Kinh tế vi mô/Microeconomics

I. Objectives
-improve economic literacy + critical thinking + prob. Solving skills
=> Explain+predict economic issues

II. Books and reading

 Principles of Economics – Mankiw, N Gregory (‘09)
 Economics – Davig Begg
III. Topics
1. Basic concepts in (micro)economics
2. Demand and supply
3. Elasticity
4. Consumer behav.
5. Producer behav.
6. Market structures
1. Basic concepts in economics and microeconomics
(key: USP)
Why:
Because resources are scarce and unlimited wants and needs.
 Collocate the wants and needs over a scarce amount of resources

 RESOURCES: a service or other assets used to produce goods and

services to meet human wants and needs.
Include: Land, Capital (K), Labor (L), Entrepreneurship

Land Nature resources

K Physical capital (how to produce)/liquid assets (not
money)
L Exert one’s powers of body/mind (human capital)
Entr. The ability and readiness to develop, organize and run
a business enterprise
What:
To give the decision to allocate the resources and output over limited backgrounds
 To study how society allocate its scarce resources, specifically:
 How people make decisions
 __________ interact with another
 Analyze forces and trends that affect the economy as a whole3
The scientific method:
 Observation -> Theory -> Conducting experiments -> Observation again
Economic models: explains how the economy or part of the economy works
 Assumption: Jugdement about features that can be ignored makes the
world easier to understand
 Assumption ceteris paribus: All other things are equal.
 Holding all other variables constant when one variable is changed
5 forms of society:
 Primitive commune
 Chattel slavery system
 Feudal
 Capitalism/Socialist rep.
 Communismss
Who:
Foundations of economics:
 Classical: Adam Smith (The Wealth of Nations - 1776), Alfred Marshall
 Neoclassical: 1940s-1950s with 6 key ideas:
Scarcity, Opportunity cost, Thinking at the margin, Incentives in individual
decision making, The role of the markets3, Market failure
 1.2. Microeconomics and Macroeconomics
 Microeconomics: The study of ow households and firms make decisions and
how they interact in market
 Macroeconomics: The study of economy-wide phenomena, including
inflation, unemployment, and economic growth
1.3. Economics and policy
Laissex faire
Adam Smith
Little gov. control

Market economy Command economy

Freely determined prices (invisible hand) Centrally planned economy (visible hand)
Free exchange of goods and services Gov. determines prices & prod.
in markets

Mixed economy
A large economy where gov. plays a large role

 Key elements of the market economy:

- Freely determined price
- Property rights and incentives
- Competitive markets
- Freedom to trade at home and abroad
- A role for te gov.
- The role of NGOs (non-government organisations)
2. Optimum economic choice
2.1. People face trade-offs
Make decisions: Compare cost with benefits or alternatives
 Choice’s principles
- Need to choose bc of scarce resources. If resource is already spent in A it
cant be spend in B
- Many ways to spend resources -> easy to choose
- However, ppl face trade-offs
 Choice’s target
- Household: optimize utility
- Firm: optimize profit
- Gov.: optimize social welfare
2.2 Opportunity cost (OC)
The value of the best missed chance when making a choice
 Marginal thinking: compare between:
- Marginal cost (MC): change in total cost resulting from a change from
quantity
∆ TC
MC=
∆Q
- Marginal benefit (MB): change in total benefit resulting from a change
from quantity
∆ TB
MB=
∆Q
Model: The production possibilities frontier
- A graph
- Combinations of output that the economy can possibly produce
- Given the available: Factors of production + Production tech.
To shift the ppf:
- Tech. advance:
 Outward shift + Ecnomic rowth + Produce more of bothh goods
- Increase factor of production
Comparative advantage and international trade
- Imports: Goods and services purchased from other countries
- Exports: Goods and services sold to other countries
- Globalization: The phenomenon of growing economic linkages between
countries
 A country has a comparative advantage if the OC of producing a good or
service is lower for that country that for other countries.
Source of comparative advantage:
- International differences in climate
- Differences in technology
- Factor endownents
2. Demand – Supply
Demand and supply are the two words most often used, the forces that
make market economics work.
 Modern economics is about supply, demand, and market equilibrium.
I. Markets and competition
- Market: A group of buyers and sellers of a particular good or service ->
any institution, mechanism, or arrangement which facilitates exchange.
- Market structures:
 Perfectly competitive:
Homogeneous product
Buyers and sellers are price takers
 Monopoly:
One seller controls price
 Oligopoly:
Few sellers, not aggressive competition
 Monopolistic competition:
Many sellers, differentiated products
II. Demand
1. Definition
 - Relationship between price (P) and quantity demanded (QD) can be
shown:
 Demand schedule – a tabke
 Demand curve – a graph: illustrates how the quantity demanded of the
good changes at its price value, slopes downward.
 Demand function: QD = f(P)
QD = aP + b (a<0)
 P = cQD + d
P only affects QD and not demand
- Types of demand:
 Individual demand: Demand of one individual
 Market demand: Sum of all individual demands for a good or service
 Market demand curve: Sum-indiidual demand curves horizontally
Total quantity demanded of a good varies -> All other factors how much
consumers want to buy are hold constant.
- Shifts in demand
 Increase in demand: Any change that increases the QD at every price ->
Demand curve shifts right
 Decrease in demand: Any change that decreases the QD at every price ->
Demand curve shifts left
- Variables that can shift the demand curve:
 Prices of related good
 Income
- Normal good: other things constant, an increase in income -> an
increase in demand
(necessary goods, luxury goods)
- Inferior good: other things constant, an increase in income -> a decrease
in demand
- Engel curve: Attitude toward any goods depends on buyer’s income, not
on goods’ quality
 Tastes
- Changes in taste -> Changes in demand
- Expectation – abt future (income, prices) -> Affect current demand
- Number of buyers – increase -> Market demand – increase
 Expectations
 Number of buyers
 QDx = f(Px, Py, I, T, E, N)
 - Substitutes: X and Y are subtitutes if the usage of X can be replaced by
the usage of X can be replaced by the usage of Y, if the initial
consumption target is changed.
An increase in the price of one leads to an increase in the demand for
the other
(Price of substitutes goods) Py ↑ → QDy ↓ → QDx ↑
(Price of substitutes goods) Py ↓ → QDy ↑ → QDx ↓
- Complement goods: A and B are complements if the usage of A
must go together with the usage of B to ensure the initial utility
of both goods.
An increase in the price of one leads to a decrease in the demand for the
other
Py ↑ → QDy ↓ → QDx ↓
Py↓ → QDy ↑ → QDx ↑
III. Supply
1. Definition
- Supply (S): An economic principle describes the quantity of
goods/services that supplier is willing to sell and able to sell at various
price level in a certain time, ceretis paribus.
- Quantity supplied (QS): The quantity of goods and services that supplier
es willing to sell and able to sell at a price level in a certain time, ceretis
paribus.
- Law of supply: Other things equall assumption, in a certain time.
When the goods’ price rises, quantity supplied of a good increases.
P↑ → QS ↑
P↓ → QS ↓
- Relationship between P and QS:
Supply schedule – a table: shows the quantity supplied at each price
Supply curve – a graph: illustrates how the quantity supplied of the good
changes as its price varies -> Slopes upward
Supply function: Qs = g(P)
- Individual supply: Supply of one seller
- Market supply: Sum of the supplies of all sellers for a good or service
- Market supply curve:
Sum: Individual supply curves horizontally
Total quantity supplied of all good varies as:
 The good’s price varies
 All other factors that affect how much suppliers want to sell are hold
constant
- Shifts in supply:
 Increase in supply:
Any change that increases the quantity supplied at every price -> Supply
curve shifts right
 Decrease in supply:
Any change that decreases the quantity supplied at every price -> Supply
curve shifts left
 Variables that can shift the supply curve:
Input prices (PI): negatively related to supply
Technology (Te): advance in tech
-> increase in productivity -> TC ↓ -> pi ↑
-> curve shifts right
Gov’s policies (G): tax and subsidy
Expectations abt future (E): affect current supply
Number of sellers (N): N increase -> market supply increase
PI ↓ → TC ↓(Total cost) → pi ↑(profit) → curve shifts right
PI↑ → TC ↑ → pi ↓ → curve shifts left
- Equilibrium – a situation
Market priced has reached the level: quantity supplied = quantity
demanded
1) Equilibrium price – the price:
Balances quantity supplied and quantity demanded
2) Equilibrium quantity:
Quantity supplied and the quantity demanded at the same time
- Surplus: Quantity supplied > quantity demanded -> Excess supply ->
Downward pressure on price
- Shortage: Quantity demanded > quantity supplied -> Excess demand ->
Upward pressure on price
- Law of supply and demand:
 1) The price of any good adjusts -> Bring the quantity supplied and
quantity demanded into the equilibrium
2) Surplus and shortage are temporary
- 3 steps to analyze changes in equilibrium
1. Decide: the event shifts the supply curve, the
demand curve, or both curves
2. Decide: curve shifts to right or to left
3. Use supply-and-demand diagram

 S unchange, (D) shift:

Right: PE up, QE down
Left: PE down, QE down
 D unchange, S shift
Right: PE down, QE down
Left: PE up, QE up
- Price controlling:
 PC: a price ceiling – the highest price allowed in the market -> to protect the
buyer
 PF: a price floor – the lowest price allowed in the market -> to protect the
supplier
IV. Elasticity
Measure of the responsiveness of quantity demanded or quantity supplied to
one of its determinants
1. The elasticity of demand
 The price elasticity of demand: E DP
 The income elasticity of demand: E DPy
 The cross-price elasticity of demand: E DI
1.1. Price elasticity of demand
1.1.1. Definition
Measure of how much quantity demanded of a good responds to 1% change in
the price of that good
D % ∆ QD
: EP=% ∆ P

 Elastic demand: Quantity demanded responds substantially to changes in

the price
 Inelastic demand: Quantity demanded responds only slightly to changes in
the price
1.1.2. Determinants of price elasticity of demand
- Availability of close substitutes
E P <1 -> less subs
D

E P >1 -> more subs

D

- Necessities vs luxuries
E P <1 -> necessities
D

E P >1 -> luxuries

D

- Definition of the market:

o E DP =∞ -> perfectly competitive
 o E DP >1 -> monopolistic competitive
o E DP <1 -> monopoly
- Time horizon
E P <1 -> short-run
D

E P >1 -> long-run

D

1.1.3. Computing the price elasticity of demand

- Use the absolute value
- Arc-elasticity of demand: Midpoint method
o Two points: (Q1, P1) and (Q2, P2)
Q2+Q 1
(Q 2−Q 1)/( )
2
 Price elasticity of demand = P 2+ P 1
( P 2−P 1)/( )
2
(QD 2−QD 1)(P 2+ P 1)
 E DPAB =
(P 2−P 1)(QD 2+QD 1)
- Point-elasticity of demand
o One point (Q*, P*)
D %∆ Q dQ P P
 EP= = × =Q ' ( p)×
%∆ P dP Q Q
1.1.4. Variety of demand curves
a) Demand is perfectly inelastic
o Elasticity = 0
o Demand curve – vertical
b) Demand is inelastic
o Elasticity < 1
c) Demand has unit elasticity
o Elasticity = 1
d) Demand is elastic
o Elasticity > 1
e) Demand is perfectly elastic
o Elasticity = inf
o Demand curve – horizontal
1.1.5. Total revenue and price elasticity of demand
 Total revenue – TR
- Amount of buyers
- Received by sellers of a good
 - Computed as: price of the good times the quantity sold
TR = P x Q
- When demand is inelastic:

 Increase in price
o Increase in total revenue
 P2 < P1
o TR1 = P1 x Q1 = S(white) + S(blue)
o TR2 = P2 x Q2 = S(white) + S(red)
 TR2 < TR1
- When demand is elastic:
 - Elasticity and total revenue along a linear demand curve:
 Linear demand curve
o Constant slove
o Different elasticities
 Pts with low price & high quantity -> inelastic
 Pts with high price & low quantity -> elastic
1.2. Income elasticity of demand (PDF)
D % ∆ QD
EI =
%∆ I

- Normal goods: E DI >0

o Necessities: E DI <1
o Luxurie: E DI >1
- Inferior goods: E DI <0
1.3. Cross-price elasticity of demand
- Measure how much the quantity demanded of a good X responds to 1%
change in the price of another good Y
D % ∆ QDx
E Py =
% ∆ Py
o E DPy > 0 -> substitutes
o E DPy < 0 -> complements
 o E DPy =0 -> independents
2. The elasticity of supply: E Sp
2.1. Definition
- Measure of how much the quantity supplied of a good responds to 1%
change in the price of that good
ESp = % delQs/% del P
- Depends on the flexibility of sellers to change the amount of the good
they produce
 Elastic supply
 Inelastic supply
2.2. Determinant of price elasticity of supply
- Time period
ESp < 1 in short-run
ESp > 1 in long-run
- Substitutions of inputs
ESp < 1 -> less subs of inputs
ESp > 1 -> more subs of inputs
2.3. Computing price elasticity of supply
- Arc elasticity (P1, Q1), (P2, Q2)
Q1−Q2
Q1+Q 2
2
ESp = P 1−P 2
P1+ P 2
2
(Qs 2−Qs 1)(P2+ P 1)
ESp (AB) = (Qs 1+Qs 2)(P 2−P 1) >0
- Point elasticity: A(P, Q)
ESp = % delQs/% del P = Q’(P) x P/Q
2.4. Varieties of elasticity of supply
a) Supply is perfectly inelastic
o Elasticity = 0
o Demand curve – vertical
b) Supply is inelastic
o Elasticity < 1
c) Supply has unit elasticity
 o Elasticity = 1
d) Supply is elastic
o Elasticity > 1
e) Supply is perfectly elastic
o Elasticity = inf
o Demand curve – horizontal
- How the price elasticity of supply can vary

Esp
- Del PD = PE’ – PE = Esp−Edp ×t
Edp
- Del PS = PE – P0 = Esp−Edp ×t
V. Theories of comsumer behavior
- Theories of consumer behavior
 Explanation of how consumers allocate income to purchase different
goods and services
- Utility theory
Utility is the satisfaction of pleasure that a consumer gets from
consuming a bundle of goods or services (market basket)
o A numerical indicator of a person’s satisfaction
o If one item is preferred to some alternative, the utility from the item
is greater than the alternative
o Actual unit of measurement for utility isnt important
 Consumers try to obtain the largest possible total satisfaction
(utility) from the market basket that they buy with their
incomes
- Utility function: formula that assigns level of utility to individual market
baskets
o Baskets of X and Y -> U=f(X;Y) -> U=X*Y -> U=X^(1/2)*Y^(1/2)
o Consumer’s purpose: maximizing total utility
 - Marginal utility (MU): measures additional satisfaction obtained from
consuming 1 additional unit of good/service
o E.g. How much happier is individual from consuming one more
unit of coffee
o The change in total utility due to a one-unit change in the quantity
of a good or service
MU = delU/delQ = U’(Q) = UQ – UQ-1
o Marginal utility decreases when consumption increases
o Principle of diminishing marginal utility
 To a consumer, the larger marginal utility, the higher the
willingness to pay
 The smaller MU, the lower willingness to pay
 The diminishing MU explains the slope downward demand curve
 Application 2: Diminishing marginal utility and Consumer surplus
 Consumer Surplus: the maximum amount a
consumer will be willing to pay for a good depends
upon the expected utility (benefits) of that good.
 CS = MUx – Px
 CSQ* = CS1 + CS2 + … + CSq
= (MU1-P1)+(MU2-P2)+…+(MUq-Pq)
Q

= ∫ ( MU −P ) dQ = TU (total utility) – TE (total expenditure: P x Q)

0
 A lower market price will increase consumer surplus
 A higher market price will reduce consumer surplus
 Consumer Benefit – Consumer expense = Consumer surplus

- Consumer preferences:
 A market basket is a collection of one or more commodities
 Individuals can choose between market baskets containing different goods
 - Basic assumptions:
 Preferences are complete: Consumers can rank market baskets
 Preferences are transitive: If prefer A to B, B to C, the must prefer A to C
 Consumers always prefer more of any good to less: More is better
- Curves indifference:
 Consumers preferences can be represented graphically using indifferent curves
 Indifference curves represent all combinations of market baskets that the person
is indifferent to
o A person will be equally satisfied with either choice
- To describe preferences for all combinations of goods/services, we have a set
of indifference curves – an indifference map
- Indifference curves slope downward to the right
U = X aY b
MUX = U’X = a * YB * Xa-1
MUX = U’y = b * Xa * Yb-1
- Indifference curves can not cross
 Violates preferences
- The shapes of indifference curves describes how a consumer is willing to
substitute one good for another
- We measure how a person trades one good for another using the marginal
rate of substitution (MRS)
 It quantifies the amount of one good a consumer will give up to obtain more of
another good
 It is measured by the slope of the indifference curve
 - If the utility function is U = g(F,C) then MRS = MUF/MUC
- In the difference curves with different shapes imply a different willingness to
substitute
- Two polar cases are of interest
 Perfect substitutes
o Two goods are perfect substitutes when the marginal rate of substitution
of one good for the other is constant
o The line is straight and have the function y = ax + b
 Perfect compliments
o Two goods are perfect complements when the indifference curves for the
goods are shaped as right angles
- Budget constraints
 Prederences do not explain all of consumer behavior
 Budget constraints also limit an individual’s ability to consume in light of the
prices they must pay for various goods and services.
I = PX * X + P Y * Y
- The budget line: PFF + PCC = I
II. Production cost
1. Economic cost, accounting cost and sunk cost
- Economic cosst: total amount paid for inputs used in production, includes:
 Explicit cost: Amount paid for inputs that don’t belong to the firm’s owner
 Implicit cost: ‘’ belong to the firm’s owner”
Economic cost = Explicit cost + Implicit cost
- Accounting cost: Amount paid for inputs used In production and reports in
accounting notes
Economic cost = Accounting cost + Opportunity cost
 Sunk cost: Amount paid for inputs used in production which neither be
refundable nor changeable by future decieios.
2. Cost in short-run
2.1. Fixed cost, variable cost, total cost
- Fixed ciost: the cost of a fixed input, independent qith the output level.
- Variable cost: the cost of a variable input, varies with the output level.
- Total cost: the sum of total fixed cost and total variable cost. TC = VC + FC
 The vertical distance between total cost curve and variable cost curve remain
constant
 2.2.2. Average cost
- Average cosr is toital fixed cost per unit of output
AFC = FC/Q
Relationship between AVC and APL
AVC = VC/Q = wl/Q=w/(Q/l), w/APL
As average product falls, average variable cost will rise substantially
- Average total cost is total cost per unit of output
ATC / TC/1 – AFC + AVC
- Marginsl cost (MC): the change in total cost results from a unit increase in out
put
MC = delT/delQ=TC’(Q)=VC’(Q)
- Relationsjip between MC and AC
MC > AVC: AVC increase
MC < AVC: AVC decrease
MC = AVC: AVC min
- Relationship between MC and ATC
- MC > ATC: ATC increase
- MC < ATC: ATC decrease
- MC = ATC: ATC min
AVC’ = (VC/Q)’= (VC’*Q-VC)/Q^2=MC*Q-AVC/Q^2=MC-AVC/Q
IV. Profit maximization
- Total rvenue is the amount if money that a firm receive from the sale oof its
output
- Average revenue can be determined b =y dividing totsl revenue by total
quantity
AR=TR/Q
- Marginal revenue is the change in total reveue resulting from the sale of an
extra product
- Profis is the firm’s total revenue minus its total cost
Q*=pi=TR-TC max
=>pi’(Q)=0
=>TR’(Q)-TC’(Q)=0
=>MR-MC=0
=>MR-MC
CHAPTER VI: MARKET STRUCTURE
1. Perfectly competitive market
1.1. Definition
- Unlimited suppliers
- Homogenous/identical product
1.2. Characteristics
- Sellers and buyers are price-takers
1.3. Maximizing profit: P*=MC -> Q*
1.4. Break-even point and shut-down point
Pi = TR-TC = P* x Q* - ATC(Q*) x Q*
= Q* (P*-ATC(Q*))
If P* > ATC (Q*) -> pi > 0