Equations, Micro Flashcards
Allocative efficiency conditions
D = S, MSB = MSC, P = MC
Productive efficiency condition
Any point of the PPF
min. of AC
X efficiency
AC₂ = AC + x, X inefficiency shifts the AC curve up
Dynamic efficiency
LR supernormal profit (from reinvesting short term profits)
Minimum efficient scale (MES)
The lowest quantity where AC is minimised and all the economies of scale are exploited
Shutdown Condition
The condition: AR (price) = AVC
The variables:
AR = (price*quantity) /quantity = price
AC (Average Cost) = Total Cost (TC) / Output (Q)
Includes both fixed costs (e.g., rent) and variable costs (e.g., raw materials, wages).
AC is always higher than or equal to AVC because it includes AFC (Average Fixed Cost) as well.
AVC (Average Variable Cost) = Total Variable Cost (TVC) / Output (Q)
Only includes variable costs, ignoring fixed costs.
AVC is always below AC since it excludes fixed costs.
Condition explained:
A firm needs to make normal profit or supernormal profit in the long run, which is TR>=TC. Because otherwise, even if the firm is making some profit each quarter (TR>TVC), the firm should still close because the factors of production could be used to better effect elsewhere. However, in the short term, a firm has fixed costs that it has to pay, whether or not it produces any output - so they will continue operating providing AR (price) > AVC, since this would mean any additional unit sold contributes towards paying off the fixed costs, furthermore, if price=AVC, then the firm may or may not stay open - depending on wether or not the expected conditions to improve. Lastly, if price < AVC, the firm will immediately shutdown since continuing operations worsens the losses.
Concentration ratio
An ‘n market share’ is the market share of the top n largest markets added together
Average utility
TU(total utility)/quantity
Marginal utility
∆TU/∆Q
Utility maximisation
MU = P
PED
% ∆Q(quantity demanded)/% ∆P
PES
% ∆Q(quantity supplied)/% ∆P
XED
% ∆Q(quantity demanded of good A)/% ∆P(price of good B)
YED
% ∆Q(quantity demanded)/% ∆Y(income)
Percentage change
Difference/original *100
Index number
Raw number in current year/raw number in the base year (*100)
Profit Max Employer
MRP = MCl
Gini Coefficient
A/(A+B)
Total cost (TC)
TFC + TVC
Average cost
Total cost/quantity
Marginal Cost
∆TC/∆Q
Total Revenue
P*Q
Marginal Revenue
∆TR/∆Q
Average Product
TP/Q
Marginal Product
∆TP/∆Q
Returns to scale
%∆output > %∆input, increasing returns to scale
%∆output = %∆input, constant returns to scale
%∆output < %∆input, decreasing returns to scale
Profit
TR-TC
Profit Maximisation
MR = MC
Revenue maximisation
MR = 0
Sales maximisation
AR = AC
This the highest level of output a firm can sustain in the long run, otherwise the firm would be making a loss
Profit satisficing
Between profit max. and sales max.
Interpretation of the values of PED, PES, XED, and YED
PED > 1 Elastic demand (responsive to price changes)
PED < 1 Inelastic demand (less responsive to price changes)
PED = 1 Unitary elastic (proportional response)
PED = 0 Perfectly inelastic (no response to price change)
PED = infinity Perfectly elastic (consumers switch entirely)
PES > 1 Elastic supply (responsive to price changes)
PES < 1 Inelastic supply (less responsive to price changes)
PES = 1 Unitary elastic (proportional response)
PES = 0 Perfectly inelastic (fixed supply)
PES = infinity Perfectly elastic (unlimited supply at a price)
XED > 0 Substitutes (positive relationship)
XED < 0 Complements (negative relationship)
XED = 0 No relationship between goods
YED > 1 Luxury good (income elastic)
0 < YED < 1 Normal good (income inelastic)
YED < 0 Inferior good (demand falls as income rises)
