ECF1100 Microeconomics
ECF1100 Microeconomics Semester 2, 2015 Notes
Textbook: Gans, King, Byford and Mankiw, Principles of Microeconomics 6th Edition, Cengage Learning, Copyright 2015 (ISBN 9780170248525).
Contents Week 1 – Introduction to Economics Notes (Ch. 1, 2, 3) ........................................................................ 3 Week 2 – Market Forces of Supply and Demand Notes (Ch. 4) .............................................................. 6 Week 3 – Market Forces of Supply and Demand Notes (Ch. 5) .............................................................. 8 Week 4 – Market Forces of Supply and Demand Notes (Ch. 6, 7, 8) .................................................... 10 Chapter 6 – Supply, Demand, and Government Policies .................................................................. 10 Chapter 7 – Consumers, Producers and the Efficiency of Markets .................................................. 11 Chapter 8 – Application: The Costs of Taxation ................................................................................ 13 Week 5 – Market Forces of Supply and Demand Notes (Ch. 9, 19) ...................................................... 13 Chapter 9 – Application: International Trade ................................................................................... 15 Chapter 19: The Markets for the Factors of Production ................................................................... 17 Week 6 – Market Forces of Supply and Demand Notes (Ch. 10, 11) .................................................... 17 Chapter 10 – Externalities ................................................................................................................. 19 Chapter 11 – Public Goods and Common Resources........................................................................ 20 Week 7 – Mid Semester Test (No Notes) .............................................................................................. 21 Week 8 – Market Forces of Supply and Demand Notes (Ch. 13) .......................................................... 23 Week 9 – Market Forces of Supply and Demand Notes (Ch. 14) .......................................................... 24 Week 10 – Market Forces of Supply and Demand Notes (Ch. 15, 16).................................................. 24 Chapter 15 – Monopoly .................................................................................................................... 26 Chapter 16 – Monopolistic Competition .......................................................................................... 27 Week 11 – Market Forces of Supply and Demand Notes (Ch. 17)........................................................ 28
Every Diagram You Will Ever Need (Annotated)................................................................................... 30 Circular Flow Diagram ....................................................................................................................... 30 Production Possibilities Frontier (PPF).............................................................................................. 30 Demand Schedule ............................................................................................................................. 31 Demand Curve .................................................................................................................................. 31 Supply Schedule ................................................................................................................................ 31 Supply Curve ..................................................................................................................................... 32 Equilibrium of Supply and Demand .................................................................................................. 32 Perfectly Inelastic Demand (PED = 0)................................................................................................ 33 Inelastic Demand (PED < 1) ............................................................................................................... 33 Unit Elastic Demand (PED = 1) .......................................................................................................... 33 Elastic Demand (PED > 1) .................................................................................................................. 34 Perfectly Elastic Demand (PED = Infinity) ......................................................................................... 34 Total Revenue with Inelastic Demand .............................................................................................. 34 Total Revenue with Elastic Demand ................................................................................................. 35 Perfectly Inelastic Supply (PES = 0) ................................................................................................... 35 Inelastic Supply (PES < 1) .................................................................................................................. 35 Unit Elastic Supply (PES = 1) .............................................................................................................. 36 Elastic Supply (PEs > 1) ...................................................................................................................... 36 Perfectly Elastic Supply (PEs = Infinity) ............................................................................................. 36 Binding Price Ceiling.......................................................................................................................... 37 Binding Price Floor ............................................................................................................................ 37 Tax on Buyers .................................................................................................................................... 38 Tax on Sellers .................................................................................................................................... 38 How the Burden of a Tax is Divided .................................................................................................. 39 Elastic Supply; Inelastic Demand................................................................................................... 39 Inelastic Supply; Elastic Demand................................................................................................... 39 Subsidy to Sellers .............................................................................................................................. 40 How Price Affects Consumer Surplus................................................................................................ 40 How Price Affects Producer Surplus ................................................................................................. 41 Tax Revenue ...................................................................................................................................... 41 How a Tax Affects Welfare................................................................................................................ 42 Tax and Supply Elasticity ................................................................................................................... 42 Tax and Demand Elasticity ................................................................................................................ 43 Effect of Tax Size on Deadweight Loss and Tax Revenue ................................................................. 43 Deadweight Loss
Tax Revenue (Laffer Curve) .................................................................... 43
Cost of Subsidy and Deadweight Loss............................................................................................... 44 How Free Trade Affects Welfare in Exporting Countries .................................................................. 44 How Free Trade Affects Welfare in Importing Countries ................................................................. 45 Effects of a Tariff on an Importing Country ...................................................................................... 45 Effects of an Import Quota on an Importing Country....................................................................... 46 Production Externalities.................................................................................................................... 46 Pollution (Negative)
Technology Spillover (Positive) ................................................... 46
Consumption Externalities ................................................................................................................ 47 Negative
Positive .................................................................................. 47
Pigovian Tax
Pollution Permits.................................................................................. 47
Production Function
Total Cost Curve .................................................................................... 48
Cost Curves for a Typical Firm ........................................................................................................... 48 Average Total Cost in the Short Run and in the Long Run ................................................................ 49 Competitive Firm’s Short-Run and Long Run Curves Curve.............................................................. 49 Profit and Loss in Competitive Firms ................................................................................................ 49 Market Supply with Entry and Exit ................................................................................................... 50 Increase in Demand in Short and Long Run ...................................................................................... 50 Economies of Scale as a Cause of Monopoly .................................................................................... 51 Demand Curves for Competitive and Monopoly Firma .................................................................... 51 Demand and Marginal Revenue (MR) Curves for a Monopoly ......................................................... 51 A Monopolists Profit ......................................................................................................................... 52 Prices and Patents............................................................................................................................. 52 The Inefficiency of Monopoly ........................................................................................................... 52 Monopolistic Competitors in the Short Run ..................................................................................... 53 Monopolistic Competitors in the Long Run ...................................................................................... 53 Welfare with and Without Price Discrimination ............................................................................... 53
Week 4 – Market Forces of Supply and Demand Notes (Ch. 6, 7, 8) Chapter 6 – Supply, Demand, and Government Policies Controls on Prices How Price Ceilings Affect Market Outcomes Price Ceiling – legal maximum on the price at which a good can be sold Non-binding: ceiling price > equilibrium price, economy moves to equilibrium; price ceiling no effect Binding constraint: ceiling price < equilibrium price. When the market price hits the ceiling it can by law move no further. This shortage (Qd > QS) results in mechanisms like waiting in lines (first come, first served) or sellers rationing the good according to personal bias (petrol prices, rent control).
How Price Floors Affect Market Outcomes Price Floor – legal minimum on the price at which a good can be sold Non-binding: floor price < equilibrium price, economy moves to equilibrium; price floor no effect Binding constraint: floor price > equilibrium price. Market price equals floor price and a surplus of goods is created where Qs > Qd. (Ex. minimum wage).
Evaluating Price Controls Market prices result from business/consumer decisions, balancing supply/demand and coordinating economic activity. Policymakers setting prices legally obscures signals guiding resource allocation. Governments sometimes improve market outcomes by setting price controls as they view market’s outcome unfair. These can hurt those they are trying to help: rent controls discourage landlords maintaining buildings and makes housing hard to find; minimum wage causes unemployment.
Taxes Tax Incidence – study of who bears the burden of taxation
On Buyers - Buyers pay tax to government and good price to sellers; demand shifts left by tax size On Sellers - Sellers pay tax to government and costs of producing good; supply shifts left by tax size Summary Taxes discourage market activity; quantity sold is smaller in the new equilibrium. Buyers and sellers share the burden of taxes; buyers pay more for the good and sellers receive less. Taxes on buyers and sellers are equivalent on market outcomes; difference is who sends money to the government.
Elasticity and Tax Incidence Tax burden falls more heavily on less elastic side of the market. When the good is taxed, the side of the market with fewer good alternatives cannot easily leave and must bear more of the tax burden.
Subsidies Subsidy – government payment to consumers/sellers for each unit of a good that is bought/sold Price paid by consumers is less than the price received by sellers (government makes up difference). Buyers and sellers share benefits despite who receives the monetary amount from the government. Buyer demand is more elastic than supply hence majority of benefit goes to suppliers. Cost of subsidies is funded by taxes on other parts of the economy; deadweight loss is represented by the triangle formed by supply and demand curves and the increased quantity with the subsidy.
Binding Price Ceiling
Binding Price Floor
Textbook: Gans, King, Byford and Mankiw, Principles of Microeconomics 6th Edition, Cengage Learning, Copyright 2015 (ISBN 9780170248525).
Contents Week 1 – Introduction to Economics Notes (Ch. 1, 2, 3) ........................................................................ 3 Week 2 – Market Forces of Supply and Demand Notes (Ch. 4) .............................................................. 6 Week 3 – Market Forces of Supply and Demand Notes (Ch. 5) .............................................................. 8 Week 4 – Market Forces of Supply and Demand Notes (Ch. 6, 7, 8) .................................................... 10 Chapter 6 – Supply, Demand, and Government Policies .................................................................. 10 Chapter 7 – Consumers, Producers and the Efficiency of Markets .................................................. 11 Chapter 8 – Application: The Costs of Taxation ................................................................................ 13 Week 5 – Market Forces of Supply and Demand Notes (Ch. 9, 19) ...................................................... 13 Chapter 9 – Application: International Trade ................................................................................... 15 Chapter 19: The Markets for the Factors of Production ................................................................... 17 Week 6 – Market Forces of Supply and Demand Notes (Ch. 10, 11) .................................................... 17 Chapter 10 – Externalities ................................................................................................................. 19 Chapter 11 – Public Goods and Common Resources........................................................................ 20 Week 7 – Mid Semester Test (No Notes) .............................................................................................. 21 Week 8 – Market Forces of Supply and Demand Notes (Ch. 13) .......................................................... 23 Week 9 – Market Forces of Supply and Demand Notes (Ch. 14) .......................................................... 24 Week 10 – Market Forces of Supply and Demand Notes (Ch. 15, 16).................................................. 24 Chapter 15 – Monopoly .................................................................................................................... 26 Chapter 16 – Monopolistic Competition .......................................................................................... 27 Week 11 – Market Forces of Supply and Demand Notes (Ch. 17)........................................................ 28
Every Diagram You Will Ever Need (Annotated)................................................................................... 30 Circular Flow Diagram ....................................................................................................................... 30 Production Possibilities Frontier (PPF).............................................................................................. 30 Demand Schedule ............................................................................................................................. 31 Demand Curve .................................................................................................................................. 31 Supply Schedule ................................................................................................................................ 31 Supply Curve ..................................................................................................................................... 32 Equilibrium of Supply and Demand .................................................................................................. 32 Perfectly Inelastic Demand (PED = 0)................................................................................................ 33 Inelastic Demand (PED < 1) ............................................................................................................... 33 Unit Elastic Demand (PED = 1) .......................................................................................................... 33 Elastic Demand (PED > 1) .................................................................................................................. 34 Perfectly Elastic Demand (PED = Infinity) ......................................................................................... 34 Total Revenue with Inelastic Demand .............................................................................................. 34 Total Revenue with Elastic Demand ................................................................................................. 35 Perfectly Inelastic Supply (PES = 0) ................................................................................................... 35 Inelastic Supply (PES < 1) .................................................................................................................. 35 Unit Elastic Supply (PES = 1) .............................................................................................................. 36 Elastic Supply (PEs > 1) ...................................................................................................................... 36 Perfectly Elastic Supply (PEs = Infinity) ............................................................................................. 36 Binding Price Ceiling.......................................................................................................................... 37 Binding Price Floor ............................................................................................................................ 37 Tax on Buyers .................................................................................................................................... 38 Tax on Sellers .................................................................................................................................... 38 How the Burden of a Tax is Divided .................................................................................................. 39 Elastic Supply; Inelastic Demand................................................................................................... 39 Inelastic Supply; Elastic Demand................................................................................................... 39 Subsidy to Sellers .............................................................................................................................. 40 How Price Affects Consumer Surplus................................................................................................ 40 How Price Affects Producer Surplus ................................................................................................. 41 Tax Revenue ...................................................................................................................................... 41 How a Tax Affects Welfare................................................................................................................ 42 Tax and Supply Elasticity ................................................................................................................... 42 Tax and Demand Elasticity ................................................................................................................ 43 Effect of Tax Size on Deadweight Loss and Tax Revenue ................................................................. 43 Deadweight Loss
Tax Revenue (Laffer Curve) .................................................................... 43
Cost of Subsidy and Deadweight Loss............................................................................................... 44 How Free Trade Affects Welfare in Exporting Countries .................................................................. 44 How Free Trade Affects Welfare in Importing Countries ................................................................. 45 Effects of a Tariff on an Importing Country ...................................................................................... 45 Effects of an Import Quota on an Importing Country....................................................................... 46 Production Externalities.................................................................................................................... 46 Pollution (Negative)
Technology Spillover (Positive) ................................................... 46
Consumption Externalities ................................................................................................................ 47 Negative
Positive .................................................................................. 47
Pigovian Tax
Pollution Permits.................................................................................. 47
Production Function
Total Cost Curve .................................................................................... 48
Cost Curves for a Typical Firm ........................................................................................................... 48 Average Total Cost in the Short Run and in the Long Run ................................................................ 49 Competitive Firm’s Short-Run and Long Run Curves Curve.............................................................. 49 Profit and Loss in Competitive Firms ................................................................................................ 49 Market Supply with Entry and Exit ................................................................................................... 50 Increase in Demand in Short and Long Run ...................................................................................... 50 Economies of Scale as a Cause of Monopoly .................................................................................... 51 Demand Curves for Competitive and Monopoly Firma .................................................................... 51 Demand and Marginal Revenue (MR) Curves for a Monopoly ......................................................... 51 A Monopolists Profit ......................................................................................................................... 52 Prices and Patents............................................................................................................................. 52 The Inefficiency of Monopoly ........................................................................................................... 52 Monopolistic Competitors in the Short Run ..................................................................................... 53 Monopolistic Competitors in the Long Run ...................................................................................... 53 Welfare with and Without Price Discrimination ............................................................................... 53
Week 4 – Market Forces of Supply and Demand Notes (Ch. 6, 7, 8) Chapter 6 – Supply, Demand, and Government Policies Controls on Prices How Price Ceilings Affect Market Outcomes Price Ceiling – legal maximum on the price at which a good can be sold Non-binding: ceiling price > equilibrium price, economy moves to equilibrium; price ceiling no effect Binding constraint: ceiling price < equilibrium price. When the market price hits the ceiling it can by law move no further. This shortage (Qd > QS) results in mechanisms like waiting in lines (first come, first served) or sellers rationing the good according to personal bias (petrol prices, rent control).
How Price Floors Affect Market Outcomes Price Floor – legal minimum on the price at which a good can be sold Non-binding: floor price < equilibrium price, economy moves to equilibrium; price floor no effect Binding constraint: floor price > equilibrium price. Market price equals floor price and a surplus of goods is created where Qs > Qd. (Ex. minimum wage).
Evaluating Price Controls Market prices result from business/consumer decisions, balancing supply/demand and coordinating economic activity. Policymakers setting prices legally obscures signals guiding resource allocation. Governments sometimes improve market outcomes by setting price controls as they view market’s outcome unfair. These can hurt those they are trying to help: rent controls discourage landlords maintaining buildings and makes housing hard to find; minimum wage causes unemployment.
Taxes Tax Incidence – study of who bears the burden of taxation
On Buyers - Buyers pay tax to government and good price to sellers; demand shifts left by tax size On Sellers - Sellers pay tax to government and costs of producing good; supply shifts left by tax size Summary Taxes discourage market activity; quantity sold is smaller in the new equilibrium. Buyers and sellers share the burden of taxes; buyers pay more for the good and sellers receive less. Taxes on buyers and sellers are equivalent on market outcomes; difference is who sends money to the government.
Elasticity and Tax Incidence Tax burden falls more heavily on less elastic side of the market. When the good is taxed, the side of the market with fewer good alternatives cannot easily leave and must bear more of the tax burden.
Subsidies Subsidy – government payment to consumers/sellers for each unit of a good that is bought/sold Price paid by consumers is less than the price received by sellers (government makes up difference). Buyers and sellers share benefits despite who receives the monetary amount from the government. Buyer demand is more elastic than supply hence majority of benefit goes to suppliers. Cost of subsidies is funded by taxes on other parts of the economy; deadweight loss is represented by the triangle formed by supply and demand curves and the increased quantity with the subsidy.
Binding Price Ceiling
Binding Price Floor
