Basic Formulas and characteristics for Macro and Micro economics

Macroeconomics Lists You Should Remember:

Conditions for Perfect Competition:

1. Many producers none of whom has a large market share
2. Standardized good (otherwise → monopolistic competition)
3. Free entry - exit in the long-run

Barriers That Guarantee the Monopolistic Condition of a Firm:

1. Control over a scarce resource or input
2. Increasing returns to scale (- ATC as output increases)
3. Technology superiority
4. Network externalities
5. Government barriers (patents, copyrights)

N.B. Same factors for oligopolies but in a less strong way

Government Can:

• Prevent monopoly (non-natural)
• Deal with it (natural) = - Public ownership - Regulation (B: pricing P = min ATC)

Tools for Monopolistic Perfect Price Discrimination:

• Advance purchase restrictions
• Volume discounts
• Two-part tariffs

Factors That Make It Difficult For An Oligopoly To Coordinate on High P:

1. Less concentration (greater number of oligopolists)
2. Complex products and pricing schemes
3. Differences in interests
4. Bargaining power of buyers

(= illegal cartels = price war)

The U-6 Takes on Account:

• Unemployment
• Underemployment
• Discouraged workers
• Marginally attached workers

^{Unemployment rate can over or underestimate the real unemployment}

What Can Bring W > WE:

1. Minimum wages
2. Efficiency wages
3. Labor unions
4. Government policies (unemployment helps)
5. Mismatches between employees and employers

MACROECONOMICS' LISTS YOU SHOULD REMEMBER:

Conditions for Perfect Competition:

• Many producers none of whom has a large market share
• Standardized good (otherwise → Monopolistic competition)
• Free entry - exit in the long-run

Barriers that guarantee the monopolistic condition of a firm:

• Control over a scarce resource or input
• Increasing returns to scale (-ATC as output increases)
• Technology superiority
• Network externalities
• Government barriers (patents, copyrights)

N.B. Same factors for oligopoly but in a less strong way

Government can:

• Prevent monopoly (non-natural)
• Deal with it (natural) = Public ownership
• Regulation (B4 P-rising P = min ATC)

Tools for monopolistic perfect price discrimination:

• Waning purchase restrictions
• Volume discounts
• Two-part tariffs

Factors that make it difficult for an oligopoly to coordinate on high P:

• Less concentration (greater number of oligopolists)
• Complex products and pricing schemes
• Differences in interests = Illegal colludes
• Bargaining power of buyers = Price war

U-6 Takes on account:

• Unemployment
• Underemployment
• Discouraged workers
• Marginally attached workers

Unemployment rate can over or underestimate the real unemployment

What can bring W > UE:

• Minimum wages
• Efficiency wages
• Labor unions
• Government policies (unemployed helps)
• Mismatches between employed and employees

• What can change the natural unemployment:
  1. Changes in labor force characteristics
  2. Changes in labor market institutions
  3. Changes in government policies
• Economic costs imposed by high inflation:
  1. Menu costs
  2. Unit of account costs
  3. Shoe-leather costs
  4. Discourages people from entering in long-term contracts
• Remember: i measures the opportunity cost of investment: the higher it is, the higher the O.C. for I (G I)
• Demand for loanable funds shifters:
  1. Changes in perceived business opportunities
  2. Changes in government borrowing (crowding out when economy is not depressed)
• Supply for loanable funds shifters:
  1. Changes in private savings behavior
  2. Changes in net capital inflow (IM - X)
• r has been driven by:
  • Changes in gov. policies
  • Changes in tech. innovation
  • Changes in expectations about future inflation, which shift both S and D
• The Fisher effect: The expected real interest rate is unaffected by changes in expected future inflation (if S and D for loanable funds change accordingly, growing in the same percentage of the inflation rate)
• The financial system's tasks:
  1. Reducing transactions costs
  2. Reducing risk
  3. Providing liquidity
• Types of financial assets:
  1. Bonds
  2. Loans
  3. Stocks

• Financial intermediaries:
  1. Mutual funds
  2. Pension funds and life insurance companies
  3. Banks
• Financial fluctuations:
  1. Demand for stocks (r + expected value)
  2. Demand for other assets (r + expected value)
  3. Asset price expectations (rational vs irrational)
• CF = C = A + MPC * Yd (relationship with consumer spending and disposable Yd)
  • Shifters:
    1. Changes in expected future Yo (permanent income hypothesis)
    2. Changes in aggregate wealth (life cycle hypothesis)
• I (planned + unplanned) depends on:
  1. r
  2. expected future real GDP
• I planned depends on:
  1. r
  2. expected future real GDP
  3. current level of production capacity
• Inventories = ∅ unplanned = slowing economy (sales ∀ than expected) ∅ inventories = ∃ unplanned = growing economy (sales ∃ than expected)
• Aggregate demand curve (AD):
  • Why does it slope downward?
    • - wealth effect
    • - interest rate effect (+A_I = ∃ demand for borrowings = +r = ∃ I) ∅ C
  • Shifters:
    1. Changes in expectations
    2. Changes in wealth
    3. Size of existing physical capital
    4. Fiscal or monetary policies
• Aggregate supply curve (AS):
  • Slopes downward in short run (sticky wages) vertical in long run because wages are adjustable
  • SRAS shifters:
    1. Changes in commodities prices
    2. Changes in nominal wages
    3. Changes in productivity
  • LRAS shifters:
    1. Physical capital
    2. Human capital
    3. Technological progress

• Fiscal policies (expansionary or contractionary), 3 arguments against:
  1. Government spending always crowds out private spending (wrong)
  2. Government borrowing always crowds out private investments (sometimes)
  3. Government budget deficits lead to reduce private spending (wrong)

Generally: - a change in government purchases or a change in tax/transf. may have some effect on gdp.&balance but # in the economy - changes in g8 are the result, not the cause, of economic fluctuations

• When overall level of interest rates, the opportunity cost of holding money falls (it's more convenient to hold money) & vice-versa (so, MD slopes downward)
• Money demand curve shifters:
  1. Changes in aggregate price level
  2. Changes in real gdp
  3. Changes in credit markets and banking technology
  4. Changes in institutions
• Money supply curve shifters:
  1. The Fed buys U.S. Treasury Bills from Banks (+MS) -> -> r
  2. The Fed sells U.S. Treasury Bills to Banks (-MS) -> -> r
• Long-term bonds rate & short-term bonds rate because:
  • If investors expect +Str -> Buy +St bonds Buy +Lt bonds even if they offer r now
  • If investors expect -Str -> Buy -Lt bonds Buy St bonds even if they offer r now
  <Ltr > Str because of higher risk>
• Expansionary monetary policy -> +MS -> -r -> +I -> +C -> +AD
• Contractionary monetary policy -> -MS -> +r -> -I -> -C -> -AD
• Money is neutral in the long run: the only effect of monetary policies is to increase or decrease P level in the same percentage
  • It doesn't affect r, because the Ad will adjust back (+ prices when gdp +MS -> O md)

Macroeconomics Formulas:

• TR = P x Q
• Profit (π) = TR - TC
• Optimal output rule in perfect competition = P = MC (since P = MR) They produce the last quantity at which there's a profit
• Optimal output rule for a monopolist = MR = MC (with P > MR, cause it takes the price effect into account) (If Pd = a-bQ, TR = P(Q) x Q = aQ-bQ² so MR = a-2bQ )
• Yd = Total income - Taxes + Transfers
• Real GDP = Q. Final goods x Base year prices
• Nominal GDP = Q. Final goods x Current year prices
• Inflation rate = ^{Price index in year 2 - Price index in year 1} / _{Price index in year 1} x 100
• GDP Deflator = ^{Nominal GDP given year} / _{Real GDP given year} x 100 (Measures the level of prices of new final goods in an economy)
• Price index = ^{Cost of market basket given year} / _{Cost of market basket in base year} x 100
• Labor force = Employment + Unemployment
• Unemployment rate = ^Unemployment / _{Labor force} x 100
• Natural unemployment = Structural + Frictional unemployment
• Actual unemployment = Natural + Cyclical unemployment (due to economic downturns)
• In a closed economy: I = Snational (PS + BB)
• In an open economy: I = PS + BB + (IM-X) Snational NCI = Flow of funds
• In 1 year: X (1 + r), in N years: X (1+r)ⁿ _{(₵ X = ¹⁰⁰⁰ / (1+r)ⁿ)₵}

• MPC = ^∆C / _∆disposable income
• Total increase in real GDP from a $1 billion rise in I: ¹/_1-MPC × $1 billion
• ∆C = MPC · ∆Y (change in consumer spending)
• CF : C = a + MPC · ∆Y
• AE_planned = C + I_planned ; GDP = AE_planned + I_unplanned
• Output GDP = ^{Y - Y_p}/_Yp · 100
• Budget Balance : S_gov = T - G - TR

Microeconomics Lists You Should Remember:

• Demand Shifters:

  1. Changes in price of related goods
  2. Changes in income
  3. Changes in tastes
  4. Changes in expectations
  5. Changes in the n° of consumers

• Supply Shifters:

  1. Changes in input prices
  2. Changes in prices of related goods and services
  3. Changes in technology
  4. Changes in expectations
  5. Changes in the number of producers

In Competitive Markets:

1. Allocate consumption among buyers who most value the good
2. Allocate sales to sellers who most value the right to sell the good (lowest prices)
3. All transactions are mutually beneficial

Efficient Markets:

• Property rights
• Correct price signals

≠

Inefficient Markets:

• Monopolistic forces
• Negative externalities
• Asymmetric information

A market in reality is never perfectly efficient

Price Ceilings Effects:

1. Inefficiently low quantity (Qd > Qs)
2. Inefficiently low quality
3. Black markets
4. Wasted resources
5. Inefficient allocation to customers

Price Floors Effects:

1. Inefficiently high quantity (Qd < Qs)
2. Inefficient allocation of sales among sellers
3. Wasted resources
4. Inefficiently high quality
5. Black markets

• Quotas effects:
  1. Deadweight loss
  2. Incentive for illegal occurrences
• When demand is inelastic the price effect dominates the quantity effect:
  • ↑Price = ↓Qd (slightly) or ⊕P = ⊖Qd (slightly) ⊕TR
• When demand is elastic the quantity effect dominates the price effect:
  • ↑Price = ↓Qd (a lot) or ⊕P = ⊖Qd (a lot) ⊖TR
• When demand is unit-elastic the Q effect = P effect:
  • ↑Price = ⊖Qd (in the same proportion) ⊖TR at any price
• Factors that determine the price elasticity of demand:
  1. Availability of close substitutes
  2. The share of income spent
  3. The length of time elapsed since the price change (LRE > SRE)
• Factors that determine the price elasticity of supply:
  1. Availability of inputs
  2. Time elapsed
• Principles of tax fairness:
  1. The benefit principle
  2. The ability-to-pay principle
• The tax falls mainly in the less elastic curve; deadweight loss is lower when demand/supply are inelastic
• Why a rational decision maker might choose a worse payoff:
  1. Fairness
  2. Bounce-rationality (good enough)
  3. Risk aversion
• Irrational decision maker: (makes himself worse off)
  1. Misperceiving opportunity cost
  2. Overconfidence
     • Unrealistic expectations
  3. Counting dollars unequally
     • Better-loss aversion
     • Having a bias toward status quo

The substitution effect (of a change in the price of a good): the change in the Q consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.

The income effect (of a change in the price for a good): the change in the Q consumed of that good as consumer purchasing power changes because of a change in the price for that good.

Normal goods: ⬇️Price → ⬆️Purchasing power ⤷ The 2 effects work → ⬆️Demand in the same direction

Inferior goods: ⬇️Price → ⬆️Purchasing power ⤷ The 2 effects work ⤷ ⬇️Demand in opposite directions

Giffen goods (the income effect dominates ⤷⬆️⬆️⬆️⬇️demand)

2 opposing effects on ATC curve:

1. Spreading effect: the larger the output, the more AFC is spread, leading to lower AFC (dominates at low Q)
2. The diminishing return effect: the larger the output, the more VC (to produce additional units), the higher the AVC (dominates at high Q)

ATC is U-shaped: - Spreading effect at low Q - Diminishing return effect at high Q

Initially, MC slopes downward because of increasing specialization; once specialization is exhausted, diminishing returns set in and MC slopes upward.