Category Archives: Microeconomics

Micro 4/17

Monopoly

  • one seller
  • many buyers
  • barriers to entry (source of monopoly power)
  • no close substitutes (electricity) (other source of monopoly power)
  • firms are price setters (price searchers)

Price Discrimination

  • Three Requirements:
  • monopoly power
  • segment the market (hair cuts for women)
  • no arbitrage (buying something and selling at a higher price)

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Micro 4/12

Perfect Competition: when Shift changes

  • Start with Firm MC=ATC (breaking even)
  • Demand increases in Short Run: D up, P up, Q up, q up, Profit up (causes supply to increase cause other people will enter to get profits)
  • Demand increases in Long Run: P down to Pe, Q up, q down to qe, profit = 0
  • Demand decrease in Short Run: P down, Q down, q down, profit negative (causes supply to decrease cause no one likes to lose money)
  • Demand decreases in Long Run: P up to Pe, Q down, q up, profit = 0

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Micro 4/3

read local food inefficiency article for quiz (quiz only over the article) / get homework

Test

Profit sharing is a way firms attempt to control shirking (true)
There are no fixed costs in the long run (true)
Economies of Scale occur when per unit costs rise as output rises (false: lowers)
If the demand for tobacco is highly inelastic, then the burden of a tax on tobacco production would be born almost entirely by consumers (true)
The law of diminishing marginal utility states that as consumption increases the marginal utility of consumption increases (false: decreases)
The elasticity of demand remains constant along a linear demand curve, while the slope changes along a linear demand curve (false)
Implementing an excise tax in a market with a highly elastic demand curve would cause a smaller than average deadweight loss (true)
The goal of every rational individual is to maximize utility subject to their income and the prices they face (true)
If the cross price elasticity of supply between two goods is 1.1, then these two products are compliments in production (true)

In order to maximize profits firms set: Marginal revenue equal to Marginal Cost
Which of the following is typically defined as a variable input? Labor
Laura has a marginal utility of 5 for shirts and a marginal utility of 25 for guns. The price of a shirt is $10 and the price of a gun is $100. What does Laura need to do to maximize her utility? Increase her consumption of shirts
Which of the following is not a shift factor for a firm’s cost curves? Demand (its on the curve)
If the income elasticity (Yd) of a good is 0.8 then the good is a(n): Necessity
Which of the following is a form of taxation that follows the ability-to-pay principle of taxation? United States Income tax
A significant increase in equilibrium price with virtually no change in equilibrium quantity would most likely be caused by a market with: a highly inelastic demand curve in which supply has just fallen
Suppose a firm, interested in raising revenues, comes to you for economic advice. You calculate the price elasticity of demand for a good is 0.3. What advice would you give this firm? “Increase prices to raise revenues since your customers are not likely to change their buying habits”

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Micro 3/14

Equations

  • Total Cost = total fixed cost + total variable costs
  • Average Total cost (ATC) = TC / Q
  • AVC = TVC / Q
  • AFC = TFC / Q
  • ATC = AVC +AFC
  • MC = change in total cost / change in Q

shift cost curves

  • cost of inputs (increase in minimum wage leads to MC shift left, ATC up, AVC up)
  • technology (more technology, cost goes down)
  • taxes (cost goes up)
  • subsidies (cost goes down)

Long Run

  • TFC = 0
  • Long run is when your fixed cost is gone
  • TC = VC
  • Economies of scale (electric company) as quantity goes up, Average Total Cost goes down
  • Diseconomies of Scale: as quantity rises, ATC goes up

Why Economies of scale

  • high startup costs
  • Bulk (or quantity) discounts
  • Mass production
  • learning by doing
  • Specialize
  • Economies of scope: cost sharing across products (using same light bulb for 7 different vehicles… gets you better bulk discount)

Why Diseconomies of scale (why do costs go up)

  • Organizational complexity (company so large, communication sucks)
  • Increase shirking (goofing off)

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Micro 3/13

Theory of Utility: theory behind demand curve

  • measure your preferences
  • good “x” gives you some amount of utility (happiness)
  • Goal: maximize utility; subject to prices and income
  • hard to measure because it is very subjective (no scale for happiness)
  • Marginal utility = change in total utility / change in quantity…. how much marginal happiness you gain from one to the next
  • Law of diminishing marginal utility: as consumption of “x” goes up, the marginal utility (MUx) you receive goes down
  • People consume until: (MUx / Px) = (MUy / Py)

Theory of the Firm: theory behind supply curve

  • Goal: maximize profit
  • Profit = Total Revenue – Total Cost
  • Find where marginal Revenue = Marginal cost
  • Marginal revenue is the slope of total revenue (MR = change in total revenue / change in Q)
  • Marginal Cost is the slope of Total Cost (MC = change in Total cost / change in Q)
  • why firm?
    1. minimize transaction costs (people specialize)
    2. Economies of scale
    3. Team production

Principal Agent Problem

  • Goal of the principal is not the goal of the agent
  • when goals aren’t the same, you get outputs that hurt the principal
  • Fix:
    1. monitoring (checks and balances)
    2. monetary (reward or punishment)

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Micro 3/8

Why government taxes

  1. $$$
  2. change behavior
  3. protect domestic producers

How do we tax

  1. Benefit principle: you pay for the programs you benefit from (gas tax used on roads)
  2. Ability to pay principle: you should pay if you are able to pay (opposite)(progressive income tax)

Definitions of first graph drawn

  • Allocative efficiency: Q is correct from society’s point of view
  • Consumer Surplus: amount you are willing to pay minus the actual price of a good
  • Producer surplus: actual price the producer gets minus the minimum price they would accept
  • Total Surplus: Producer Surplus + Consumer Surplus

2nd graph drawn

  • Price equilibrium and Qe are given
  • Tax causes supply to shift left, Price to increase, quantity will decrease
  • tax revenue: tax * Q after taxes

Taxes and Ed&Es

  • Legal incidence: who writes the check? Legal incidence is on producers (in this class)(the result is the same even if the burden is shared)
  • Economic incidence (tax burden): who gets screwed?
  • General rule: whichever curve is more elastic, that person is going to have less tax burden than the other
  • Consumer burden= change in price
  • Producer burden= tax – change in price

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Micro 3/6

Taxation

Excise Tax

  • a per unit tax
  • cigarette/gasoline tax
  • tariff is a type of excise tax

Income Tax

  • U.S. has a progressive income tax (brackets)

Sales Tax

  • consumption tax
  • goods and services

Fair tax

  • no income tax on the federal level
  • 23% sales tax; P increase 17%
  • Pros: more $$$, catches black market
  • Cons: not progressive (response was prebate: covers the taxes on necessity goods which fixes it and makes it progressive again); old people (decreases their savings in sales tax)

Property taxes

  • public schools
  • some wanted to go to vouchers (get a coupon to choose school)(school choice)
  • pros of a voucher: choose; education level goes up; competition
  • cons of a voucher: the transition (poor people will be screwed)

Death tax (inheritance tax)

  • affects upper middle class
  • gift tax

Social Security Tax

  • you pay a % into your social security account—->when you retire, you get paid back
  • Forced retirement account
  • Chris works, pays a %, goes to retired people

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