Micro Flashcards
MR
dTR/dQ
PED
DQ/q/Dp/p = (dQ/dP) * (P/Q)
MR and E
MR = P (1+1/Ed)
First Degree Price discrimination
Charging the maximum WTP per uni
2nd Degress price discrimination
Bulk discounts
3rd degree
Charing a different price to different markets with different demand curves
Conditions for price discrimination
- Firm must be a price setter
- Prevent resale
- Face groups with different WTP
Hurwcz Criteria
alphaworst+1-Alphabest
Market Failure
The inability of a market to produce a pareto efficent outcome.
merit good
a good that consumption has a positive externality
demerit good
a good that’s consumption has a negative externality
non-rival in consumption
one person’s consumption does not reduce the amount available to anyone else. eg. Defence, information
non-excludable
available to all
club good
non-rival, but excludable
Pecuniary social effects
Indirect effects that occurr through the price mechanism
Techcological social effects
Effects that occurr outside the price mechanism ‘externalities’
Coase Theorm
if there are no transaction costs and property rights are well defined (exchangeable, private and legally enforcable), an efficient market allocation will result. Regardless of wo owns the river.
common property
Owned by society as a whole
private property
owned privately, can either be exchangeable or non-exchangable.
inferior good
WIth rising income and constant prices, the demand for an inferior good will decrease. Negative YED
Normal good
with rising income and constant prices, the demand for a normal good will increase. Positive YED
Complements
a rise in the price of one good leads to a fall in demand of the other good. Negative XED
Substitutes
A ris ein the price of one goods leads to an increase in the demand for the other good. Positive XED.
inverse demand function
Price in terms of quantitiy
inverse demand function
Price in terms of quantity
Engel Curve
Relationship between the consumer’s income and the quantity demanded. Derived from the tangencies of the utility function on the consumption possibilities line with increasing income.
income effect
the effect of the change in income on quantitiy
substitution effect
the effect of a change in prices on quantity
A,B,C
A=original point, B= new point, C= new budget line on old IC, A to C is SE. and B to C is IE
lespeyres price index
income necessary to achieve original consumption bundle relative to old income necessary.
Compensating variation
the amount of additional income an agent would need to reach their original consumption bundle. AKA, the change in income required to reach old consumption bundle
Equivalent variation
the amount the agent would pay to prevent a price rise. AKA Total expenditure - current quantity * old prices.
MR and E
MR = P(1+1/e)
PED
(dQ/Q)/(DP/P)
Markup
(p-mc)/p
Bertrand model
Allocatively efficent
Cournot model
simultaneous, Q=qa+qb
stackleberg
One firm is sophisticated
Isocost
all production points that have the same cost. Derived from the cost function. M = wL +rK
XED
(dQa/Qa)/(dPb/pb)= (dqa/dpb) * (pb/qa)
YED
(dQ/Q)/(dY/Y)*(Y/Q)
Completeness
first axiom. Completeness. All preferences are complete. For any two bundles either xRy or yRx or both (indifferent)
Reflexivity
Second axiom. reflexivity, each bundle lies on its own indifference set. xRx
Transitivity
third axiom. Indifference curves do not cross. if zRx and xRy y cannot Rz
Axiom of greed
more is preferred to less. IC is a line that slopes downwards and to the right, individual is on the boundary of the budget constraint.
Continuity and smoothness
Defined for all values ( no breaks), No kinks in the IC, (always defined)
Strict convexity
convex to the origin, individuals want to consume some of every good.
Weak preferance ordering
if reflexitvity, completeness and transitivity are satisfied, then R shows a weak preference ordering. weak, because you may be indifferent between two bundles in the ordering.
Price expansion path
the optimal quantity of x as px changes.
drp
directly revealed preferred
Revealed Preferance theory axioms
Axiom of greed, Only one optimal bundle per BC, For each optimal bundle there is only one BC on which it is optimal. WARP - assumptino of consistency
Substitution effect RPT
Can rule out area bounded by old BC, new BC and the origin by WARP, consistnecy. Rule out interior bundles by greed and therefore the new BC must lie on the AS. If this is to the right of A, SE is positive if to the left it is negative.
RPT and Lespeyres index
By comparing the amount spent on bundle B after the change in income and prices to the amount that would be spent on the old bundle A with the new prices we can see if the agent is better off. If the cost of the old bundle at new prices is lower then B drp A because they had the option to consume the old bundle and chose not to.
Paache Index
if the old bundle is considered and the cost of this bundle compared to the cost of the new bundle at old prices. If A is greater than B, the A drp B
Consumer optimisation
maximising utility subject to costs. the highest indifference curve on a given budget constraint.
Producer optimisation
Minimising cost subject to quantity produced. The lowest Isocost curve on a given Isoquant
