Micro Alphabetical Meaning of Symbols

Symbol Meaning Symbol Meaning

⇒ Causes Ppc Production Possibilities Curve
↑ Increases Pr Socially Optimal Price
Σ Sum of PS Producer Surplus
↓ Decreases PW World price
∆ Delta = Change in q Firm’s quantity
AFC Average Fixed Costs Q Quantity (amount)
ATC Average Total Costs QD Quantity Demanded
AVC Average Variable Costs QS Quantity Supplied
CS Consumer Surplus R Rent (payment for land)
d Firm’s demand r Real Interest Rate
D Demand S Supply
DL Demand for Labor=MRP SL Supply of Labor=MRC
DWL Deadweight Loss, Efficiency Loss SLF,DLF Supply & Demand for Loanable
Ed Elasticity Coefficient of Demand Funds
FC Fixed Costs SR Short Run
LR Long Run T Tariff or Tax
LR ATC Long Run Average Total Costs TC Total Costs
M Imports TP Total Product
MB Marginal Benefits TR Total Revenues
MBP Marginal Private Benefits TU Total Utility
MBS Marginal Social Benefits VC Variable Costs
MC Marginal Costs W Wage rate
MCP Marginal Private Cost WC Competitive Wage rate
MCS Marginal Social Cost WU Union Wage rate
MP Marginal Product WTO World Trade Organization
MR Marginal Revenues X Exports
MRC Marginal Resource Cost=SL Y Income
MRP Marginal Revenue Product=DL
MU Marginal Utility
p Firm’s price
P Price
PC, QC Competitive Price & Quantity
Pe, Qe Price & Quantity at the initial
equilibrium
Pf Fair Return Price to Monopolist
Pm, Qm Monopolist’s Price & Quantity
 Microeconomics Cue Card
Economic Analysis
1. Point A - Before change
2. ∆ (Delta) = Change Scarcity & Choices Specialize & Trade : Comparative Advantage Benefits
3. Point B - After change Ppc P Gasoline 1. Input or Output problem? _____Output because outputs vary__
MCS2 2.Absolute advantage for each? EM
Heat- .B .G P2 B 3.Comparative advantage for each? EM for Heat, ST for Gasoline
Scarcity & Choice ing ↑ .A MCS1 4.Terms of trade? 1.1 G <1 HO <1.3 G ⇒ Both Benefit

Heating Oil
Oil .F P1 A OOO -Output varies Opportunity cost goes Over
MBS Q IOU - Input varies Opportunity cost goes Under
The Economic Problem ← Q2 Q1 Prompt: Refinery EM produces 33 gal. gasoline or 30 gal. heating oil
* Resources (also called Factors of Gasoline per barrel of crude oil. Refinery ST produces 32 gal. gasoline or 24
Production or Inputs) are scarce. Two Choices are Trade-Off’s gal. heating oil per barrel of crude oil. Should they specialize & trade?
Resources Incomes Gasoline is the opportunity
Economic Analysis cost of heating oil. 30
land (natural) rent 1. A-allocative efficiency (P1=MCS1) Heating Oil Gasoline
labor wages Point F = inefficient use of
2. ∆ - cold winter resources 24 30 1 HO= 33 1 G =
capital interest Oil EM 33/30 = 1.1G 30/33=.9HO
3. B –short run give up gasoline Point G = unattainable in SR
entrepreneurship profits 24 1 HO = 32 1G =
to get heating oil ⇒ new All points on Ppc curve - full-
* Peoples’ wants and needs for Goods and ST 32/24 = 1.3G 24/32=.75HO
allocative efficiency (P2=MCS2) employment & production Gasoline 32 33
Services (Outputs) are unlimited.
Gasoline 32 33

Demand and Demand Elasticity

A Change in Price causes a change in A Change in Anything but P Elastic Demand’s Elasticity Coefficients based on percent of
Quantity Demanded. Move along curve. Price causes a change in slope: ∆Q>∆P⇒flatter change (%∆)
∆P⇒∆QD Demand. Shift the curve. D3 Perfect elastic-horizontal Price Elasticity of Demand Formulas
P 1. A at P1, Q1 ∆ Determinant⇒∆D D2 D1 P BMW * Ed = %∆QDx ÷ %∆Px (No neg. #)
P2 .B 2. ∆ ↑ Price of Typical Determinants or Less ↔ More Q P2 B * Ed = __∆QDx ÷ ∆Px
P1 A cup of coffee Ceteris Paribus Conditions are Cups of Coffee P1 A original QDx original Px
D ⇒ ↓ quantity ∆ Buyer tastes/preferences Economic Analysis D * midpoint (arc) formula: Ed = ∆Q ÷ ∆P
Q2 Q1 Q demanded ∆ Number of buyers / 1. D1 Q2 Q1 Q ΣQ/2 ΣP/2
Cups of Coffee 3. B: P↑, Q↓ population 2. ∆ Population ↑ ⇒ * luxury Elasticity & Total Revenue Test
∆ Income people drink more coffee * close substitute Elastic >1 if P↓⇒TR↑ (opposites)
Law of Diminishing Marginal Utility—The ∆ Price of related goods in Houston. * large % income Unit elastic =1 if ∆P⇒no ∆TR
more of a good a consumer already has, the (substitutes & compliments) 3. D3↑ (QD↑ at every P) * longer time
Inelastic <1 if P↓⇒TR↓ (same direction)
lower the extra (marginal) utility (satisfaction) P
provided by each extra unit. Why the demand curve slopes downward—What causes Inelastic Demand’s
P1 Ed>1 TR=P x Q
a util = a unit of satisfaction the inverse relationship between price and quantity slope: ∆Q<∆P⇒steeper P2 Ed=1
TU demanded? Move along the curve. Perfectly inelastic-vertical Ed<1
TU 1. The Law of Diminishing Marginal P P D Electricity
Consumers . . D
Utility P2 B
* want to Q
2. Income Effect—a lower price has P1
maximize their TR
Q the effect of increasing money P2 P1 A
total utility TR
MU * want the most income⇒buy more of other things D Q2 Q1 Q Q 1 Q2 QD
for their money 3. Substitution Effect—a lower price Q1 Q2 Q * necessity Cross Elasticity Exy=%∆QDx ÷ %∆Py
* MUX = MUY cause people to switch to the purchase Shoes * no close substitute
Income Elasticity EY=%∆QDx ÷ %∆Y
Q PX PY of the “better deal”. * small % income
(Y=income)
Snicker Bars MU * Σ MU = TU 4. Common sense—buy more if price is lower * shorter time
 Supply & Supply Elasticity A Change in Anything but P S2 S1 Elasticity of supply No TR test * Long Run P
Price causes a change in S3 --Slope of Curve All resources can S
Supply. Shift the curve. P S change P1,2
∆ Determinant⇒∆S * Immediately P2 Elastic supply
Typical Determinants or Inelastic supply P1 Horizontal, flat Q 1 Q2 Q
A Change in Price causes a change in Quantity Q
Ceteris Paribus conditions Vertical or steep
Supplied. Move along curve.
∆ resource (factor) prices Less ↔ More Q1&2 Q The key determinant of price elasticity
∆P⇒∆QS Eco Analysis Cups of Coffee * Short Run
∆ technology or technique of supply is the amount of time a seller
P S 1. A at P1, QS1 Economic Analysis More elastic due to P S
∆ taxes/subsidies has to change the amount of the good
P2 B 2. ∆ ↑ Price of 1. S1 firm´s intense use of P2
∆ price of other goods ⇒ they can produce (or supply).
P1 A cup of coffee 2. ∆ Starbucks opens fixed resources P1
production substitution Price Elasticity Coefficient of Supply
⇒ ↑Quantity more stores⇒# sellers↑ (upslopiing)
∆ Price expectations based on % of change, not slope
Q1 Q2 Q supplied 3. S3↑ (QS↑ at every P) Q1 Q2 Q
∆ Number of sellers ES = %∆QSx / %∆Px
Cups of Coffee 3. B: P2↑, QS2↑

Supply / Demand Equilibrium – Product Markets (Industry)

Surplus / Shortage⇒Disequilibrium Consumer & Producer Surplus
iPod’s iPod’s Price S ** Consumers’ surplus is the difference
P $20 Excess Quantity Supplied between that paid (Pe) and what one would
P Eco Analysis S1 Eco Analysis have paid based on utility (Phi)
QS>QD = Surplus
S 1. A--P1, Q1 S2 1. A—P1, Q1 P (Area “e,Phi,Pe”)
$15 Equilibrium Price=Market
P2 2. ∆ greater P1 2. ∆—faster, Phi CS S
B A Price QS=QD
P1 popularity (∆ P2 smaller chips Pe
A B $10 Excess Quantity Demanded
D1 D2 preferences) D (∆ technology) Plo PS e
D QD>QS = Shortage
Q1 Q2 Q ⇒D↑ ⇒S↑ QD Qe QS D
3. B--P2↑,Q2↑ Q1 Q2 Q 3. B--P↓, Q↑ Music CD’s Amount of Qe Q
Economic Analysis surplus (Area “e,Plo,Pe”)
1. Before change - $15/CD, quantity at Qe ** Producers’ surplus is the difference in the
Efficiency Loss = Dead Weight Loss Govt. taxes or regulations or monopoly power 2. Change: Seller raises price to $20 on new hit CD price charged (Pe) and the price a seller
reduce consumer and/or producer surpluses below society’s allocative efficiency. 3. After change – Surplus because QS > QD at the could sell for based on costs (Plo).
higher price
Government Price Floor Government Price Ceiling Excise Taxes and Tax Incidence Tariff=import tax=customs duty Quota – limit on the quantity of imports
P S=MCS P S=MCS (Who really pays the tax depends on Price S US Price S1
elasticity of supply and of demand.) Textiles S2
Pf f Floor - d Apartments P S2 PUSnotrade PUS no trade S3
Pe e Wheat Pe e S1 PW+Tariff PUS+quota
Pc c Ceiling P2 B tax ↑
g PWorld D T T D PWorld D IP IP D
D=MBS D=MBS P1 Cons.Tax D A Cosmetics D D
Q Q Pseller Prod. Tax Q1 Q2 Q3 Q4 Q5 Q US Steel Q1 Q2 Q3 Q4 Q5 Q
QD Qe QS QD Qe QS D 1. Before--Pw+Tariff., produces Q2 , has 1. Before – US pays PUS+quota,
Amount Shortage
Eco Analysis Eco Analysis Analysis Q2 Q1 Q efficiency loss areas “D”, gets tariff produces Q2 , has efficiency loss areas
of surplus amount
1. Before--PeQe 1. Before–PeQe 1. A-- No tax at equilibrium P1 , Q1 revenues areas “T”,and imports Q2 to Q4. “D”, import producer gets extra profits
2. Change – Govt. sets price 2. Change – Govt. sets apt. 2. ∆ --Govt. taxes cosmetics↑⇒per 2. Change—WTO treaty requires US to “IP”, and the US imports Q2 to Q4.
floor to help farmers at Pf. price ceiling to help poor. unit costs↑⇒S↓ (excise–business tax) remove tariffs 2. Change – WTO outlaws quotas
3. After—OS>QD⇒ Surplus 3. After – QD>QS⇒ 3. B – P2, Q2 : Consumer tax=(P2- 3. After – P↓(US pays PWorld ), Q↓ 3. After – P↓ (US pays PWorld ), QUS↓
of wheat & efficiency loss area Apartment shortage & P1)Q2; Producer tax=(P1-Pseller)Q2; (domestically producing to Q1); M↑ (US (domestically producing to Q1),
“efg” efficiency loss area “cde” Efficiency Loss area “D” imports Q1 – Q5) M↑ ( US imports Q5 – Q1)

Sally Dickson, Austin, TX 3

 Law of Diminishing Returns—As extra Short Run Production Costs—TC=FC+VC Marginal Costs: MC is the cost of producing Long Run ATC – All resources variable, none fixed
units of a variable resource/input (labor) are ATC=AFC+AVC one more unit of output. ATC
added to fixed resources (capital,land), MC crosses Economies Constant Diseconomies
output (product, quantity) will decline at TC/Q=ATC Costs ATC and of Scale Returns of Scale LR ATC
TC VC/Q=AVC
TP some point. AVC at to Scale
TP
Cost } FC VC FC/Q=AFC MC their lowest
1) If TP↑,
points.
MP↑ TC VC
Fixed costs
2) If TP↑ Less ATC
FC can’t change No q1 q2 Output
Diminishing, AVC
Cost Q in the short relationship
1 2 3 MP↓ to 0 ATC
• Economies of Scale due to labor & managerial
MP Q run. between
3) If TP↓, specialization, efficient capital⇒per unit costs↓
AFC{ AVC
MPNegative. Q MC and • Constant Returns to Scale⇒per unit costs same
1 2 3 Variable costs MC at lowest point when AFC
Fixed inputs- AVC AFC can change in • Diseconomies of Scale due to inefficiencies from
Short run only Marginal Product (MP) is at its large, impersonal bureaucracy⇒per unit costs↑
Labor MP Q the short run. highest point. These curves are mirror images.

Perfect Competition – The Firm Short Run Loss Minimization Shut Down Decision Long Run Equilibrium Industry and Firm in an Expanding Industry
MR=MC, P>AVC P<AVC MR=MC=min. ATC=P P p
Characteristics Profit Maximization Rule p MC p MC p MC ATC S1 MC ATC
**Very large MR=MC ATC ATC P1 A S2 p1 A MR=d
number of firms p P=MC ATC ATC e AVC AVC ATC
Profits
m
**Standardized MC p Loss f MR=d p MR=d P2 B p2 B MR=d
products p e MR=d D
**Price takers ATC
Economic profit
f p MR=d Q1 Q2 Q q2 q1 q
**Easy entry into
Analysis Industry Firm
and easy exit Firm q q Firm q q Firm q q 1. A--Industry at P1, Q1 equilibrium ⇒ firm price
from market *p=MR=d=AR for firm *p=MR=d=AR for the firm *p=MR=d=AR for the firm
**No non-price Firm q q taker at p1, MR=MC at q1, earns economic profits
*q where MR=MC *q where MR=MC *q where MR=MC
competition *p=MR=d=AR for firm (p1,m,A,ATC)
*loss area (ATC,e,f,p)--price *shut down because fixed *firm in long run equilibrium
(advertising) *q where MR=MC 2. ∆—Other producers see profits and enter the
below ATC & above AVC costs (ATC-AVC=AFC) are where P=MC at min. ATC
**Ex: Agriculture *economic profits area *Fixed costs are covered the least loss possible market⇒number of firms↑⇒industry supply↑ to S2
(p,e,f,ATC) (space between ATC & AVC). 3. B--P↓,Q↑ (industry) ⇒ firm price taker at p2 = MC
=MR at q2 (allocative efficiency), no economic profits
Monopoly – THEORY OF FIRM p2= min. ATC (productive efficiency)
Profit Maximizing Rule Regulated Monopoly Price Discrimination—The
MR=MC *Typically Natural Monopolies practice of selling a product Monopoly becomes Competitive
Characteristics Why Demand and P/C MC with Economies of Scale at more than one price not P Pm > MC ⇒ Pc=MC
**One firm=industry MR aren’t the same: *Fair-Return Price: Pf=ATC ⇒ justified by cost differences.
**Unique product MR<P b/c to sell Q↑, Pm e ATC monopolist breaks even Due to *monopoly power, pm A MC ATC Eli Lily produces
with no close Monopolist P↓ on all ATC
Profits
*Socially Optimal Price: Pr=MC *Ed segregates market, pc B Prozac
substitutes units⇒TR↑ in elastic f
⇒subsidies to monopolist ⇒ *buyers can’t resell product. D
**Price maker P elastic range MR=MC D allocative efficiency Examples: airlines, movies
**Many barriers, unit elastic P/C P varies; MR=D qm qc Q
entry blocked inelastic Qm MR Q Profits above ATCxQm MR
**Little advertising D Q **Qm where MR=MC Pm 1. A P1, Q1 – Monopoly with profits, efficiency loss
P/C MC
except for public MR **Pm where Qm intersects D Pf ATC 2. ∆ The patent protecting Prozac runs out and
ATC
relations PxQ=TR **Eco Profit = (Pm-ATC)Qm Pr MC Profits other firms now produce the generic drug ⇒
**Ex: local utilities, TR or Economic Profit=TR-TC D competition ⇒ firm becomes price taker
ATC MR=D
patented drugs TR Q **Efficiency loss (e, f, MR=MC) MR Q 3. B ↓pc, ↑qc
Qm Q

Sally Dickson, Austin, TX 4

Monopolistic Competition – Theory of the Firm Oligopoly Definitions— Game Theory Ex:--Two Cereal Firms
* Strategic Behavior-A firm General Mills Cereals
Characteristics Monopolistically Competitive firm reaches Long Run Equilibrium Characterisitcs consider reactions of other Ad’s No Ad’s
**Many firms P P/C MC **Few firms firms to its actions. K
**Differentiated S1 p1 Demand $70M $40M
A ATC **Standardized or * Concentration Ratio--% of e l
very elastic. 1
products S2 Profits differentiated market controlled by largest l Ad’s
**Limited control d1 **Interdependence $70M $90M
ATC1 _ _ _ _ _ _ _ _ _ _ _ firms o
over price P1 A p2 B limits price control * Market oligopolistic if at g No
**Few entry P2 MR1 unless collusion $90M $50M
B least 4 firms control 40% g Ad’s
barriers d2 **Many barriers to $40M $50M
* Collusion=Cooperation
**Much non-price MR2 entry * Self-interest⇒non-coop * Dominant Strategy—best for a player no
competition— Industry Q1 Q2 Q Firm q2 q1 q **Non-price * Cartel—a formal collusion matter what other does— Both runs ad’s
many ads,brands 1. A Industry at equilibrium P1, Q1 Firm earning eco profits (p1>ATC) competition high on price, quantity, share even though it is an inferior position.
**Ex: retail 2. ∆ New firms enter industry, S↑ ⇒ firm’s d↓ b/c more close substitutes with product * Game Theory—the study * Payoff Matrix—Payoff or profit to each
trade, clothing, and a smaller share of total demand ⇒ MR↓ differentiation—ads of how people behave in party for each combination of choices
restaurants 3. B Industry ↓P2,↑Q2; Firm in Long Run Equilibrium at ↓p2=ATC, ↓q2 **Ex: Aircraft, tires strategic situations. * Outcome: Qoligopolists > Qmonopolist; Po < Pm

Resource (Factor, Input) Markets

Imperfect Competition or Workers (SL) Gain Monopoly Power as a Union Economic Rent paid for use of Land
Monopsonist (1 firm DL) W Organize all workers R SLand
* Resource demand Pure Competition Labor Market How unions raise Eco Analysis
* Firm can set wages, but if SL=MRC R2 B Austin
derived of product W Market W Firm wages: 1. A at R1, Q0
one more worker hired at WU Real
* MPxP=MRPL=DL W2 B SL2 SL1 W2 B s2=MRC2 * Increase demand 2. ∆ Population↑
higher wage, all current WC A R1 A Estate
The ∆ TR from W1 W1 s1=MRC1 for products ⇒ DL↑ 3. B at R2↑, Q0
A A workers receive pay raise,
each added unit of * Increase
so SL ≠ MRC. DL=MRP Q0 Q
resource DL dL=MRP productivity ⇒ DL↑
* Wages=MRCL=SL W MRC surplus
B SL * Restrict QD QC QS Q Interest paid for use of Capital
The ∆ TC from Analysis Q2Q1 Q q2 q1 labor q membership ⇒ SL↓ 1. A Competitive Equilibrium r SLF = Savers, lenders (House-
each added unit Wc A
1. A Firm is wage taker at W1, q1 Wm * Organize all in labor market--WC,QC holds, firms, govts.
* Profit Max Rule: 2. ∆ baby boomers retire⇒ market SL↓, DLF = Borrowers (Businesses,
C MRP=DL workers ⇒ 2. ∆ Union negotiates W↑
MRPL=MRCL or firm’s MRC↑ Homeowners, Govts.)
negotiate W↑ 3. After QDL<QSL⇒surplus
(Σmrp’s=DL) = SL 3. B Market to W2↑,Q2↓ Firm W2↑, q2↓ Loanable Fund Market r=real interest %
Labor Qm Qc Q of labor at WU

Market Failure and Government Solutions

Public Goods Anti-Trust Laws Lorenz Curve—Income Inequality Causes of Income
* Govt. * Goals: promote competition % of Income Inequality:
Negative Externality—Private Positive Externality—Social benefits to 3rd 100 e
provides the and efficiency * Ability, talent
costs born by society/3rd party parties born by private firms 80 Perfect equality→
goods/service * Laws: Sherman—no * Education/training
P MCS P P MCP 60
* Paid by tax monopoly & no restraints of ←Lorenz Curve * Discrimination
Tax or MCP Subsidy MCS MCS 40 A B
revenues trade (collusive price fixing & * Preferences-types
P2 B Regulation P2 B P1 A Subsidy 20 Complete↓ Inequlity
* Difficult to dividing markets), Clayton—no 0 20 40 60 80 100
of work, leisure
P1 C A P1 A MBS P2 B
exclude non- price discrimination not based % of Families * Unequal wealth
MBS MBP MBS
payers ⇒ on costs, no tying contracts, no Distance between 0e and Lorenz * Market power
Q2 Q1 Q Q 1 Q2 Q Q 1 Q2 freeriders interlocking directorates, Curve shows degree of inequality. * Luck, misfortune
Analysis Gasoline Analysis Higher Education * Shared Federal Trade Commission Gini ratio--numeric measure of Income
1. A—MBS=MCP, Efficiency 1. A—P1,Q1, under- 1. A—P1,Q1 Under- consumption and Wheeler Act—Cease & overall dispersion of income Redistribution
loss (A,B,C)=society’s cost, allocation of resources allocation of resources of good, desist orders & no deceptive Gini ratio = Area A÷Areas A+B Tradeoff: Reduced
resource overallocation 2. ∆—Govt. susidy to 2. ∆—Govt. subsidy to service ⇒ no acts and practices (ads), 0 = perfect equality; .249 = Japan; efficiency,
2. ∆—Govt. taxes or regulates consumers⇒MB↑ universities⇒MC↓ rivalry for Celler-Kefauver —no anti- .435 = USA; .519 = Mexico; 1 = production & total
3. B—MBS=MCS, P2↑, Q2↓ 3. B—P2, Q2, MBS=MCS 3. B—P2,Q2, MBS=MCS good/service competitive mergers. complete inequality income

Sally Dickson, Austin, TX 5

Sally Dickson, Austin, TX 6