Micro-economics

• PPF


  Describes the maximum quantities of goods produced using all available resources in an economy
• Inputs into the PPF

  1. Labour
  2. Land
  3. Capital
• Factors effecting demand

  Complementary goods

  Substitute goods

  Consumer income

  Tastes

  Advertising
• Elasticities of demand

  Price elasticity of demand

  • Elastic: Greater than 1
  • Inelastic: Les than 1
  • Shift ALONG the curve
• Cross elasticity of demand

  Positive result implies substitute goods

  Negative result implies complimentary goods

  Shift IN the curve
• Income elasticity of demand

  Positive = Normal Good

  Greater than 1 = Luxury Good

  Negative = Inferior Good / Necessity
• Giffen Goods


  non-luxury items that generate higher demand when prices rise, creating an upward-sloping demand curve

  No ready substitute or alternative
• Supernormal Profit


  Profit in excess of measured (accounting) or opportunity (economic) costs
• Economies of Scale


  A doubling of all inputs leads to a more than proportionate increase in output
• Short and Long Run Output


  MR=MC is an optimal output

  Where LRAC=LRMC is where diseconomies of scale kick in

  
• Perfect Competition

  • Horizontal demand line
  • price takers
  • Homogeneous products
  • Low concentration
  • No barriers to entry to exit
  • Perfect information
• Perfect Competition


  In the short run, MR=SRMC, and check if this intersection is above the average cost curve

  • If not, then firms will not enter
• Long Run

  • We use where LRMC=LRAC
  • Average Total Cost
• Pure Monopoly


  SMC is short run supply

  LRS is long run supply

  
• Monopolistic Competition

  • Relatively few firms
  • Significant barriers to entry
  • Homogeneous products
  • Demand curve is kinked
• Porter's Five Forces

  • Bargaining power of suppliers
  • Bargaining power of customers
  • threat of new entrants
  • Threat of substitutes
  • Industry rivalry
• Product Life Cycle

  1. Introduction
  2. Growth
  3. Mature
  4. Decline
  5. Obsolescence
• Classical Economics

  Supply will create demand. Costs should adjust to meet demand