The document contains all the relevant information from the Microeconomics Book used in
the Economics Course at RSM. The notes are color coded and well-structured and include
additional explanations. Grade obtained by studying with this material: 10 (maximum)
RSM BT1210
The document contains all the relevant information from the Microeconomics Book used in
the Economics Course at RSM. The notes are color coded and well-structured and include
additional explanations. Grade obtained by studying with this material: 10 (maximum)
,Economics Block 3 RSM
Contents
Chapter 3: Using Supply and Demand to analyse markets ................................................................................. 8
Consumer and Producer Surplus: Who benefits in a market? ................................................................................. 8
Consumer surplus ................................................................................................................................................ 8
Consumer surplus ................................................................................................................................................ 8
Calculate the producer and consumer surplus .................................................................................................... 9
The distribution of gains and losses from changes in market conditions .......................................................... 10
Calculate the shifts in consumer and producer surpluses ................................................................................. 11
Price regulations .................................................................................................................................................... 11
Price ceilings....................................................................................................................................................... 11
Analysing surplus changes due to regulations using equations ......................................................................... 12
Chapter 4: Consumer Behaviour .................................................................................................................... 13
The consumer’s preferences and the concept of utility ........................................................................................ 13
Assumptions about consumer preferences ....................................................................................................... 13
The concept of utility ......................................................................................................................................... 14
Marginal utility ................................................................................................................................................... 14
Utility and comparisons ..................................................................................................................................... 14
Indifference curves................................................................................................................................................. 14
Characteristics of indifference curves ................................................................................................................ 15
The marginal rate of substitution ....................................................................................................................... 16
The marginal rate of substitution and marginal utility....................................................................................... 16
The steepness of indifference curves ................................................................................................................. 17
The curvature of indifference curves: Substitutes and complements ............................................................... 17
Perfect substitutes ............................................................................................................................................. 18
Perfect complements ......................................................................................................................................... 18
The consumer’s income and the budget constraint .............................................................................................. 19
The slope of the budget constraint .................................................................................................................... 20
Factors that affect the budget constraint........................................................................................................... 20
Nonstandard budget constraints ....................................................................................................................... 20
Implications of utility maximization ................................................................................................................... 26
Chapter 5: Individual and Market demand ..................................................................................................... 31
How income changes affect an individual’s consumption choices ........................................................................ 31
Assumptions about consumer preferences ....................................................................................................... 31
Income elasticities and types of goods .............................................................................................................. 31
The income expansion path ............................................................................................................................... 32
The Engel Curve ................................................................................................................................................. 32
How price changes affect consumption choices .................................................................................................... 33
,Economics Block 3 RSM
Deriving a demand curve ................................................................................................................................... 33
Shifts in a demand curve .................................................................................................................................... 34
Consumer responses to price changes: Substitution and income effects ............................................................. 35
Isolating the substitution effect ......................................................................................................................... 36
Isolating the income effect................................................................................................................................. 38
The total effects ................................................................................................................................................. 38
What determines the size of the substitution and income effects? .................................................................. 38
Giffen Goods ...................................................................................................................................................... 39
The impact of changes in another good’s price: substitutes and complements.................................................... 39
A change in the price of a substitute good ........................................................................................................ 39
Indifference curve shapes, revisited .................................................................................................................. 40
Combining individual demand curves to obtain the market demand curve ......................................................... 41
The market demand curve ................................................................................................................................. 42
The market demand curve ................................................................................................................................. 42
Chapter 6: Producer Behaviour ...................................................................................................................... 43
The basics of production ........................................................................................................................................ 43
Simplifying assumptions about firms’ production behaviour ............................................................................ 43
Production functions .......................................................................................................................................... 44
Production in the short run ................................................................................................................................... 44
Marginal product ............................................................................................................................................... 44
Average product ................................................................................................................................................. 45
Production in the long run ..................................................................................................................................... 45
The Long-Run Production Function.................................................................................................................... 45
The firm’s cost-minimizing problem....................................................................................................................... 46
Isoquants ............................................................................................................................................................ 46
Substitutability ................................................................................................................................................... 47
Isocost lines ........................................................................................................................................................ 48
Identifying minimum cost: Combining isoquants and Isocost lines ................................................................... 50
Input price changes ............................................................................................................................................ 51
Returns to scale...................................................................................................................................................... 51
Factors affecting returns to scale ....................................................................................................................... 52
Technological change ............................................................................................................................................. 52
The firm’s expansion path and total cost curve ..................................................................................................... 53
Chapter 7: Costs............................................................................................................................................ 53
, Economics Block 3 RSM
Costs that matter for decision making: Opportunity costs .................................................................................... 53
Costs that do not matter for decision making: Sunk costs..................................................................................... 54
Sunk costs and decisions .................................................................................................................................... 54
Costs and cost curves ............................................................................................................................................. 54
Flexibility and fixed versus variable costs........................................................................................................... 55
Deriving cost curves ........................................................................................................................................... 55
Average and marginal costs ................................................................................................................................... 56
Average cost measures ...................................................................................................................................... 56
Marginal cost...................................................................................................................................................... 56
Relationships between average and marginal costs .......................................................................................... 57
Short-run and long-run cost curves ....................................................................................................................... 57
Short-run production and total cost curves ....................................................................................................... 57
Short-run versus long-run average total cost curves ......................................................................................... 59
Short-run versus long-run marginal cost curves ................................................................................................ 60
Economies in the production process .................................................................................................................... 60
Economies of scale ............................................................................................................................................. 60
Economies of scale versus returns to scale ........................................................................................................ 61
Economies of scope ........................................................................................................................................... 61
Where Economies of scope come from ............................................................................................................. 62
Chapter 8: Supply in a competitive market ..................................................................................................... 63
Market structures and perfect competition in the short run ................................................................................ 63
Perfect competition ........................................................................................................................................... 63
Profit maximization in a perfectly competitive market.......................................................................................... 64
Total revenue, total cost, and profit maximization ............................................................................................ 64
How a perfectly competitive firm maximizes profit ........................................................................................... 65
Measuring a firm’s profit .................................................................................................................................... 66
Perfect competition in the short run ..................................................................................................................... 68
A firm’s short-run supply curve in a perfectly competitive market .................................................................... 68
The short-run supply curve for a perfectly competitive industry ...................................................................... 69
Producer surplus for a competitive firm in the short run .................................................................................. 70
Producer surplus and profit ............................................................................................................................... 71
Producer surplus for a competitive industry...................................................................................................... 71
Perfect competition in the long run ....................................................................................................................... 72
Entry ................................................................................................................................................................... 72
Exit ..................................................................................................................................................................... 73
Graphing the industry long-run supply curve .................................................................................................... 74
Adjustment between Long-run Equilibria .......................................................................................................... 75
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