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Summary – Microeconomics 1
Chapter 1 – Adventures in Microeconomics
Microeconomics is the branch of economics that studies the specific choices made by consumers
and producers. Theories and models are explanations of how things work that help us understand
and predict how and why economic entities behave as they do. Empirical is the use of data analysis
and experiments to explore phenomena.
Chapter 2 – Supply and Demand
2.1 – Markets and Models
The supply and demand model represents the economist’s best attempt to capture many of the key
elements of real-world markets in a simple enough way that we can analyse it. Supply is the
combined amount of a good that all producers in a market are willing to sell. Demand is the
combined amount of a good that all consumers in a market are willing to buy. There are four basic
assumptions that underpin the supply and demand model:
1. We focus on supply and demand in a single market;
2. All goods sold in the market are identical; These are commodities, goods traded in markets
where consumers view different varieties of the good as essentially interchangeable.
3. All goods sold in the market sell for the same price and everyone has the same information.
4. There are many producers and consumers in the market; No consumer or producer has
influence on the price of the good. Producers are price takers in this model.
2.2 – Demand
All sorts of factors influence how many goods consumer
buy, the most important are:
a. Price
b. Number of consumers
c. Consumers income or wealth
d. Consumer tastes
e. Prices of other goods; A substitute is a good
that can be used in place of another good. A complement is a good that is often purchased
and used in combination with another good
A demand curve is the relationship between the quantity of a good that consumers demand and the
good’s price. The demand choke price is the price at which quantity demanded is zero, it is the
vertical intercept of the inverse demand curve. The inverse demand curve is a demand curve written
in the form of price as function of quantity demanded. There are two different kind of changes in the
demand curve:
1. Changes in quantity demanded are reflected in movements along a given demand curve and
happen when a good’s price changes but everything else stays constant.
2. Changes in demand are reflected in a shift of a good’s entire demand curve and are caused
by changes in any of the factors other than price that influence demand.
2.3 – Supply
Factors that influence supply:
a. Price
b. Suppliers’ cost of production; Production technology is
the processes used to make, distribute and sell a good
c. Number of sellers
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, d. Sellers’ outside option
Supply curves show the relationship between the quantity supplied of a good and the goods price,
holding all other factors constant. The supply choke price is the price at which no firm is willing to
produce a good and quantity supplied is zero, it is the vertical intercept of the inverse supply curve.
The inverse supply curve is a supply curve written in the form of price as a function of quantity
supplied. There are two kinds of different changes in the supply curve:
1. Changes in quantity supplied are reflected in movements along a given supply curve and
happen when a good’s price changes but everything else stays constant.
2. Changes in supply are reflected in shifts of the entire supply curve and are
caused by changes in any factors other than the good’s own price.
2.4 – Market equilibrium
The point where the demand and supply curves cross is the market equilibrium. The
equilibrium price is the only price at which quantity supplied equals quantity demanded.
With a price higher than the equilibrium price, the quantity supplied is greater than the
quantity demanded. Producers want to sell at this high price, but not all producers can
find willing buyers at that price. To eliminate this excess supply, the difference between
the quantity supplied and the quantity demanded at a certain price level, producers need
to attract more buyers and to do this, sellers must lower their prices. As prices falls,
quantity demanded rises and quantity supplied falls until the market reaches the
equilibrium. The opposition situation exists when consumers demand a lot of the good
when the price is low, but that amount is more than producers are willing to supply. To
eliminate this excess demand, difference between the quantity demanded and the
quantity supplied at a certain price level, buyers who cannot find the good available for
sale will bid up the price and producers will be more than willing to raise their price. As price rises,
quantity demanded falls and quantity supplied rises until a
market equilibrium is reached.
A direct influence on the sizes of the equilibrium price and
quantity changes is the size of the demand or supply curve
shift itself. Also the slopes of the curves has an influence
on the size of the changes.
2.5 – Elasticity
An elasticity, is the ratio of the
percentage change in one value to
the
percentage
change in another. The price elasticity of demand is the percentage
change in quantity demand resulting from a given percentage change in
price.
- Markets with large price elasticities of demand, where quantity demanded is sensitive to
price differences, are those where consumers have a lot of ability to substitutes away from
or toward the good in question.
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, - Markets with less price-responsive elasticities of demand, where quantity demanded is fairly
unresponsive to price changes, are those where consumers have fewer options for
substitution.
- Markets with large price elasticities of
supply, where quantity supplied is
sensitive to price differences, are those where it is easy for suppliers to vary their amount of
production as price changes.
- Markets with low price elasticities of supply, where the quantity supplied is fairly
unresponsive to price change, are those where it is difficult to increase production.
Elasticities with magnitudes greater than 1 are referred to as elastic.
Elasticities with magnitudes less than 1 are referred to as inelastic. If
the price elasticity of demand is exactly -1, or the price elasticity of
supply is exactly 1, this is referred to as unit elastic. If price
elasticities are zero, there is no response in quantity to price
changes, the associated goods are called perfectly inelastic. If price
elasticities are infinite in magnitude ( -∞ for demand and +∞ for
supply), the quantity demanded or supplied changes infinitely in
response to any price change, this is referred to as perfectly elastic.
The Law of Demand states that demand should decline if the price increases, the exception are
giffen goods. Giffen goods occur for low income people who dace difficulties saving for luxury goods.
The cross-price elasticity of demand is the ratio of the
percentage change in one good’s quantity demanded tot the percentage change in the price of
another good. If the cross-price elasticity of demand is bigger than 0, it means the goods are
substitutes, otherwise they are complements.
Chapter 3 – Using Supply and Demand to Analyze Markets
3.1 – Consumer and Producer Surplus: Who Benefits in a Market?
Consumer surplus is the difference between the price consumers
would be willing to pay for a good and the price they actually have
to pay. Producer surplus is the difference between the price
producers actually receive for their goods and the cost of
producing them.
3.2 – Price Regulations
A price ceiling establish the highest price that can be paid legally for
a good or service. If the price ceiling is above the market price, it is
nonbinding and will not hinder the free-market outcome. In the
graph on the right, area D is called a transfer, surplus that moves
from producer to consumer, or the other way around, as result of a
price regulation. The deadweight loss (DWL) is the difference
between the maximum total surplus that consumers and producers
could gain from a market and the combined gains they actually reap
after a price regulation. It reflect the inefficiency of the price ceiling and represents the loss of a set
of mutually beneficial, surplus-generating transactions that would have occurred in an unregulated
market with a customer who was willing to buy and a producer who was willing to sell at the market
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