Riassunto esame Microeconomics, Prof. Gianfreda Giuseppina, libro consigliato Microeconomics sixth edition , David Besanko / Ronald Braeutigam

Consumer Surplus Welfare

Measure of Ordinary demand functions X(px,py,I) and y(px,py,I) Identify the OPTIMAL CHOICE of goods x,y

Set of OPTIMAL BASKETS

INCOME INCREASES Demand curve SHIFTS For every possible level of income

Income consumption curve

3 THEORY OFTOTAL EFFECT= INCOME EFFECT +SUBSTITUTION EFFECT DEMAND

Because of the DECREASE IN PRICE Increases in qx consumed SUBSTITUTION EFECT:Because of the DECREASE THE PRICE X INCREASING IN PURCHASING POWER INCOME EFFECT: Income e substitution effect

HICKS:INITIAL indifference curve TANGENT to the Budget line Engel curve X NORMAL GOODInitial utility level RESTORING If the SLOPE IS POSITIVE Good is NORMAL COSUMED MORE As income RISESIf the SLOPE IS NEGATIVE Good is INFERIOR CONSUMED LESS As income RISES

SLUTSKY:INITIAL UTILITY LEVEL PASSING from Budget lineInitial PURCHASING POWER RESTORINGThe IE INCREASE OUTWEIGHS Where SE Over the region SLOPES UPWARD The labor supply curve L: LEISUREOUTWEIGHS SE Where the IE Over the region BACKWARD But bends

Y: COMPOSITE GOOD
Backward-bending supply curve
Labor and leisure
w: HOURLY WAGE for labour
T0: TOTAL NUMBER OF HOURS
DAILY INCOME: w (T0 - L)
4 choice of labor and leisure
For buy a unit y OF WORK REDUCES the amount of
The increase in w
Substitution effect
This leads to w/py= SLOPE
Income effect
Composite Good
POSITIVE On LABOUR SUPPLY
Substitution effect and income
Budget constraint
BUDGET LINE: ALL COMBINATIONS
Substitution effect effect Hours of leisure
NEGATIVE LEISURE
NEGATIVE Of LABOUR SUPPLY
Income effect
POSITIVE LEISURE > higher quantities composite goods
wage rate increases
So budget line INCREASES
And optimal choice CHANGES
Any event For which the outcome Is UNCERTAIN
NEXT YEAR 3 THINGS WILL HAPPEN:
EV of a lottery Lottery
Between - Its value could go up by 20 percent to $120 (outcome A).
And payoff of a SURE THING Necessary DIFFERENCE -Its value could remain the same (outcomeThe decision maker INDIFFERENT To make E.G. B).
Risk premium
To make DEC. MAKER INDIFFERENT Must DECREASE Payoff of

sure thing -Its value could fall by 20 percent to $80 (outcome C).

Outcomes: A,B,C

SURE THING Prefer Risk AVERSE: P(A): 0.30 P(B): 0.40 P(C): 0.30

Probability distribution of a lottery Probability: Likelihood that the Outcome will OCCUR

INDIFFERENT All possible outcomes

Probability distribution:5 Risk and And their associated probability

RiskRisk NEUTRAL: uncertainty -P between 0 - 1

Properties: -sum of all P = 1

AVERAGE PAYOFF

A LOTTERY Prefer Expected value Expected value = probability of A x payoff if A occurs + probability of B x payoff if B occurs

Risk LOVING: + probability of C x payoff if C occurs

Var = (A - EV)2(Pr(A)) + (B - EV)2(Pr(B)) + (C - EV)2(Pr(C))

Variance: e.g. internet investmentπ1áu(c1)+π2áu(c2)U(c1,c2)= Standard deviation: SQUARE ROOT of VARIANCE

Expected utility = probability of A x utility if A occurs Expected utility+ probability of B x utility if B occurs+ probability of Z x utility if Z occurs

PAYOFFS IN A LOTTERY Recipes from That the decision maker

Expected value Ratio of PERCENTAGE CHANGEPrice elasticity of demand Price elasticity of demand NEGATIVE (ABSOLUTE VALUE)MORE ELASTIC More substitutes -AVAILABILITY OF SUBSTITUTIONLESS ELASTIC Necessity -NECESSITIES vs LUXURIES DeterminantsMORE ELASTIC LuxuryMORE ELASTIC More important -IMPORTANCE OF BUYER'S BUDGETMORE ELASTIC Long-run -TIME HORIZON (Absolute value)Elasticity FALLS Along linear demand curve from Infinite to 06 Price elasticity of SLOPE COSTANTdemand Linear demandTR and MR Price CAHNGES TR will be CONSTANTElasticity and marginal revenue CONSTANT elasticity demandOf the inverse demand curve MR curve is some CONSTANT fraction Term in brackets are CONSTANTNEUTRAL: Technological progressMPK INCREASES more rapidly: MAXIMUM quantity of output A firm can produceShows Given the Quantities of inputs That might employProduction function Y=f(x1,x2,x3,..xn)MPL INCREASES more rapidly: Thecnology Determines QUANTITY OF OUTPUT To attain A given set of INPUTSSet of points In the

1. PRODUCTION SET

Technically efficient: Created by Points ON or BELOW The production function

2. INCREASING RETURNS TO SCALE:

PRUDUCTION SET: Inputs

FEASIBLE combinations And outputs

3. CONSTANT RETURNS TO SCALE:

Returns to scale

4. DECREASING RETURNS TO SCALE

To vary Q of all its inputs As much as it desires

Long-run:

Short run and long run At least one of The firmÕs input Q Cannot be CHANGED

Short-run:

ALL INPUTS are INCREASED

SIMULTANEOUSLY

Decreasing returns to scale Do NOT IMPLY Decreasing margina returns Shows Total output DEPENDS ON The level of INPUT

5. MARGINAL PRODUCT:

LAW OF DIMINISHING Marginal returns: One input INCREASES Other being FIXED

Total product function At any point EQUALS SLOPE Of the total product curve At that point

6. Production
7. LINEAR PRODUCTION:

Elasticity of substitution AVERAGE PRODUCT: Equal to the slope Of the RAY form the origin

8. Neither increases
9. FIXED-PROPORTION PRODUCTIONFUNCTION
10. Nor decreases
11. AP increases
12. MP greater
13. AP decreasing
14. MP less AN INPUTS VARIES
15. Change in TOTAL PRODUCT

Other inputs FIXED

MARGINAL PRODUCT: COBB-DOUGLAS PRODUCTION FUNCTION: Production function with 2 inputs

Substitutability among inputs CAPITAL (K)

A curve that shows ALL COMBINATIONS of AND LABOUR (L) Can produce OUTPUT

For every unit inease in QL The QK can BE REDUCED RATE at which Measures the Isoquants

Marginal rate of technical Diminishing MRTS substitution

SLOPE NEGATIVE POSITIVE If both MARGINAL PRODUCTS MARIGINAL RATE TOO DIMINISHING MARGINAL RETURNS

K is FIXED To produce EXACTLY THE QUANTITY THEY With K FIXED MINIMUM OF L Firms uses

WANT (Q0) Than LONG-RUN SHORT-RUN HIGHER SHORT-RUN cost minimization

When INPUTS VARIABLE INDEPENDENT OF PRICE DEMAND L (Increase Q increase L) DEPENDENT ON Q VALUE OF SACRIFIED opportunities

DIRECT monetary outlay

EXPLICT COSTS: Fuel Costs E.g. For airline are Salaries Maintenance

NOT INVOLVE outlays of cash

IMPLICIT COSTS: E.g. Income forgoes by not leasing its jets

LABOR: Opportunity cost Value of the BEST ALTERNATIVE FOREGONE (scontata)

CHANGE IN cost-minimizing L /

change in price L NOT BE RECOVERED

Sunk costs Rent

E.g.Price elasticity of demand for Interest

CAPITAL: inputs Find INPUT COMBINATION That MINIMIZES FirmÕs TC Of particolar output

Subject: Producing a GIVEN AMOUNT OF OUTPUT

Desired LEVEL OF OUTPUT CHANGE in 8 cost minimization LABOR

ISOCOST LINE: Combinations CAPITAL Same TC

CONNECTS COST-MINIMIZIONG INPUT

With more output Cost-minimizing INCREASES NORMAL inputs:

With more output Cost-minimizing DECREASES INFERIOR inputs:

ADDITIONAL OUTPUT ON LABOUR =-COST MINIMIZATION

ADDITIONAL OUTPUT ON CAPITAL

TANGENCY CONDITION:

Expansion path DOWNWARD

CHANGE ISOCOST SLOPE Additional dollar to spend on L

SLOPE ISOCOST= -w/r

CHANGE in price of INPUTS: Additional dollar to spend on K

Optimal choice LONG RUN Faces 2 decisions:

INCREASE w CORNER SOLUTION:

DIMINISHING MRTS:

INCREASE cost min. K DECFREASE cost minimizing L

CAPITAL DEMAND CURVE INTERIOR SOLUTION:

INPUT DEMAND: Comparative statics -OPTIMAL LEVEL OF OUTPUT

LABOR DEMAND CURVE COBB-DOUGLAS:

PERFECT

SUBSTITUTES: Substitution with K DO NOT CAUSE INCREASING price of L

PERFECT COMPLEMENTS: INPUT FIXED

Curve shows how TC VARIES with output

CHOOSING ALL INPUTS To MINIMIZING

The SHORT-RUN CURVE To the optimal Q OF INPUTS (long-run) Is EQUALS When the Q OF FIXED INPUTS (Short-run)

COINCIDE AND LONG-RUN CURVE Long-run and short-run costs INCREASE IN P(K) -> TC INCREASES

LONG-RUN total cost curve INPUT PRICE CHANGE:

LONG RUN AC AS AN EVELOPE CURVE: TC(Q) UPWARD

When one INPUT FIXED MINIMIZED TC of units of output STC(Q):

On VARIABLE INPUTS MINIMIZED SUM of EXPENDITURES TVC(Q):

NOT VARY with output FIXED INPUTS TFC: AVERAGE COST and MARGINAL COST

9 cost curve

SHORT-RUN total cost functions ECONOMIES OF SCALE: AVC goes DOWN When OUTPUT goes UP

DISECONOMIES OF SCALE: AVC goes UP OUTPUT goes UP

Economies and diseconomies of scale

Change in TC/ change in output (Q) Output elasticity of total cost MINIMUM POINTS

TR box(Q* x AVC) box Difference between Seller

PRICE TAKER: Buyers

Price-taking firm When MAKE AN

OUTPUT DECISIONNO ALTERING MARKETA firm that TAKES PRICEPRODUCER SURPLUSPS: Revenue box - area under MCPrice and supply curve Area between (Depending on market structure)Short-run market PS: P=MRProfit maximizationMAX AMOUNT WILLING TO PAY Difference between ECONOMIC RENT: PROFIT MAXIMIZATION PRICE-TAKER:INPUTÕS RESERVATION VALUE ECONOMIC RENTOUTSIDE INDUSTRY In its BEST ALTERNATIVE USE By deploying input RETURN RESERVETION VALUE:ADJUST PLANT SIZE ESTABLISHED FIRMS 10 price-taking firm TC (MC) = SLOPE TR (P)LEAVE INDUSTRY TOGETHER MAXIMIXED WHEN: MC=MR=P MC MUST INCREASINGSO PLANT SIZE WAS ADJUST FIRM EXPECTED: P=0.40 Q=75000PROFIT MAXIMIZATION: P=MC PROFIT MAXIMIZATION: THE PROFITS AREAProfit maximization output CHANGESShows howP=MCif P>min(AC)=Ps 0 (shut-down) if P < As MARKET PRICE CHANGESmin(AC) = PsP1 FIRMS (A,B,C) PROFIT 0 CHOOSE TO PRODUCE POSITIVE OUTPUT P=SMC Only if P>AVCAT P1 (FALLS) -> firm A SHUT DOWN NEW FIRM ENTER SUPPLY CURVE:LONG-RUNPRICE FALLS TO

P2 NEW FIRMS ENTER MARKET:NEW FIRM CONTINE ENTERB SHUT DOWN TOO SHOR-RUNNO FIRM ENTER

FirmÕs PROFIT = 0 AT P3 (EFFICIENT) EQUILIBRIUM:

Shows Q SUPPLIED of all firms in the market For each MARKET PRICE When number firms FIXED

MARKET SUPPLY CURVE:At DIFFERENT PRICES That will SUPPLIED in the market Tot Q of output ShowsADJUSTMENTS take place Assuming MARKET EQUILIBRIUM:

ALL FIRMS Q= ALL FIRMS SNO EFFECT on input Changes industry output COSTANT COST INSUTRY:

MARKET SUPPLY CURVE:LS= MARKET SUPPLY CURVEPRICE INPUTS DECREASES OUTPUT INCREASES DECREASING-COST INDUSTRY:

SINGLE SELLERMonopoly MANY BUYERSPROFIT MAXIMIZATION:Monopoly vs competitive Marginal revenue MR= TWICE THE SLOPE OF DEMANDCURVELINEAR DEMAND CURVE:

NATURAL MONOPOLYPRODUCING SAME LEVEL Than TC of other firms Is LESS Producing output TC by single firmDECREAS profit maximization monopolistÕs -UPWARD SHIFT of MCTR Shifts MR and TRINCREASES -DOWNWARD SHIFT OF MC MR=MC -> Q*11 monopoly PROFIT MAZIMIZATIONShift

Marginal cost (MC) is the additional cost incurred for producing one more unit of a good or service. In a market where the price is endogenous (determined by market forces), the supply curve is formed by the relationship between the price and the quantity supplied. When the MC increases, the quantity supplied remains the same at two different prices.

A monopolist, depending on the shape of the demand curve, might supply a different quantity at the same price. Profit-maximization for a monopolist occurs when the price (P) and quantity (Q) are set to maximize profits. If the demand curve shifts to the right (increases), the market demand curve shifts, resulting in an increase in quantity supplied and an increase in profit. When the MC decreases, the price decreases as well, maximizing the monopoly power.

The Lerner Index is a measure of monopoly power.