Summary for final exam Microeconomics

Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU).

Summary for final exam MICROECONOMICS Chapter 1: Ten Lessons from Economics People face trade-offs efficiency va equity The cost of sth is what you give up to get it Rational people think at the margin People respond to incentives Reward Punishment Trade can make everyone better off Markets are usually a good way to organise economic activity +Market economy: allocates resources through decentralised decisions of firms/ household +Invisible hand Goverments can sometimes improve Market Outcomes Market failure: +Externality Standard of living depends on ability to produce goods and +Market power (Monopoly) services Living standard is affected by (+)Productivity (-)Budget deficit Prices rise when government prints too much money => Inflation 10 Society faces a short term trade off between inflation and unemployment => Philip curve: reduce inflation=temporary rise in unemployment Chapter 2: Thinking like an Economist Producion Possibiliies Fronier: graph that shows various combinaions of output the economy can possibly produce given available factors of Chapter 4: The Market Forces of Supply and Demand Law of Demand: quanity demanded of a good falls when price of the good rises (other things being equal) Supply Chapter 5: Elasticity and its Applications Elasic- if demand changes substanially to changes in price Inelasic- quanity demanded responds slightly to changes in price What inluences Price Elasticity of Demand? Availability of close subsitutes close subsitutes = MORE elasic demand (eg buter and margarine) no subsitutes = less elasic demand (eg eggs) Necessiies vs Luxuries luxuries = elasic (eg high price of yacht = low demand) necessiies = inelasic (eg going to the doctor) Deiniion of Market narrow deiniion = elasic (eg ice cream- other close subsitutes such as frozen yoghurt) broad deiniion = inelasic (eg food- no other subsitute) Time Horizon PE is higher if you spend a big part of your income longer time period = MORE elasic (demand may fall slowly- drasic over ime) Total Revenue = price of good × quantity sold Inelasic: Elasic: incr price = incr revenue incr price = decr revenue Cross Price Elasicity of Demand: Subsitute good : >0 (price of hot dogs and + demand for hamburgers move in same direcion) Complementary good : 0 Inferior goods : Taxes on buyers AND sellers are equivalent ~Only diference is who sends the money tothe government inelastic S, elastic D elastic S, inelastic D Look at the curve: + D curve for buyers + S curve for sellers => which one is STEEPER -> share MORE burden of tax OR Tax burden falls more heavily on side of the market that is LESS ELASTIC Chapter 7: Consumers, Producers and the Eiciency of Markets consumer surplus The amount a buyer is willing to pay for a good - the amount the buyer actually pays for it Lower Price Raises Consumer Surplus producer surplus the amount a seller is paid for a good - the seller's cost of providing it Higher Price raises Producer Surplus Total surplus = Value to buyers - Cost to sellers allocaion of resources that maximises total surplus = eicient Evaluating the Market Equilibrium - allocate supply of goods to buyers who value them most highly (measured by willingness to pay) - allocate demand for goods to the sellers who can produce them at lowest cost - produce the quanity of goods that maximises the sum of consumer and producer surplus- lOMoARcPSD|6916227 Chapter 10: Externalities Chapter 10 – Externalities - Externality – Market Failure, a cost or benefit from an action that affects a bystander They can be positive (beneficial) or negative (adverse) o Market is not efficient o Government can help with externalities  Negative Externalities – other people have to deal with the problem you create You not bear the full of cost of what you are doing  Neighbors barking dog  Air pollution  Loud stereo in the apartment next to you  Internalizing an Externality – the incentives in the market are altered so that individuals take into account the external effects of their actions  Taxes are often used to internalize an externality  In the previous example, if a $1 tax per gallon was imposed then sellers cost = social costs  If market participants must pay social costs then market eq’m = social optimum  Positive Externalities – benefits others and the person/business is not compensated for all of the benefits  Ex Thomas Edison and the light bulb, there is no way that he received all of the benefit from his invention (ex Getting vaccinated, research, individuals attending college/university.)  Private Value – direct value to individuals engaged in the action  External Value – the value to bystanders  Socially Optimal Quantity – where the social value intersects the supply curve o Any value LOWER than this optimal Q, the social value of an additional unit exceeds its COST o Any value HIGHER than this optimal Q, the cost of an additional unit exceeds its SOCIAL VALUE Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Social Value – benefit everybody gets  Private Benefit + Social Benefit = Social Benefit   - With NEGATIVE externality the eq’m quantity will be LARGER than is socially desirable With a POSITIVE externality the eq’m quantity will be SMALLER than is socially desirable Government Policy  Responses to Externalities  Command and Control Policies – control actions directly Ex Limits on air pollution, requiring manufacturers to use a technology to reduce air pollution (low incentive)  Market Based Policies – offer incentives so that individuals will choose the socially optimal quantity Ex Taxes on pollution, subsidies for research, cap-and-trade for pollution  Corrective Tax (& Subsidies) – a tax designed to induce private decisionmakers to take account of the social costs that arise from a negative externality  AKA Pigovian Taxes after Arthur Pigou  The ideal corrective tax is equal to the external cost  Moves economy toward a more efficient allocation of resources o Abatement – when you try to get rid of something bad  Ex Pollution Tax is efficient because: o Firms with low abatement costs will reduce pollution to reduce their tax burden o Firms with high abatement costs have greater willingness to pay tax  Ex Of a Corrective Tax: Gas Tax o Targets negative externalities: congestion, accidents, pollution Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227  Tradable Pollution Permits – when government auctions off permits for rights to pollute  Firms with a low cost of reducing pollution so and sell their unused permits  Firms with high cost of reducing pollution buy the permits  Coase Theorem – Let people deal with externalities privately  Transaction Costs – the costs parties incur in the process of agreeing to and following through on a bargain Chapter 11 – Public Goods & Common Resources - Characteristics of Goods:  Excludable – you can prevent people from consuming it (ie: food, cell service,) (NOT excludable: AM/FM radio signals, national defence etc.)  Rival – if one person’s consumption diminishes others’ use (ie: pizza, someone borrowing your stuff etc.) (NOT rival: mp3 song, cable tv etc.) - Types of Goods:  Private Goods – Excludable & Rival  Ie: clothes, phone, food etc  Public Goods – Not Excludable | Not Rival  Ie: clean air, national defence  Problem with free riders  Not enough of the good is produced because there is little incentive  Common Resource – Not Excludable | Rival  Ie: fishing, public ponds, timber  Free riders  Costs everyone else  Have to be governed so not over used   Natural Monopolies – Excludable | Not Rival  Ie: private parks, cable tv, Netflix - Tragedy of the Commons – When there is a free resource the public will begin to over use it making it no good for anybody Policies can be made to govern and put limits on how much a resource is used (fishing licence etc.) Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Public Sector – Government Interactions & Policy (Part 1) Externalities: type of market failure; a cost or benefit from an action that affects a bystander - Market outcome is not efficient; people committing actions are not bearing full costs/benefits When externalities exist, governments can improve efficiency Supply Curve: shows private cost (costs directly incurred by sellers) Demand Curve: shows private value (prices WTP) Social Cost: Private Cost + External Cost Social Value: Private Value + External Benefit Social Optimum for Negative Externality: Where social cost intersects demand curve - When market equilibrium quantity > social optimum quantity; one solution is taxing sellers Internalizing Externality: market incentives are altered so traders are effected by their actions When market participants pay social costs, then market equilibrium = social optimum Social Optimum for Positive Externality: Where social value intersects supply curve - Private Value: direct value to individuals engaged in the action External Value: the value to bystanders Any value below than optimal Q, social value of an additional unit exceeds its cost Any value above optimal Q, the cost of an additional unit exceeds its social value When market equilibrium quantity < social optimum quantity; one solution is subsidy Government Policy: Two approach or responses to externalities - Command and Control Policies: Control actions directly Market-based Policies: Offer incentives so that individual choices creates social optimum Corrective Tax (Pigovian Taxes): Designed to induce traders to take account of social costs/benefits - Move economy toward a more efficient allocation of resources (social optimum) Ideal Corrective Tax = External Cost Ideal Corrective Subsidy = External Benefit Private Solutions to Externalities: - Moral codes and social sanctions Charities Contracts between market participants and the affected bystanders Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Chapter 13: The cost of production Firm Behaviour and Market Power – Costs of Production (Part 1) “Firms’ sole goal is to maximize profit” Profit: Total Revenue – Total Cost Total Revenue: All the money a firm receives from selling its product Total Cost: The market value of the inputs a firm uses in the production - Explicit Costs: Money costs Implicit Costs: Opportunity costs Accounting Profit (higher or equal to Economic Profit): Total Revenue – Total Explicit Cost Economic Profit: Total Revenue – Total Cost (Implicit and Explicit) Product Function: Relationship between quantity of production inputs and quantity of good outputs  AKA – How much resources needed to produce how much goods Marginal Product (MP): The amount of output that rises when one more unit of input is added  Change in Quantity / Change in Labour (slope of Production Function)  Costs rise by the increase of input and output rises by MPL Marginal Cost (MC): increase in Total Cost from producing one more unit (Change in CTotal / Change in Q) Fixed Costs (FC): Do not vary with the quantity of output produced (flat/constant line on graph) Variable Costs (VC): Vary with the quantity produced Total Costs (TC or CTotal): Fixed Costs + Variable Costs Average Fix Cost (AFC): Fix Cost / Total Quantity (sold or produced) Average Variable Cost (AVC): Variable Cost / Total Quantity (sold or produced) Average Total Cost (ATC): Total Cost / Total Quantity (sold or produced) or the sum of AFC and AVC  U shaped: AFC pulls ATC down at first; eventually rising AVC pulls ATC up  Efficient Scale: Quantity that minimizes ATC (nadir or where MC curve intercepts ATC curve)  When MC < ATC then ATC is falling; when MC > ATC then ATC is rising Short Run: Some inputs are fixed costs Long Run: All inputs are variable (no fixed costs); ATC at any Q is cost per unit Gedownload door nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Long Run ATC (factory sizes): Economies of Scale: ATC falls as Q increases  Cause: When increasing production allows greater specialization (common when low Q) Constant Returns to Scale: ATC stays the same as Q increases Diseconomies of Scale: ATC rises as Q increases  Cause: Coordination problems in large organization; un-manageable(common when high Q) Gedownload door nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Chapter 13 – Costs of Production *We assume that a firm’s sole goal is to maximize profit Total Revenue – Total Cost = Profit  Total Revenue – the money a firm receives from selling its product  Total Cost – the market value of the inputs a firm uses in production   Explicit Costs – require the firm to pay money (ex Money for materials, where money HAS changed hands.) Implicit Costs – does not require money to be paid (ex Opportunity costs of an owner’s time Money has NOT changed hands.) *Cost = what is given up to get something else (time/money etc.)  Accounting Profit = Total Revenue – Total Explicit Costs (always higher than economic profit) Economic Profit = Total Revenue – Total Costs (explicit & implicit)  Production Function – how much you will sell/produce based on inputs  Marginal Product – of any input is the increase in output that occurs when you add one more unit that input, holding all other inputs constant *MPL helps people decide whether they would benefit from hiring more people  Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227  Diminishing Marginal Product – the marginal product of an input falls as the quantity of the input rises  Marginal Cost (MC) – is the increase in Total Cost from producing one more unit MC = TC (total cost)/Q (quantity)   Fixed Costs (FC) – not vary (has to be paid whether or not you are producing) (ex Rent, equipment payments etc.) Variable Costs (VC) – vary with the quantity produced (ex Wages, cost of materials etc.) Total Cost (TC) = FC + VC  Average Fixed Costs (AFC) – Always falling (More produced is lower AFC.) Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227  Average Variable Cost (AVC) – U shaped  Average Total Cost (ATC) – equals total cost divided by the quantity of output (U shaped - always falls at first.)  ATC = TC/Q also ATC = AFC + AVC  Efficient Scale – the quantity that minimizes (is lowest) ATC Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 *MC crosses ATC curve at the lowest point - Short Run Costs Vs Long Run Costs  Short Run (SR) – Some inputs are fixed (factories, land etc.) The costs of these inputs are Fixed Costs  Long Run (LR) – All inputs are variable (firms can build more factories, or sell existing ones.) (always look at minimum) Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Chapter 14 – Competitive Markets Characteristics of Perfectly Competitive Markets  Many buyers and sellers  The goods that are sold are very similar  Firms/Businesses can easily enter or exit the market  No single person can change prices MR = P for a competitive firm (only true for firms in CM) Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 - Shutdown Vs Exit  Shutdown – a SHORT-RUN decision not to produce anything because of market conditions (temporary) (will still pay FC) Cost of shutting down: revenue loss = TR Benefit of shutting down: cost of savings = VC (still pay FC) Shut down if: TR/Q < VC/Q = Shut down if P < AVC  Exit – a LONG-RUN decision to leave the market (zero costs) Cost of exiting: revenue loss = TR Benefit of exiting: cost of savings = TC (zero FC in long run) Exit if: TR/Q < TC/Q = Exit if P < ATC  Sunk Costs – a cost that has already been committed and cannot be recovered  Should be irrelevant to decisions Ex Buffet  FC is a sunk cost – firm must pay whether or not it is producing New firm to enter market when TR > TC = P > ATC - The Zero-Profit Condition  Long-run Equilibrium – the process of entry or exit is complete – remaining firms earn zero economic profit  Zero economic profit occurs when P = ATC *Firms will stay in business if profit is $0 because firms are still earning enough to cover variable costs Accounting profit is positive Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Why the LR supply curve is horizontal if: o All firms have identical costs o Costs not change as other firms enter or exit the market o If either of these assumptions is not true, then LR supply curve slopes upward Firms have different costs a As P rises, firms with lower costs enter the market before those with higher costs b Further increases in P make it worthwhile for higher-cost firms to enter the market, which increases the market quantity supplied – LR market supply curve slopes upward Costs rise as firms enter the market a In some industries, the supply of a key input is limited (amount of land suitable for farming is fixed.) b The entry of new firms increases demand for this input causing its price to rise – increases firms costs Curve is upward sloping Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) lOMoARcPSD|6916227 Chapter 14: Competitive Market Firm Behaviour and Market Power – Competitive Market (Part 2) Competitive Market: - Lots of buyers and lots of sellers Identical goods being sold; homogenous goods Firms/business can easily enter/exit the market No single person can change prices; first two points force each buyer/seller to be a “price taker” Revenue of a Competitive Firm:     Total Revenue (TR): Price x Quantity (P x Q) TR= P x Q Average Revenue (AR): Total Revenue / Quantity or Price (TR/Q = P) Marginal Revenue (MR): Change in total revenue from selling one more unit (TRChange / QChange) Marginal Revenue is equal to price for and only for a competitive firm MR=P=AR Profit Maximization:     - MC When MR > MC then selling more Q increase profit When MR < MC then selling more Q decreases profit When MR = MC then it is Profit Maximization When Q increase by one unit, revenue rises by MR; costs rise by Marginal Cost Change in Profit: MR – MC MC (firm’s supply curve) is upward-sloping, MR is flat horizontal line MR Shut Down vs Exit:  Shut Down: Short-run decision not to produce anything due to market conditions (still pay FC) o Cost: Revenue Loss = Total Revenue o Benefit: Cost Savings = VC o When TR < VC it is a good decision to shut down o Firm’s Decision Rule: Shut down when P < AVC or when MC curve is below AVC Sunk Cost: Committed cost that cannot be recovered (usually FC); should not affect decision MARKET ONE FIRM  Exit: Long-run decision to leave the market (zero costs after Exit) o Cost: Revenue Loss = Total Revenue o Benefit: Cost Savings = Total Cost (VC +FC) o When TR < TC it is a good decision to exit o Firm’s Decision Rule: Exit when P < ATC or when MC curve is below LRATC D D Long Run Equilibrium: Process of entry/exit is complete – remaining firms earns zero economic profit MC CURVE IS SUPPLY CURVE FIRM MC AVC Downloaded by nguyen tuanh (tuanhnguyen2611@gmail.com) MARKET S lOMoARcPSD|6916227 Chapter 15: Monopoly Firm Behaviour and Market Power – Monopolies (Part 3) Monopoly: A firm that is the only seller of a product which has no close substitutes; has market power Main Cause of Monopolies: Barriers to entry – other businesses cannot enter the market A single firm owns all/or almost all of one key resource The government gives a single firm the exclusive right to produce the good Natural monopoly – when a single firm can produce the entire market Q at lower cost Monopoly vs Competition: Demand Curve Monopoly: Same as Market Demand Curve = downward slope (creates DWL – rectangle to where MC| D) For a single firm For market Competitive Market: Individual Demand Curve = straight horizontal line Profit Maximization: MR = MC (use the X-coordinate and match with Demand Curve point) Monopolist’s Profit: (Profit – ATC) x Quantity Price Discrimination: Selling the same good at different prices to different buyers (based on WTP)  Divide people into groups to discriminate (ex Movie Tickets; Airlines; Need-Based Financial Aid) Perfect Price Discrimination: The monopolist captures all CS as profit (no DWL) – doesn’t exist in reality Public Policy toward Monopolies: - Increasing competition with Antitrust Laws: Ban some anticompetitive practices Regulation: Government agencies set the monopolist price MR never equal P Public Ownership Because the more you sell, the smaller the price Do Nothing => MR < D Oligopoly: fewer sellers while Competitive Market is more sellers MC D D FIRM = MARKET MR NO SUPPLY CURVE FOR MONOPOLY Gedownload door nguyen tuanh (tuanhnguyen2611@gmail.com) ... floor Short run: (Small shortage) supply and demand are inelasic Long run: (large shortage) supply and demand for housing is more elasic Tax on seller Tax on buyer => Taxes on buyers AND sellers... The larger is DWL When a tax increases, DWL rises even more When a tax is small, increasing it causes tax revenue to rise When the tax is larger, increasing it causes tax revenue to fall lOMoARcPSD|6916227... higher taxes o Smaller Government – proves less services, but requires less taxes   Tax on labour income is very important, since it is the biggest source of government revenue Marginal Tax Rate