Principles of Microeconomics: Market Equilibrium
MARKET EQUILIBRIUM
Linear Equations
We can analyze Demand and Supply and Market equilibrium with linear equations. These
are equations of the form Y = a + bX where a is the Yintercept, i.e., the value of Y
Principles of Economics: Efficiency
EFFICIENCY
Definition: Productive Efficiency is optimal output from given resources or minimal cost for a
given output.
We have already seen the concept of productive efficiency in our discussion of Production
Possibili
Principles of Economics: Monopoly
MONOPOLY
A monopoly (single sellers) is the sole producer in an industry. This means that Demand
for the industry is Demand for the Monopoly and that the marginal cost and average cost
functions of the monopoly are the ma
Principles of Economics: Shortrun Firm Equilibrium
PROFIT MAXIMIZATION
Profit = Total Revenue (P*Q) Total Costs
Accountants calculate Profit as operating Profit
= Total Revenue Operating Costs
= Total Revenue Variable Costs (in economic terminology)
(Ope
Principles of Economics: Longrun Competitive Equilibrium
LONGRUN COST
Recall that all factors, particularly capital, are variable in the longrun. There are two ways
(plus combinations of the two ways) that Capital can change in the longrun.
1.
Change
Principles of Economics: Shortrun Cost
We first examine the cost of firms in the period when capital is fixed to understand the
importance of marginal cost in the determination of profit maximizing output. We do this by
deriving cost functions from produ
Preference Theory and Derivation of Demand
CONSUMER CHOICE THEORY (DEMAND)
BUDGET CONTRAINTS:

Suppose that the consumer (household) consumes only two goods (X and Y).
Given the Prices of the two goods (PX, PY) and the consumers income (m), the possible
Principles of Microeconomics: Sales Taxes and Subsidies
SALES TAXES
Our understanding of elasticity will help us analyze the impact of sales taxes or subsidies on
equilibrium price and quantity.
1.
Per Unit Tax
The simplest sales tax is a fixed tax per un
Principles of Microeconomics: Elasticity
ELASTICITY
Elasticity
Definition: Elasticity measures the responsiveness of a change in a variable to the change in
another variable
=> = %Q/%P
Economists measure Elasticity as the ratio of percentages changes beca
Principles of Microeconomics: Demand and Supply
DEMAND AND SUPPLY
This lecture examines the basic Demand/Supply model that is central to microeconomics.
We do so by defining the relationship between Price and Quantity in Demand and Supply
without analyzin
Principles of Microeconomics: Production Possibility Frontiers
INTRODUCTION
Alfred Marshall, the founder of modern Microeconomics in 1890, defined Economics as
the study of mankind in the ordinary business of life; it examines that part of individual and