Basic Microeconomics Flashcards
The demand curve
The demand curve has 2 uses:
1) If we know what the price is, we can predict the number of slices bought.
2) To measure the consumer surplus (the area between the demand curve and the price level).
We can read the demand curve in the normal way as taking a as the dependent variable and p as the independent variable.
Or, the opposite, where the demand curve gives the willingness to pay in relation to output.
Demand elasticity
How much demand changes as a result of price changes (mathematically: the derivative of QD with respect to price multiplied by the ratio of price over quantity).
Given by the slope of the demand curve
Measured by: the percent variation of QD/percent variation in price.
Because QD decreases when price increases it is common to give a minus sign before the value of the ratio.
Costs
FC: doesn’t depend on output
VC: this cost would be 0 If output were 0
TC: Sum of F.C. + VC
AC: This decides whether to produce at all (TC/output)
MC: This decides how much to produce (the cost of one additional unit)
OC (or imputed cost): the foregone benefit from not applying the resource in the best alternative use. These costs should be included when making decisions.
SC: Investment in an asset (specific asset) with no alternative use I.e an asset with no OC. These should not be included in economic decision making.
Economic decisions should be based on economics cost. Economic cost includes OC that do not correspond to actual expenditures and excludes expenditures that correspond to sunk costs.
Whether a cost is sunk depends on the timeframe. If you have already leased a machine then it is sunk, if you are considering economic decisions, which involves leasing a machine that hasn’t already been done, it is not sunk and should be considered.
EOS and scope
We say that there are EOS if average cost declines with output.
If AC is constant then we say that we have constant returns to scale.
DOS where AC is increasing with output.
Minimum efficient scale: the lowest output at which the minimum average cost is attained.
EOScope is where the cost of producing outputs is lower than if you were to do so separately.
Profit maximisation
Think of profit maximisation as a hill where the top is the output level that corresponds to profit maximisation.
The slope of the hill is 0, that is, the derivative of profit with respect to output is 0.
Saying that the derivative of profit is 0, means that I.e. the derivative of revenue - cost is 0 or the derivative of revenue = the derivative of cost.
So, where MR = MC is profit maximisation.
MR = p (1-1/E)
Because the demand elasticity (e) is lower than 0 I.e negative. Marginal revenue is lower than price.
Why? When scrum sells an extra unit of output, it’s gets p for it. In order to sell this output a firm must lower the price by the amount greater the lower the demand elasticity.
In competitive markets, firms set output at the level where price is equal to MC.
Efficiency
As discussed:
Producer surplus
Consumer surplus
Productive efficiency: how close the actual production cost is to the lowest cost achievable. X-inefficiency (waste in production) and efficiency in the choice of production also falls under this.
Dynamic efficiency (efficiency over time)
Allocative efficiency requires that output be at the appropriate level. Productive efficiency requires that such output be produced in the least expensive way given the available set of technologies. Dynamic efficiency refers to the improvement over time of products and production techniques.
