Microeconomics Study Guide: Technology, Costs, Market Structures, GDP, and Income Inequality

Chapter 9 – Technology, Production and Cost

Production Functions and Marginal Product

Understanding how firms transform inputs into outputs is central to microeconomics. The production function describes the relationship between input quantities and output quantity.

• Production Function: Shows the maximum output that can be produced with given inputs.

• Marginal Product: The additional output produced by using one more unit of an input, holding other inputs constant.

• Law of Diminishing Marginal Product: As more units of a variable input are added to fixed inputs, the marginal product of the variable input eventually decreases.

• Example: Adding workers to a fixed-size factory increases output, but after a point, each additional worker contributes less to total output.

Types of Costs

Firms face various costs in production, which are classified as follows:

• Total Fixed Cost (TFC): Costs that do not vary with output (e.g., rent).

• Total Variable Cost (TVC): Costs that change with output (e.g., raw materials).

• Total Cost (TC): The sum of fixed and variable costs: $TC = TFC + TVC$

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

• Average Fixed Cost (AFC): $AFC = \frac{TFC}{Q}$

• Average Variable Cost (AVC): $AVC = \frac{TVC}{Q}$

• Marginal Cost (MC): The increase in total cost from producing one more unit: $MC = \frac{\Delta TC}{\Delta Q}$

• Example: If producing 10 units costs $100 and producing 11 units costs $108, then$MC = 8$.

Cost Curves and Their Shapes

Cost curves illustrate how costs change as output changes.

• ATC Curve: Typically U-shaped due to spreading fixed costs and diminishing returns.

• MC Curve: Intersects ATC and AVC at their minimum points.

• Example: As output increases, AFC falls, AVC may fall then rise, and MC eventually rises due to diminishing returns.

Chapter 11 – Firms in Perfectly Competitive Markets

Characteristics of Perfect Competition

Perfect competition is a market structure with many firms selling identical products.

• Features: Many buyers and sellers, identical products, free entry and exit, perfect information.

• Price Taker: Firms cannot influence market price; they accept the market price.

• Example: Agricultural markets like wheat or corn.

Profit Maximization in Perfect Competition

Firms maximize profit where marginal cost equals marginal revenue.

• Marginal Revenue (MR): In perfect competition, $MR = P$ (market price).

• Profit Maximization Rule: Produce where $MC = MR$.

• Shutdown Rule: If price falls below AVC, firm should shut down in the short run.

• Example: If market price is $10, firm produces where$MC = 10$.

Chapter 10 – Monopoly

Monopoly Characteristics and Market Power

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

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

• Barriers to Entry: Legal restrictions, control of resources, economies of scale.

• Example: Local utility companies.

Monopoly Pricing and Output Decisions

Monopolists maximize profit by producing where marginal revenue equals marginal cost, but unlike perfect competition, $MR < P$.

• Profit Maximization: Produce where $MR = MC$.

• Deadweight Loss: Monopoly leads to lower output and higher prices than perfect competition, causing inefficiency.

• Example: If $MC = 5$ and $MR = 5$, monopolist sets output where this is true, but price is set from the demand curve.

Chapter 12 – GDP: Measuring Total Production and Income

GDP Measurement Approaches

Gross Domestic Product (GDP) measures the total value of goods and services produced in a country.

• Expenditure Approach: Adds up spending on final goods and services.

• Income Approach: Adds up incomes earned by households and firms.

• Value Added Approach: Sums the value added at each stage of production.

• Formula: $GDP = C + I + G + (X - M)$, where C = consumption, I = investment, G = government spending, X = exports, M = imports.

• Example: Calculating GDP by adding up all expenditures in the economy.

Nominal vs. Real GDP

Nominal GDP is measured at current prices; real GDP is adjusted for inflation.

• Real GDP: $\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Index}} \times 100$

• Example: If nominal GDP is $1,000 and price index is 125, real GDP is $800.

Income Inequality and Poverty

Income Inequality

Income inequality refers to the uneven distribution of income among individuals or households.

• Measurement: Gini coefficient, Lorenz curve.

• Causes: Differences in education, skills, technology, discrimination.

• Example: Higher income inequality in countries with less access to education.

Poverty

Poverty is the condition where people lack sufficient income to meet basic needs.

• Poverty Line: The minimum income required to meet basic living standards.

• Policies: Government programs, minimum wage, social insurance.

• Example: Food stamps and Medicaid in the US.

HTML Table: Cost Concepts Comparison

Cost Concept	Definition	Formula
Total Cost (TC)	Sum of all costs	$TC = TFC + TVC$
Average Total Cost (ATC)	Cost per unit	$ATC = \frac{TC}{Q}$
Average Fixed Cost (AFC)	Fixed cost per unit	$AFC = \frac{TFC}{Q}$
Average Variable Cost (AVC)	Variable cost per unit	$AVC = \frac{TVC}{Q}$
Marginal Cost (MC)	Cost of one more unit	$MC = \frac{\Delta TC}{\Delta Q}$

Additional info: Some definitions and examples have been expanded for clarity and completeness. The table is inferred from the study guide's listed cost concepts.