Summary of Microeconomics basic concepts, important!

MICROCONOMICS FOCUSES ON EXCHANGE VIA MARKETS. A MARKET IS MADE UP OF TWO SOURCES: THE
GOODS SOLD (GOODS OR SERVICES) AND THE MEANS TO BUY THEM (PRICES AND MONETARY
TRANSACTIONS).

IN A PERFECTLY COMPETITVE MARKET NO ONE CAN AFFECT THE PRICE.

THE SUPPLY AND DEMAND MODEL – EQUILIBRIUM PRICE AND QUANTITY

THE FACTORS THAT SHIFT THE DEMAND CURVE ARE:

- CHANGES IN PRICES
- CHANGES IN INCOME
- IN TASTE
- IN EXPECTATIONS
- IN THE NUMBER OF CONSUMERS



SUSTITUTE GOODS: GOOD A INCREASED PRICE  PEOPLE GO BUY GOOD B

COMPLEMENTS: GOOD A INCREASED PRICE  NOBODY BUYS GOOD B.

NORMAL GOODS: MORE INCOME, MORE DEMAND.

INFERIOR GOODS: MORE INCOME, LESS DEMAND.



FACTORS THAT ALTER THE SUPPLY CURVE:

- RAISE OR DECREASE IN INPUT PRICES
- PRICE OF RELATED GOODS
- TECHNOLOGY
- EXPECTATIONS ON PRICE IN THE FUTURE
- NUMBER OF PRODUCERS

SURPLUS: QUANTITY SUPPLIED IS MORE THAN DEMANDED AND PRICE IS ABOVE EQUILIBRIUM

SHORTAGE: QUANTITY SUPP IS LESS THAN DEMANDED AND PRICE IS BELOW EQUILIBRIUM.

PRICE CONTROLS ARE IMPOSED BY GOVERNMENTS TO REGULATE PRICES

PRICE CEILINGS ARE MAX LIMIT TO SELLERS

PRICE FLOOR IS THE MINIMUM TO BE CHARGED

PRICE CONTROLS LEAD TO INEFFICIENCY – LOSS OF SURPLUS: DEADWEIGHT LOSS!

- Inefficient allocation to consumers
- Wasted resources
- Low quality



THERES ALSO QUOTA LIMITS … THE GOVERNMENT ISSUES LICENCES TO INDIVIDUALS, GIVING THEM
THE RIGHT TO SELL A GIVEN QUANTITY. THE OWNER OOF A LICENCE EARNS A QUOTA RENT.

, ELASTICITY AND TAXATION:

ELASTICITY IS MINUS P old/Q old

Price elasticity of demand

Perfectly inelastic demand: no price elasticity despite price variation. The demand curve is a vertical
line.

Perfectly elastic demand is a horizontal line. PE>1= elastic (+price – revenue)

PE<1= inelastic (+price +revenue)

P=1 unitelastic.

Total revenue equals price x quantity sold.

Price elasticity is low when the good is a necessity and it is high when the good is a luxury.

Price elasticity is low when there are no close substitutes and it is high when the good can easily be
replaced for cheaper.

CROSS-PRICE ELASTICITY OF DEMAND bwt two goods: %change in q of A demanded/change in price of
B.

It is positive when 2 goods are substitutes +price A + demand for B

It is negative when A and B are complements  + price A – demand for B

INCOME ELASTICITY OF DEMAND: %change in q demanded/ % change in income.

It is positive incase of normal goods +income + demand

It is negative in case of inferior goods. Demand is income elastic if income elasticity of demand for that
good is more than 1.

PRICE ELASTICITY OF SUPPLY: %change in q supplied/%change in price

Perfectly inelastic supply if elasticity is 0 or more

Perf elastic supply= infinito. It is determined by the availability of inputs (+PE when inputs are easily
available).

TAXATION: an excise tax is a tax on sales of a good or service. The tax rate is the amount of tax that
people are required to pay per unit.

+ tax  - transactions – revenue  DWL (inefficiency)

The DWL is less if demand and supply are inelastic.

THE MARGINAL COST is the change in total cost generated by the production of one additional unit of
output= change in total cost/change in quantity of output.

Increasing returns to scale: long run average cost decreases as output increases.

Decreasing returns to scale: long run average cost increases as output increases.ù

Constant returns to scale: average is constant as output increases, so the cost curve is a horizontal line.