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.