Micro
Cost Curves of the Individual Firm
Total Fixed, Total Variable, Average Total Cost, Average Variable,Long-Run Avg. Costs
and Total Costsand Marginal Costs
Production Possibilities Curve:
- Shows possible outputs for alternative uses of inputs
- Shows Opportunity Cost of various production levels
- Optimal point on PPC is where MB=MC
- Incremental increases in producing one alternative causes increasing costs of the other given up (Law of Increasing Opportunity Costs
- Production inside the PPC is inefficient/wasteful
- Production outside the PPC is essentially impossible in long-run
Economic Growth:Outward movement of PPC. Caused by:
- More resources
- Technology
- Investment in Human Capital
- Specialization
Supply and Demand
ShortageSurplusProducer/Consumer Surplus
Price Elasticity:
Ep=1 Unitary
Ep>1 Elastic
Ep<1 Inelastic
Demand Elasticity Determinants:
- Necessity of product
- Expense of product (as % of budget)
- Number of Substitutes for product
- Amt. of time to adjust to price changes
Supply Elasticity Determinants:
- Complexity of production process
- # of different resources used
- Amt. of time to adjust production when prices change
Factor Markets
The market demand for resources is DERIVED from the market for products.
Some Important Formulas:
Notes:
Changes in productivity will affect both MRP and MC (opposite directions)
Changes in product demand in one market MAY NOT shift demand for a resource, but will shift MR and MRP for the firm
Resource prices in the market are a function of Supply and Demand for that resource
Slope of MRP curve for firm will be greater the LESS competition in the product market
Least-Cost Resource Combination:Profit Maximizing Resource Combination:
Factor Markets (Cont’d)
Monopsony
- Single resource buyer
- Optimizes resource use where MRP=MFC
- MFC>Wage
- Pays lower wage and employs fewer than competitive resource market
Market Failures and Government Intervention
Negative Externalities (Spillover Costs):
MSC>MPC
Some market costs are paid by parties outside the market (Ex: pollution)
Overallocation
Positive Externalities (Spillover Benefits):
MSB>MPB
Benefits are received by parties outside the market for the product (Ex: lighthouses)
Underallocation
Government can correct externalities with:
Taxes
Regulations
Fines
Subsidies
Public Goods
Tax Policies:
Progressive vs. Regressive taxes
Benefits-Received vs. Ability-to-Pay taxes
Tax Incidence
Income Distribution
Inequities caused by:
- Abilities
- Discrimination
- Preferences
- Education
- Wealth
- Chance
Income Disparity has increased because of:
- increased demand for skilled workers
- increased international trade (lower world wages)
- decreased influence of labor unions
- shift to service oriented economy (lower income jobs)
Argument FOR Inequality:
Income inequality provides incentives for individuals to innovate and grow the economy as a means of increasing personal income
Argument AGAINST Inequality:
Redistribution of income will result in increased Total Utility in society.
Economics of Public Policy
Inefficient Voting
Public programs may be implemented (or not implemented) because of the distribution of benefits vs. costs within the society.
Inefficient “Yes” Voting – policies pass when policy costs to society are greater than society’s benefit.
Inefficient “No” Voting – policies are rejected by voters even though total costs to society are lower than total benefit to society.
Logrolling
Inefficient programs are implemented because policy-makers garner support for their program by promising support to fellow policy-makers in their inefficient programs.
Benefits vs. Costs
Public policies that involve immediate benefits but delayed costs are favored over policies that involve immediate costs with delayed benefits. Total Benefits vs. Costs are not a factor of decision making.