Microeconomics Study Guide: Core Concepts and Market Structures

Ch. 1 What is Economics

Introduction to Economics

Economics is the study of how individuals and societies allocate scarce resources to satisfy unlimited wants. It is divided into two main branches: microeconomics (the study of individual decision-makers and markets) and macroeconomics (the study of the economy as a whole).

• Scarce Resource: A resource with limited availability relative to the demand for it.

• Normative Statement: A statement expressing a value judgment about what ought to be.

• Positive Statement: A statement that can be tested and validated; it describes what is.

• Three Principles of Economics: Optimization, Equilibrium, and Empiricism.

• Free Rider Problem: Occurs when individuals benefit from resources without paying for them, leading to under-provision of those resources.

Example: Public goods like national defense are subject to the free rider problem.

Ch. 3 Optimization

Cost-Benefit Analysis and Opportunity Cost

Optimization involves making the best choice given available information, by comparing costs and benefits.

• Cost-Benefit Analysis: A method for comparing the costs and benefits of different choices.

• Opportunity Cost: The value of the next best alternative forgone.

• Marginal Analysis: Examining the additional benefits and costs of a decision.

• Optimization Techniques: Total value and marginal analysis.

Formula:

$\text{Net Benefit} = \text{Total Benefit} - \text{Total Cost}$

Example: Choosing between two jobs by comparing salary and commute time.

Ch. 4 Supply, Demand, and Equilibrium

Perfectly Competitive Markets

In perfectly competitive markets, many buyers and sellers interact, and no single agent can influence the market price.

• Quantity Demanded: The amount of a good consumers are willing to buy at a given price.

• Demand Schedule: A table showing the quantity demanded at different prices.

• Law of Demand: As price decreases, quantity demanded increases, ceteris paribus.

• Quantity Supplied: The amount of a good firms are willing to sell at a given price.

• Law of Supply: As price increases, quantity supplied increases, ceteris paribus.

• Market Equilibrium: The price and quantity at which quantity demanded equals quantity supplied.

Formula:

$Q_d = Q_s$ (at equilibrium)

Example: The intersection of supply and demand curves determines the market price for wheat.

Ch. 5 Consumer Behavior

The Budget Constraint

The budget constraint represents all combinations of goods a consumer can afford given their income and prices.

• Budget Set: All possible consumption bundles a consumer can afford.

• Budget Constraint: The boundary of the budget set.

• Income and Expenditure Equality: $\text{Income} = \text{Expenditure}$

Solving the Consumer's Problem

• Objective: Maximize utility subject to the budget constraint.

• Constraints: Income and prices.

• Utility: Satisfaction derived from consumption.

Elasticity

• Price Elasticity of Demand: Measures responsiveness of quantity demanded to price changes.

• Formula: $\text{Elasticity} = \frac{\%\,\text{change in quantity}}{\%\,\text{change in price}}$

• Cross Price Elasticity: Measures responsiveness of demand for one good to price changes in another.

• Income Elasticity: Measures responsiveness of demand to changes in income.

Example: If the price of coffee rises, the demand for tea (a substitute) may increase.

Ch. 6 Producer Behavior

Production and Costs

Producer behavior focuses on how firms transform inputs into outputs and the associated costs.

• Marginal Product: The additional output from one more unit of input.

• Increasing/Diminishing Returns: Marginal product may rise or fall as input increases.

• Fixed Cost: Costs that do not vary with output.

• Variable Cost: Costs that vary with output.

• Average Total Cost (ATC): $ATC = \frac{TC}{Q}$

• Marginal Cost (MC): $MC = \frac{\Delta TC}{\Delta Q}$

The Firm's Problem

• Objective: Maximize profit.

• Revenue: $\text{Revenue} = \text{Price} \times \text{Quantity}$

• Economic Profit: $\text{Economic Profit} = \text{Total Revenue} - \text{Total Cost}$

Ch. 7 Efficiency of Perfectly Competitive Markets

Market Efficiency and Surplus

Perfectly competitive markets allocate resources efficiently under certain conditions.

• Invisible Hand: The self-regulating nature of the marketplace.

• Social Surplus: The sum of consumer and producer surplus.

• Deadweight Loss (DWL): Loss of total surplus due to market inefficiency.

• Equity-Efficiency Trade-off: Balancing fairness and efficiency in market outcomes.

Formula:

$\text{Social Surplus} = \text{Consumer Surplus} + \text{Producer Surplus}$

Ch. 8 Trade

Production Possibilities and Trade

Trade allows agents to specialize and benefit from comparative advantage.

• Production Possibilities Curve (PPC): Shows maximum output combinations of two goods.

• Absolute Advantage: Ability to produce more of a good with the same resources.

• Comparative Advantage: Ability to produce a good at a lower opportunity cost.

• Terms of Trade: The rate at which goods are exchanged.

Example: If country A can produce wheat more efficiently than country B, it has an absolute advantage.

Ch. 9 Externalities, Public Goods, and Common Pool Resources

Externalities

Externalities are costs or benefits that affect third parties not directly involved in a transaction.

• Negative Externality: Imposes costs (e.g., pollution).

• Positive Externality: Confers benefits (e.g., education).

• Market Inefficiency: Externalities can lead to inefficient market outcomes.

• Reducing Externalities: Private bargaining, government intervention (taxes, subsidies).

Formula:

$MSC = MPC + MEC$ $MSB = MPB + MEB$

Public Goods and Common Pool Resources

• Public Good: Non-excludable and non-rivalrous.

• Free Rider Problem: Individuals benefit without paying.

• Common Pool Resource: Rivalrous but non-excludable (e.g., fisheries).

• Tragedy of the Commons: Overuse of common resources.

Ch. 11 Markets for Factors of Production

Factors of Production and Labor Markets

Markets for factors of production determine the allocation and pricing of inputs like labor, capital, and land.

• Marginal Product of Input: Additional output from one more unit of input.

• Labor-Leisure Trade-off: Workers balance labor supply and leisure to maximize utility.

• Wage Inequality: Differences in wages due to human capital, discrimination, and skill-biased technological change.

Formula:

$\text{Value of Marginal Product} = \text{Marginal Product} \times \text{Price of Output}$

Ch. 12 Monopoly

Monopoly Market Structure

A monopoly is a market with a single seller and no close substitutes.

• Monopoly Power: Ability to set prices above marginal cost.

• Barriers to Entry: Legal, technological, or resource-based obstacles.

• Price Discrimination: Charging different prices to different consumers.

• Deadweight Loss: Inefficiency due to monopoly pricing.

Formula:

$MR = MC$ (profit-maximizing condition for monopoly)

Ch. 14 Oligopoly and Monopolistic Competition

Oligopoly

Oligopoly is a market structure with a few large firms, which may sell homogeneous or differentiated products.

• Strategic Interaction: Firms consider competitors' actions when making decisions.

• Nash Equilibrium: No firm can improve its outcome by changing its strategy unilaterally.

• Bertrand Competition: Firms compete by setting prices.

Monopolistic Competition

• Differentiated Products: Many firms sell similar but not identical products.

• Downward Sloping Demand: Each firm faces a downward sloping residual demand curve.

• Short-run and Long-run Equilibrium: Firms can enter or exit the market, affecting profits.

Table: Summing up the Different Market Structures

Market Structure	# of Firms	Type of Good	Barriers to Entry	Price-Setting Ability	Demand Curve	Social Surplus	Long-run Profits
Perfect Competition	Many	Homogeneous	None	Price Taker	Firm Demand Curve: Horizontal	Maximized	Zero
Monopolistic Competition	Many	Differentiated	None	Some	Firm Demand Curve: Downward Sloping	Not Maximized	Zero
Oligopoly	Few	Homogeneous or Differentiated	Yes, Some	Some	Firm Demand Curve: Downward Sloping	Not Maximized	Positive
Monopoly	One	Unique	Yes, High	Price Maker	Market Demand Curve: Downward Sloping	Not Maximized	Positive

Additional info: Table entries inferred and expanded for clarity and completeness.