𝑨
o ΔQ = 0 PED = 0 - exception: 𝑸𝒅 = , 𝑨 > 𝟎
𝑷
then whole demand curve is PED=-1
-1-
