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Summary Micro-Economie
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Summary of 8 pages for the course Micro-economie at VU
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Hoofdstuk 1Microeconomics is the study of how individuals and firms make themselves as
well off as possible in a World of scarcity and the consequences of those
individual decisions for markets and the entire economy.
Microeconomics is often called price theory, because prices play an important
role.
Paragraaf 1.1
Trade-Offs:
1. Which goods and services to produce.
2. How to produce.
3. Who gets the goods and services.
Prices Determine Allocations, such as the price equals the cost of production.
Without a market price there would be serious problems (such as pollution).
Paragraaf 1.2
To explain how individuals and firms allocate resources and how market prices
are determined, economists use a model. Als to predict how a change in one
variable will affect another.
Model: a description of the relationship between two or more economic variables.
Without simplifications, it is difficult to make predictions because the real world is
too complex to analyze fully. Economists make many assumption to simplify their
models.
Economic theory is the development and use of a model to test hypotheses,
which are predictions about cause and effect.
Economists test theories by checking whether predictions are correct. But we can
use evidence on whether a theory’s predictions are correct to refute the theory
but not to prove it. (We cannot prove that the model is correct, we can only fail to
reject it).
The skill in model building is to chart a middle ground.
That resources (example: money) are limited plays a crucial role in these models.
Positive statement: a testable hypothesis about cause and effect. ‘Positive” does
not mean that we are certain about the truth of statement – it only indicates that
we can test the truth of the statement.
Normative statement: a conclusion as to whether something is good or bad. It
cannot be tested because a value judgment cannot be refuted by evidence. It is a
prescription rather than a prediction.
Difference: a normative statement concerns what somebody believes should
happen; a positive statement concerns what will happen.
Paragraaf 1.3
Individuals can use microeconomics to make purchasing and other decisions.
Firms must decide which production methods to use to minimize cost and
maximize profit.
Hoofdstuk 2
,The supply-and-demand model describes how consumers and suppliers interact
to determine the quantity of a good or service sold in a market and the price at
which it is sold. To use the model you need to determine 3 things: buyers’
behavior, sellers’ behavior and how they interact.
Competitive market are those with many buyers and sellers, such as most
agriculture markets, labor markets and stock and commodity markets.
Paragraaf 2.1
Demand -> the quality of a good or service that consumers demand depends on
price and other factors such as consumers’ incomes and the price of related
goods.
Quantity demand -> the amount of a good that consumers are willing to buy at a
given price. (Voorbeeld: in de winkel zijn er maar 10 DVD’s en je wilde er 25
kopen).
Demand curve -> shows the quantity demanded at each possible price, holding
constant the other factors that influence purchases.
Law of demand -> consumers demand more of a good the lower its price, holding
constant tastes, the prices of other goods and other factors that influence the
amount they consume -> the demand curves slope downward.
Response to changes in price -> movements along the demand curve.
A change in any factor other than the price of the good itself -> shift of the
demand curve.
Demand function -> Q = D(p,pb,pc,Y)
Slope = rise/run = Δp/ΔQ
A negative slope is consistent with the Law of Demand.
Total quantity demanded -> summing demand curves; only when all consumers
face the same price.
Paragraaf 2.2
Supply -> the quantity of a good or service that firms supply depends on price
and other factors such as the cost of inputs firms use to produce the good or
service.
Quantity supplied -> the amount of a good that firms want to sell at a given
price.
Supply curve -> shows the quantity supplied at each possible price. The curve
can slope upward, vertical, horizontal or slope downward.
When the price changes -> movement along the supply curve; when costs,
government rules, or other variables change -> supply curve shifts.
Supply function -> Q = S(p,ph)
Total supply curve -> summing supply curves.
The effect of the import ban is to rotate the total supply curve toward the vertical
axis.
The limit that a government sets on the quantity of a foreign-produced good that
may be imported is called a quota.
, Paragraaf 2.3
Market equilibrium -> the interaction between consumers’ demand and firms’
supply determines the market price and quantity of a good or service that is
bought and sold.
Equilibrium -> when all traders are able to buy or sell as much as they want; a
situation in which no participant wants to change its behavior.
Using math to determine the equilibrium: de evenwichtsprijs en
evenwichtshoeveelheid. Dus: Qd=Qs.
Excess demand -> consumers would want to buy more than suppliers want to
sell.
Excess supply -> suppliers want to sell more than consumers want to buy.
The equilibrium price is called the market clearing price because it removes from
the market all frustrated buyers and sellers.
Paragraaf 2.4
Shocking the equilibrium -> changes in a factor that affect demand (such as
consumers’ incomes), supply (such as a rise in the price of inputs), or a new
government policy (such as a new tax) alter the market price and quantity of a
good.
Effects of a shift in the demand curve -> causing a movement along the supply
curve.
Effects of a shift in the supply curve -> causing a movement along the demand
curve.
Paragraaf 2.5
Equilibrium effect of government interventions -> government policies may alter
the equilibrium and cause the quantity supplied to differ from the quantity
demanded.
Policies that shift supply curves:
1. Licensing laws -> limits the number of firms that may sell goods in a
market.
2. Quotas -> limit the amount of a good that can be sold.
Policies that cause demand to differ from supply:
1. Price ceilings (price may not be higher than p) = maximum price. Must be
less than the equilibrium price to be effective.
An enforced price ceiling causes a shortage: a persistent excess demand.
2. Price floors = minimum wage. Must be greater than the equilibrium price
to be effective.
The quantity that firms want to sell and the quantity that consumers want to buy
at a given price need not equal the actual quantity that is bought and sold.
Paragraaf 2.6
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