Microeconomics: Key Concepts and Formulas
Key Concepts in Microeconomics
Monopolistic Competition, Oligopoly/Game Theory, Externalities, and Public Goods and Common Pool Resources
Monopolistic Competition:
- Monopoly: Price maker (downward sloping demand curve), creates deadweight loss (DWL), but customers get variety. Scale isn’t efficient (doesn’t minimize average fixed cost (AFC) in the long run (LR)).
- Perfect Competition: Many firms, only earn profit in the short run (SR). In the LR, profit = 0 (due to barriers to entry, competitors are quick
Perfect Competition: Profit, Loss, and Shutdown Analysis
Perfect Competition
1) Super Normal Profit
A perfectly competitive firm is in equilibrium at point E, where MR = MC and MC cuts MR from below. OQE is the equilibrium output. OP is the equilibrium price, which is equal to EQE, and CQE is the average cost. As price is greater than average cost, the firm is earning Super Normal Profit (SNP), which is equal to the rectangular area PBCE.
2) Normal Profit
Normal Profit (NP) is the minimum amount of profit a producer must earn to stay in the same business.
Read MoreUnderstanding Monopolies: Causes, Profit Maximization, and Inefficiency
What Causes Monopolies?
- A legal fiat (e.g., US Postal Service)
- A patent with legal power (e.g., a new drug)
- Sole ownership of a resource (e.g., toll highway)
- Formation of a cartel (e.g., OPEC)
- Large economies of scale, where AVC decreases as y increases (e.g., local utility companies)
- Legal monopoly power, with certification such as a doctor or professor.
Profit Maximization for Monopolies
If a monopoly wants to maximize profits:
ProfitM = p(y) · y – c(y)
Max ProfitM = d(p(y).y)/dy – dc(y)/dy = 0 à d(
Read MoreUnderstanding Elasticity and Its Economic Impact
Understanding Elasticity in Economics
1. Many economic questions depend on the size of consumer or producer responses to changes in prices or other variables. Elasticity is a general measure of responsiveness that can be used to answer such questions.
Price Elasticity of Demand
2. The price elasticity of demand—the percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)—is a measure of the responsiveness of the quantity demanded to changes in
Key Economic Terms and Definitions
Basic Economic Principles
Absolute Advantage: The ability to produce a good using fewer inputs than another producer.
Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.
Exports: Goods produced domestically and sold abroad.
Imports: Goods produced abroad and sold domestically.
Opportunity Cost: Whatever must be given up to obtain some item.
General Economic Concepts
Business Cycle: Fluctuations in economic activity, such as employment and production.
Economics:
Labor Economics: Supply, Demand, and Market Equilibrium
Labor Economics
Lecture 1 (Ch1)
Labor Supply
Definitions of Unemployment and Other Statistics
In the Current Population Survey, people aged 16 and greater are classified into the following three categories:
- Employed: In the reference week, the person must work at least one hour with pay, or work at least 15 hours in a non-paid job (family farm, etc.).
- Unemployed: The person is on temporary layoff from a job, or has no job but is actively seeking a job.
- Out of the labor force: Neither employed nor unemployed.