10/9/2013 8:07:00 PM Product Markets: -1 firm= monopoly -2 firms = duopoly -few firms= oligopoly -many firms= perfect competition

Utility: subjective to Income Max U=f[x,y] Income Expenditure Identity: -I= xPx + yPy [Price is constant] -elasticity of demand(Ed): 1% change in quantity demanded -always (-) for normal goods -Elastic goods : Ed>1 -Inelastic goods: Ed<1 -Unit Elastic: Ed=1 -Perfectly Inelastic: Ed=0 -Perfectly Elastic: Ed = infinity -Relationship bwtn. Demand, TR and P: Elastic Demand: P TR Inelastic Demand: P & TR move in same direction

Demand Curve:
-Qdx = f[px,py,I,taste,time] -px= movement of demand curve -py(related good),I, taste, time= shift demand curve -normal goods: price rises & consumption drops -prestigious goods: price rises & consumption rises -Giffen goods: price falls & quantity demanded falls All Giffen goods are inferior but not all inferior goods are giffen goods -giffen paradox : phenomenon of price decreasing only When Income Effect is (-) & more than offsets the substitution effect such that price effect is (+) than its a giffen paradox/giffen good When Income Effect completely offsets SE the demand curve is completely inelastic

Unit Elastic: TR constant - point elasticity: -varies from point to point -income elasticity of demand:

-Elastic: N>1 (ex: luxuries) -Inelastic: N<1 (ex: food) -N = 0 : neutral good -N<0 : inferior good -N>0: normal good -cross-price elasticity:

Cross price > 0 : substitutes Cross price = 0 : unrelated goods Cross price < 0: compliments

Supply Curve: -Qds = f[px,py,cost,technology,

#suppliers] -px= movement of supply curve

-py,cost,tech.,#suppliers= shift of supply curve -Elasticity rules same as elasticity rules of demand Slope: -marginal slope: measure by drawing a tangent to the point -avg. slope: measure by drawing the point to the origin -when 2 curves touch each other their marg. & avg. slope equal -elasticity: ratio of marginal slope to avg. - law of diminishing utility: additional U derived from additional consumption -as you a unit, it has less U -indifference curve: the locust(spot) of all the combos of x,y, which yield the same level of U -[A=B=C] 1) Falling Curve 2) Dont touch each other 3) Convex to origin( budging twd. Origin b/c slope is falling) -marginal rate of substitution(MRS): slope of indifference curve

-price ratio of 2 goods, must be willing to give up 4 units of X for 2 units of Y.

Change of Income:
-Income Consumption Curve(ICC): the locust locust of all consumer equil. Pts. At diff. levels of I, holding price & ratio constant If ICC is both goods(x,y) are normal Goods If ICC straight vertical line, x = income Neutral good If ICC is bending twd. Y axis,x =inferior Good If ICC is bending twd. X axis,y =inferior Good In a consumer budget of N Commodities only (N-1) can Be inferior goods; 1 has to be Normal -Critical level of income: any good is not Inferior at all levels of income; it becomes Inferior @ partial level of I, where it becomes An inferior good -for inferior good demand curve is more inelastic

-defined as the amount of Y a consumer is willing to give up for 1 unit of X; this must be equal to price ratio at equilibrium pt. thus MRS -falling b/c of law of diminishing U -varies from person to person based on taste or preferences; hard to measure -consumer equilibrium point ( for MRS):

Change of Price:
-Price Consumption Curve(PCC): locust of all consumer equil. Pts. @ diff. price ratios,Holding I constant Gives Marshallian Demand Curve

When X and Y stays constant: the cross price =0 & x/y are independent o Aka when PCC is constant x/y are unrelated goods When Y and X : the cross price is (-) & x/y are compliments o Aka when PCC is rising x/y are compliments

-Compensated Demand Curve is drawn from substitution effect when holding U constant -Slursky Approach: I req. to purchase old basket of goods CVs =

Can retrieve price index from it Allows consumers to attain a higher level When Y and X : the cross price of U than Hicks b/c on a higher indiff. is (+) & x/y are substitutes curve o Aka when PCC is falling Risk & Uncertainty: x/y are substitutes -Risk: know probability & possible -Law of Equilibrium Marginal Utility: outcomes; measurable/ controllable Consumer should spend $ where marg. U -Uncertainty: all unknown of -Probability: likelihood of an event, last $1 spent is the same for all $ spent relative frequency of an event -Independence Assumption: No matter of previous outcome, the next flip will have -Hicks Approach: line HH parallel to new budget line tangent to old U curve/ indiff. curve -Compensating Radiation: Change in I req. to Purchase original level of U I req. to buy Original level of U at original prices CVh = -allows you to buy same level of U for Price -P : CVh + -P : CVh same % chance of being something -ex: heads or tails -Expected Value = expected gain

-Fair gamble: a gamble is known to be fair if its EV=0 -Stochastic Risk: coin tosses, roll of die, black jack -Risk Lovers: ppl who rather have a risk w/ something w/ EV of 0 -Risk Averse: someone who prefers a certain outcome to a gamble w/ the same EV - the more curvature of utility the more risk averse

-Risk Neutrality: indifferent btwn. Risk w/ a lottery & something with an EV - Fair Insurance: insurance where the premium is equal to expected loss -Full Insurance: no risk

Taxes:
-Lump sum tax is better than sales tax b/c its only doing income effect allowing the consumer more choices. - Income subsidy is > price subsidy due to more choices

- Ex: When trying to decide how many

workers to hire, one must look at where the MPL of labor and land is >0. There are 3 stages. -Stage I: APL, MPL>APLas long as

Biases in CPI:
-Quality Bias: dont adjust for quality of new product -Wholesale Bias: dont adjust for wholesale prices at places such as department stores -Substitution Bias: doesnt allow consumers to substitute items, overestimates cost of inflation

APL farmer will continue to hire o Here the land is densely distributed over the labor -Stage II: APL, MPL<APL although APL, MPLabor >0, MPLand>0, the TPL is still rising, Laws of Returns: and nothing has hit the (-) mark. - Scaled by holding fixed inputs constant, as we variable inputs, - The farmer will choose output proportionally less than the this option b/c of the law in inputs of Equal Marg. Productivity - Average Product of Labor or Land o APL= Q/L -Law of Equal. Marg. Productivity: Where Marg. product of the last $ - Marginal Product of Labor or Land o MPL= Q/L spent is the same for both inputs APL: MPL>APL -Stage III: TPL,MPL<0 APL: MPL<APL This shows that there are too many APL = Max: workers, the extra workers are MPL=APL getting paid for more than they are TPL = Max: MPL = 0 putting out TPL: MPL<0

-Here the labor is densely distributed over the land -Law of Absolutely Diminishing Returns: when TP

-MPL: Q/L -MPK: Q/K

Short Run:

-Production:
-Isoquant: locust of different combos of L,K which yield same output -difference between Isoquant and ICC is that the ICC is an ordinal concept where the isoquant is a numerical/quantitative concept that can be measured -falls only in Stage II of production -Rate of Technical Substitution:

-Cost curves U shaped b/c of laws of returns -cost curves are mirror reflections of product curves -If choose, choose Stage II b/c APL>0, MPL>0 but still falling -TC = FC + VC -(TC/Q) = (FC/Q) + (VC/Q) -Avg.Cost = Avg. FC + Avg. VC -AC inversely proportional to (1/AP) -MC = (PL/MPL) -MC can be found by VC & TC - MC inversely proportional to (1/MP)

-Constant Returns to Scale:

Fixed Cost:
-L & K will always add up to total cost -Increasing Returns to Scale: -pt. of inflection- where the curve changes shape

-Diminishing Returns to Scale:

-AFC always diminishes but never touches X axis, its a rectangular hyperbola, an asymptote

-Cobbs-Douglass Function: Q=f[L,K] -Cost= L(PL)+K(PK)

-Marg. Cost attains min 1st, then passes through AVC, then ATC -TC parallel to VC -Diff. between TC and VC = FC