Consumer Behavior, Production & Market Structures Economics
Consumer Behavior: Utility & Indifference Curves
This unit explores how consumers make choices to maximize their satisfaction.
Key Concepts
Utility: The want-satisfying power of a commodity.
Cardinal Utility: Assumes utility can be measured numerically (e.g., in “utils”). This is the basis for the Marginal Utility Analysis.
Ordinal Utility: Assumes utility can only be ranked or compared (e.g., first, second, third preference). This is the basis for the Indifference Curve Analysis.
Law of Diminishing
Microeconomics: Nature, Elasticity, Demand, Supply & Equilibrium
1. Nature and Scope of Microeconomics (16 Marks)
Microeconomics is an important branch of economics that deals with the study of individual economic units such as consumers, firms, industries and markets. It focuses on how individuals and firms make decisions regarding the allocation of scarce resources and how these decisions affect prices, output and the distribution of income. Microeconomics is also known as price theory because it explains the determination of prices of goods and services in
Read MoreMicroeconomics: Taxes, Subsidies, and Utility Maximization
1. Taxes, Subsidies, and Deadweight Loss (DWL)
This topic analyzes how government intervention (taxes or subsidies) affects market equilibrium, consumer surplus (CS), producer surplus (PS), and total efficiency (DWL).
Key Formulas & Concepts
Tax Wedge:
A tax ($\tau$) drives a wedge between the price buyers pay ($P_d$) and the price sellers receive ($P_s$).$P_d = P_s + \tau$
The new equilibrium quantity ($Q_t$) is found where $Q_d(P_d) = Q_s(P_s)$.
Subsidy Wedge:
A subsidy ($s$) also creates a wedge,
Microeconomics: Costs, Market Structures, and Game Theory
Chapter 12 — Cost of Production
Cost Definitions and Key Formulas
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC).
Marginal Cost (MC) = ΔTC / ΔQ or ΔVC / ΔQ.
Average Fixed Cost (AFC) = Fixed cost / Quantity.
Average Variable Cost (AVC) = Variable cost / Quantity.
Average Total Cost (ATC) = Total cost / Quantity = AFC + AVC.
Profit Concepts
Accounting profit = Total revenue − Explicit costs.
Economic profit = Total revenue − Explicit costs − Implicit costs. (Economic profit = Accounting
Read MoreMarket Structures: Monopoly and Competition Analysis
Monopoly Market Structure: Key Concepts
What is *not* a barrier to entry in a monopolized market?
Answer: A single firm is very large.
Definition of a Natural Monopoly
A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a natural monopoly.
Marginal Revenue for a Monopolist
When a monopolist produces an additional unit, the marginal revenue generated by that unit must be below the price because the price effect outweighs the output
Key Concepts in Microeconomics: Consumer Theory and Market Welfare
Four Properties
1.
Higher indifference curves are preferred to lower ones.
2. Indifference curves cannot cross
3. Indifference curves are downward sloping.
4. Indifference curves are bowed inward –convexity-
Tangency Condition
MRS = P1 / P2
Consumer’s Optimal Choice
MU1 / MU2 = P1 / P2
Proportionality Rule
MU1 / P1 = MU2 / P2
Perfect Substitutes:
Indifference curves are straight lines. Optimal choice is at one extreme (all of one good).
Perfect Complements:
Indifference curves are L-shaped.