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Summary Micro Economy Business Administration EUR
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Summary of the book that belongs to the course Micro-Economics (Business Administration RSM Erasmus University, year 1 block 3)
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Instructors Resource Manual for Microeconomics 3rd Edition by Austan Goolsbee, Steven Levitt, Chad Syverson
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Solution Manual for Microeconomics 3rd Edition by Austan Goolsbee, Steven Levitt, Chad Syverson
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Summary Microeconomics I Economics and Business Economics Vrije Universiteit, ISBN: 9781319153960 Microeconomics I (E_EBE1_MICEC)
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Microeconomie boek samenvatting kort1 Adventures in microeconomics
Microeconomics relies on theories and models to study the choices made by
individuals and firms. Intermediate microeconomics builds on the principle of
microeconomics course by adding mathematical models to the examination of
consumer and producer behaviour. Practicing the mathematics underlying
microeconomic theory is the key to becoming a skilled economist. In addition,
intermediate microeconomics has a strong focus on policy and its effects on
behaviour.
Microeconomics looks at a variety of decisions made by consumers and producers as
they interact in the markets for goods and services, and at the different market
structures in which consumers and producers operate. A wide range of topics deepens
or understanding of the microeconomics, including risk and uncertainty, the role of
information, and the study of behavioural economics. In recent years, microeconomics
has evolved from a discipline that relied primarily on theory to one based empirical
studies (data analysis and experiments).
2 Supply and demand
Economists use models to analyse markets. Models employ simplifying assumptions
to reduce the incredible complexity of the real world so that general insights can be
learned. The supply and demand model is one of the most used analytic frameworks
in economics. This model makes several assumptions about the market that is being
analysed, including that all goods bought and sold in the market are identical, they
are all sold for the same price, and there are many producers and consumers in the
market.
Demand describes the willingness to purchase a product. There are many factors that
affect demand, including price, income, quality, tastes, and availability of substitutes.
Economists commonly use the concept of a demand curve, which essentially divides
these factors into two groups: price and everything else. A demand curve relates
consumers’ quantity demanded to the price of the good while holding every other
factor affecting demand constant. A change in a good’s price results in a movement
along a given demand curve. If nonprice factors change, the quantity demanded at
every price changes and the whole demand curve shifts.
Supply describes the willingness of producers to make and sell a product. Factors that
affect supply include price, available production technologies, input prices, and
producers outside options. Supply curves isolate the relationship between quantity
supplied and price, holding all other supply factors constant. A change in a good’s
price results in a movement along a given supply curve. If nonprice factors change,
the quantity supplied at every price changes and the whole supply curve shifts.
Combining demand and supply curves lets us determine the market equilibrium price,
which is where quantity demanded equals quantity supplied. This equilibrium can be
determined because demand and supply curves isolate the relationships between
quantities and the one factor that affects both demand and supply: price. At the
equilibrium, every consumer who wants to buy at the going price can, and every
producer who wants to sell at the current market price can as well.
, Changes in the factors (other than price) that affect demand or supply will change the
market equilibrium price and quantity. Changes that increase demand and shift out
the demand curve will raise equilibrium price and quantity in the absence of supply
shifts: when the changes decrease demand and shift the demand curve in, price and
quantity will fall. Changes that increase supply and shift out the supply curve,
assuming no change in the demand curve, will increase equilibrium quantity and
reduce price. Changes that decrease supply and shift in the supply curve decrease
quantity and raise price.
If both supply and demand shift, either the effect on equilibrium price or the effect on
equilibrium quantity will be ambiguous. If demand and supply move in the same
direction, equilibrium quantity will follow, but the impact on price is unknown. On the
other hand, if demand and supply move in opposite directions, equilibrium price will
move in the same direction as demand (increase when demand rises, fall when
demand decreases) but we cannot say with certainty what effect on equilibrium
quantity will be.
Economists typically express the sensitivity of demand and supply to various factors,
but especially price, in terms of elasticities. An elasticity is the ratio of the percentage
in two variables. The price elasticity of demand is the percentage change in quantity
demanded for a 1% change in price, and the price elasticity of supply is the
percentage change in quantity supplied for a 1% price change.
Total expenditure and total revenue are both equal to price times quantity demanded.
When demand is elastic (>1), an increase in price will lead to a fall in expenditures
(revenue), while decrease in price will lead expenditures (revenue) to increase. When
demand is inelastic (<1), expenditure (revenue) rises when price rises and falls when
price falls. When demand is unit elastic (=1), a change in price has no effect on total
expenditure.
Other common demand elasticities measure the responsiveness of quantity
demanded to changes in income and the prices of other goods. The income elasticity
of demand is positive for normal goods and negative for inferior goods. The cross-
price elasticity of demand is positive for substitutes and negative for complements.
7 Costs
Economic cost include accounting cost + the opportunity cost of inputs. Opportunity
cost is the value of the value of the input’s next-best use. Decisions should be made
taking opportunity costs into account - that is, on the basis of economic costs, not
accounting cost.
Sunk costs are costs that can never be recovered even if the firm shuts down
completely. Costs that are already sunk should not affect decisions going forward,
because they have already been paid regardless of what choice is made in the
present.
A firm’s total cost can be split into fixed and variable components. Fixed costs does
not change when the firm’s output does and must be paid even if output is zero. It can
only be avoided by the firm completely shutting down and disposing of the inputs (an
action that can be undertaken only in the long run). Variable costs are costs that
change with the output level.
Cost curves relate a firm’s cost to its output quantity. Because fixed cost doesn’t
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