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The Study of Microeconomics

Updated: Apr 21

Hey everyone! In this blog, I wanted to share a little peek at my Introduction to Microeconomics class, lecture notes. At UC Riverside, I am expanding my knowledge in Economics after taking both AP Micro and Macro in high school. Being a Business Major requires a heavy focus on economic studies, therefore this course is important to share in my blog. Right now, I am studying for finals and in light of exam week, I wanted to blog about my experience along with notes, of this class!

Specifically, I will be diving into the last chapters of my Microeconomics textbook and analyze its key micro concepts!


. CHAPTER 6.

. CLASS .


LECTURE NOTES


  • Perfect knowledge is assumption that households possess a knowledge of qualities and prices of everything available on the market, and firms have all info concerning wage rates, capital cost, technology and output prices

  • Perfect competition is industry structure where theres many firms, each being small relative to industry and producing virtually identical products, also where no firm is large enough to have any control over prices

  • Homogenous products are undifferentiated output, because these products are identical to one another

  • People make choices everyday

  1. How much of each product to demand?

  2. How much labor to supply?

  3. How much to spend today? How much to save for future?


DETERMINANTS OF HOUSEHOLD DEMAND

Theres many factor that changes quantity of good/service demanded by household

  • Product price

  • Income

  • Prices of other products

  • Tastes preferences

  • Future income etc expectations


  • Budget constraint are limits imposes on household choices by income wealth and product prices

  • Choice set or opportunity set are set of options that is defines and limited by budget constraint 

  • Because of these constraints household are free to choose what they will and not buy

  • To do this, they weight their choices between that good against all other thing the same $$$ could buy

  • With a limited budget, the real cost of any good is the value of other goods and service that could have been bought with same amount of money


Prices and income affect household’s opportunity set

  • Real income is set of opportunity to buy goods available to house, determined by prices and income

  • Budget constraint equation

  • (P x) (X) + P y (Y) = I

  • P x = price of good X

  • X = quantity of good X consumed

  • P y = price of good Y

  • Y = quantity of good Y consumed

  • I = household income

  • W/P = real wage

  • After solving, you make it into equation and draw a line

  • Lets say price of a good changes, now you go from having a budget constraint with infeasible border outside line → new budget with a newly feasible border between new line and old!


  • Utility is satisfaction of product yields

  • Marginal utility is additional satisfaction gained by consumption of 1 + units

  • Law of diminishing MU means more bought of any good, the lesser the satisfaction generated

  • Marginal utility per dollar/item = marginal utility / price

  • In a table, you have total utility, marginal is difference, price is prices, then the equation. Here you will see law of diminishing utility


With changing the allocations of basketball club and home, here are 2 findings

  1. Utility maximizing consumers (idea of equation ratio of MU of 1 good to its price for all goods) spread out there expenditures until the following condition holds that 

  • MU clubs / P clubs = MU basketball / P basketball

  • Until utility is equal!

  1. Diminishing marginal utility he;ps understand law of demand.

  • You receive increase of utility so a + MU, form buying 1 apple. But the additional increase per dollar is not worth given what you have to give up of other goods. 

  • So if basketball prices fell, even tho we love clubs more, we end up going to more basketball games then clubs.  


  • We assume that products yield a positive MU because you wanted it so you bought it so YOU HAPPY

  • So the MU of substitution being the ratio where household willing to substitute X for Y (MU X / MU Y) is diminishing


Consumers choose the combo of goods. Their choices are consistent with assumption of rationality!


  • Indifference curve is a set of points, each point represents combo of goods X and Y, all of which yield same total utility

  • Indifference curve slope is MRS = △ Y / △ X = MU X / MU Y


THE EQUATION BELOW IS OPTIMAL POINT!

SO WHEN INDIFFERENCE CURVE = BUDGET CONSTRAINT LIKE A POINT THATS SHARED IS BEST POINT!

THE POINT OF BOTH, MEANS THAT SLOPE OF BOTH IS SAME! And IT SHUD BE NEGATIVE


  • The meeting point between indifference curve and budget constraint has problems!

  • They have same slope because 

  • MU Y / P X (MU X / MU Y) = PX / PY (MU Y / P X) =

  • MU X / PX = MU Y / PY





. CHAPTER 7.

. CLASS .


LECTURE NOTES


  • Firm is the organization that comes into being when a person or group decided to produce good to meet a perceived demand. 

  • Production is process by where inputs are combined, transformed and turned into outputs. Firms must must maximum profits and minimize costs

  • The basic decisions of a firm

  1. How much output to supply?

  2. Which production tech to use?

  3. How much of each input to demand?

  • Profit is TR - TC

  • Total revenue is total amount firm takes from sales in product which is P per unit x Quantity of units firms decided to produce

  • Total costs is total fixed costs + total variable costs so TC = FC + VC

  • Economic profit is profit that accounts for both explicitly and opportunity costs

  • EP = Tr - Total economic cost

  • Total economic cost = accounting cost + opportunity cost

  • To treat opportunity cost of capital you need to add normal rate of return to capital as part of economic cost

  • Normal rate of return is capital that is just sufficient to keep wonders and investors satisfied. For risk free firms, it is nearly the same as interest rate on risk free government bonds


EXAMPLE

I want to make belts. 

To start my business, I need outside investment of $20,000

The interest rate is 10% 

My opportunity cost is 20,000 x 0.10 = $2000


TOTAL REVENUE 3000 BELTS X 10$ = $30,000

COSTS

  • RAW MATERIALS = $15,000

  • LABOR COST = $14,000

  • NORMAL RETURN / OC OF CAPITAL = $2000

TOTAL COSTS = $31,000

ECONOMIC PROFIT = -$1000


  • The normal return is the same even if you use your own money instead of borrowing it from other people. So what ever money you need to start is considered, the same. 

  • You could get the interest rate if you lent your $20,000 to someone else, so to use it in your own business you would want a normal return rate / or > interest rate

  • Short run is period of time for which two conditions hold

  1. Firm is operating under fixed scale, fixed factor of production

  2. Firms can neither enter nor exit an industry 

  3. So basically at least one resource is fixed and you cant leave

EXAMPLE:

You sign lease of 6 months of business. Those months is fixed. 

You can keep store, expand or downsize. Once all resources are changeable, you become long run. Meaning you have bigger capital, so its fixed like huge factories that you cant just break down


  • Long run is period of time where there's no fixed factors of production. Firms can increase or decrease scale of operation, and new firms can enter and existing firms can exit

  • Optimal method of production is method that minimizes cost for a given level of output. So your basically money managing.  

  • So for this you must

  1. Market price of output, think about potential revenues

  2. Production techniques that are available, so think how much input needed

  3. Input prices, so think of costs


PRODUCTION PROCESS

  • Production technology is quantitative relationship between inputs and outputs. 

  • Labor intensive tech is tech that relies heavily on human labor instead of capital

  • Capital intensive tech is tech that relies heavily on capital instead of human labor 

  • So Q = F (PRODUCTION TECH) (K(CAPITAL), L(LABOR))


PRODUCT FUNCTIONS

  • Product function/Total product function is a numerical expression of relationship between inputs and outputs. It shows units of total product as a functions of units of inputs

  • The marginal product is additional output that can be produced by adding one more unit of specific input, ceteris paribus

  • Q = K L ^ 1- smth

  • This is MP L = △ Q/ △ L = △ TP/ △ L

  • MP K = △ Q / △ K = △ TP / △ K

  • Law of diminishing returns says that when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of variable input decreases. 

  • EVENTUALLY labor cannot work so much I GOT ITTTT

  • Average product is average amount produced by each unit of variable factor of production

  1. AP L = Q / L = TP / L

  2. AP K = Q / K = TP / K


If marginal product > average product then the average rises!

Meaning that if the extra effort is more than the diminishing, thats great, that means theres profit in terms of products being made


If marginal product is < average product then average falls!

But if extra effort is less because labor is diminishing more, that means we shud stop working because theres no more product being made typa profit


  • When inputs working together in production, we see capital and labor as complementary inputs

  • Meaning, if capital increases, productivity of labor being the amount of output producer per worker per house also increases


Building new modern plants and equipment enhances nation’s productivity!


The cost of minimizing tech depends on relative prices of capital and labor.

  • When labor becomes expensive, firms switching to more capital intensive obvio. 


  • Isoquant is a graph that shows all combos of capital and labor that can be used to produce a given amount of output

  • For output to remain constant, loss of output from using less capital has to be matched by adding output produced by using more labor! So if less capital then more labor

  • Slope of isoquant is MRTS = △ K / △ L = MP L / MP K

  • Marginal rate of technical substitution is rate at which firm can substitute capital for labor and hold output constant which same as slope of isoquant


  • Isocost line is graph that shows all combos of capital and labor available for a given total cost

  • TC = PK (K) + PL (L)

  • Y = mx + b

  • Y = k

  • X = l

  • B = TC / PX

  • M = - (PL) / (PK)

  • When total cost decreases, isocost line shifts inward!

  • When cost of input changes, isocost line rotates


  • Profit maximizing firms will minimize costs by producing their chosen level of output with technology represented by point where isoquant meets isocost line

  • MAKING IT MOST OPTIMAL POINT FOR PROFIT WITH LEAST COSTS! 

  • THIS point is also when the slope is same

  • So if isoquant = isocost then

  • MP L / MP K = PL / PK =

  • MP L / PL = MP K / PK!

  • With multiple isoquants and isocosts, we can form a line at all optimal points calling it is cost curve of TC


  • Accounting profit = TR - AC

  • ECONOMIC profit= TR - EC








. CHAPTER 8.

. CLASS .


LECTURE NOTES


  • To make profits firm must

  1. Know price of output

  2. Know production techniques available

  3. Know price of inputs

  • Total cost is total fixes costs + total variable costs

  • Fixed cost is like rent, so it does not depend on firms level of output. These costs are happening even if there is no revenue

  • Variable cost is cost that depends on level of production chosen SO

  • TC = TFC + TVC

  • Average total cost ATC is total cost / number of units of output

  • So its per unit measure of total costs

  • ATC = TC / Q = AFC + AVC

  • Average fixed costs is total fixed cost divided / number of units of output so a per unit measure of fixed costs

  • As output increases, AFC decrease since we are dividing fixed number by larger and larger quantity so thats great!

  • Spreading overhead is the process of dividing total fixed coast by more units of output. The average fixed cost declines as quantity rises!

  • AFC = TFC / Q

  • Total variable cost curve is graph that shows relationship between total variable cost and level of firms output

  • Marginal cost is the increase in total cost that results from producing 1 + unit of output. This costs reflects changes in variable costs


SHORT RUN

  • In short run, every firm is constrained by some fixed input. This lead to

  1. diminishing returns to variable inputs

  2. Puts limits on capacity to produce

  • As firm approaches capacity it becomes more expensive to produce higher levels of output

  • Marginal costs do increase with output in short run



  • Total variable costs always increase with output

  • Marginal cost is cost of producing each additional unit

  • So the marginal cost curve shows how total variable cost changes with single unit increase in total output

  • △ TVC / △ Q = △ TVC / 1 = MC

  • Average variable cost is total variable cost divided by number of units of output so per unit measure of variable costs

  • AVC = TVC / %


EQUATIONS

  1. TC = TVC + TFC

  2. TVC = TC - TFC

  3. ATC = TC / Q

  4. TC = ATC (Q)

  5. AVC = TVC / Q

  6. TVC = AVC (Q)

  7. AFC = TFC / Q

  8. TFC = AFC (Q)


  • When MC < AC, AC = decreasing

  • When MC > AC, AC = increases

  • MC intersects AVC = at minimum point of AVC




To add TFC and TVC, means adding same amount of total fixed cost to every level of TVC

  • Meaning TC curve has same shape as TVC curve

  • Meaning that high by an amount equal to TFC


  • If AVC falls with output, declining amount added to AVC

  • This causes AVC and ATC to get closer together as output increases, but two lines never meet!


TC = TVC + TFC

ATC + AVC + AFC


IF MC IS < ATC, ATC DECREASES TOWARD MC

IF MC IS > ATC, ATC INCREASES


MC INTERSECTS ATC AT ATC MINIMUM POINT! As shown in graph




  • Total revenue is amount firm takes from products sales

  • TR = PQ

  • Marginal revenue is additional revenue that firms takes when it increases a unit. In perfect comp, MR is = P

  • The MR curve and demand curve face comp firm are identical

  • MR = △ TR / △ Q = △ PQ / △ Q = P


IF P > MC

Then you increase output by 1 unit, so profit changes by △TR - △ TC

WITH TR / TC, profit will increase. So output should increase. 


If opposite, then decrease output


If P = MC then profits are maximized 


The marginal cost curve shows output level that maximizes profit. The MC curve of a perf comp is firms short run supply curve 


Except when price is low, firm pays to shut down. 

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