Begrippenlijst Micro-economie

Begrippenlijst Micro-economie

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MICROECONOMICS

Chapter 1

Comparative Statics Analysis A Comparative Statics Analysis compares the equilibrium state of a system before a change in the exogenous variables to the

equilibrium state after the change

Marginal Impact The Marginal Impact of a change in the exogenous variable is the incremental impact of the last unit of the exogenous variable on the endogenous variable.

Chapter 2

Competitive Markets Competitive Markets are those with sellers and buyers that are small and numerous enough that they take the market price as given when they decide how much to buy and sell.

Market Demand Function The Market Demand Function tells us how the quantity of a good

demanded by the sum of all consumers in the market depends on various factors. Qd _{= (Q,p,p}

0,I,…)

Demand Curve The Demand Curve plots the aggregate quantity of a good that consumers are willing to buy at different prices, holding constant other demand drivers such as prices of other goods, consumer income, quality. Qd _{= Q(p)}

Law of Demand The Law of Demand states that the quantity of a good demanded decreases when the price of this good increases.

Law of Supply The Law of Supply states that the quantity of a good offered increases when the price of this good increases.

Market Equilibrium A Market Equilibrium is a price such that, at this price, the quantities demanded and supplied are the same.

V = A

Excess Supply If sellers cannot sell as much as they would like at the current price, there is Excess Supply.

If there is no excess supply or excess demand, there is no pressure for prices to change and thus there is equilibrium.

Price Elasticity of Demand The Price Elasticity of Demand is the percentage change in quantity demanded brought about by a one-percent change in the price of the good.

ε=

∂Q

∂ P

∙

P

Q

Elastic Demand Curve When a one percent change in price leads to a greater than one-percent change in quantity demanded, the demand curve is elastic. (eQ,P < -1)

Demand tends to be more elastic:

*the larger the number of close substitutes *the more narrowly defined the market *if the good is a luxury

*the longer the time horizon

Inelastic Demand Curve When a percent change in price leads to a less than one-percent change in quantity demanded, the demand curve is inelastic. (0 > eQ,P > -1)

Unit Elastic Demand Curve When a percent change in price leads to an exactly one-percent change in quantity demanded, the demand curve is unit elastic. (eQ,P = -1)

Income Elasticity of Demand Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. <0 : Inferior good

>0 : Normal good

Between 0 and 1 : Necessity >1: Luxury good

ε

=

∂ Y

∂ I

∙

I

Y

Cross-price Elasticity of Demand The Cross-price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of another good. (complements – substitutes)

Price Elasticity of Supply Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.

Chapter 3

Consumer Preferences Consumer Preferences tell us how the consumer would rank (that is, compare the desirability of) any two combinations or allotments of goods, assuming these allotments were available to the

consumer at no cost. Basket

Bundle

These allotments of goods are referred to as baskets or bundles. These baskets are assumed to be available for consumption at a particular time, place and under particular physical circumstances. Preferences are complete Preferences are complete if the consumer can rank any two baskets

of goods (A preferred to B; B preferred to A; or indifferent between A and B)

Preferences are transitive Preferences are transitive if a consumer who prefers basket A to basket B, and basket B to basket C also prefers basket A to basket C Preferences are monotonic Preferences are monotonic if a basket with more of at least one

good and no less of any good is preferred to the original basket. Indifference Curve

Indifference Set

An Indifference Curve or Indifference Set: is the set of all baskets for which the consumer is indifferent.

*Negatively sloped *Convex to origin *Do not intersect

*Each bundle belongs to just one IC *Cannot be ‘thick’

Indifference Map An Indifference Map : Illustrates a set of indifference curves for a consumer

Marginal Rate of Substitution The marginal rate of substitution: is the maximum rate at which the consumer would be willing to substitute a little more of good x for a little less of good y.

MRS

x , y=

U

x , y

U

x , y

=

P

P

Grafisch: helling van de raaklijn in een punt aan de indifferentiecurve.

Utility function The utility function assigns a number to each basket so that more preferred baskets get a higher number than less preferred baskets. Utility is an ordinal concept: the precise magnitude of the number that the function assigns has no significance.

Quasi-linear utility functions The only thing that determines your personal trade-off between x and y is how much x you already have.

U = v(x) + Ay

Marginal Utility The marginal utility of a good, x, is the additional utility that the consumer gets from consuming a little more of x when the consumption of all the other goods in the consumer’s basket remain constant.

1 good :

M U

( y )=U

y=

d U

dy

2 goods:

M U

( x , y )=U

x , y =

∂Ux , y

_{∂ x}

M U

( x , y )=U

x , y=

∂ Ux , y

∂ y

Chapter 4

Budget Constraint The set of baskets that the consumer may purchase given the limits of the available income. Pxx+Pyy=I

Interior Optimum Interior Optimum: The optimal consumption basket is at a point where the indifference curve is just tangent to the budget line. Tangent A tangent: to a function is a straight line that has the same slope as

the function.

Corner solution A corner solution occurs when the optimal bundle contains none of one of the goods.

Chapter 5

Price consumption curve The price consumption curve for good x can be written as the quantity consumed of good x for any price of x. This is the individual’s demand curve for good x.

Engel curve The income consumption curve for good x also can be written as the quantity consumed of good x for any income level. This is the individual’s Engel Curve for good x. When the income consumption curve is positively sloped, the slope of the Engel Curve is positive. Normal good If the income consumption curve shows that the consumer

purchases more of good x as her income rises, good x is a normal good. Equivalently, if the slope of the Engel curve is positive, the good is a normal good.

Inferior good If the income consumption curve shows that the consumer purchases less of good x as her income rises, good x is an inferior good. Equivalently, if the slope of the Engel curve is negative, the good is an inferior good.

Income effect As the price of x falls, all else constant, purchasing power rises. This is called the income effect of a change in price.

The income effect may be positive (normal good) or negative (inferior good).

Substitution effect As the price of x falls, all else constant, good x becomes cheaper

relative to good y. This change in relative prices alone causes the

consumer to adjust his/ her consumption basket. This effect is called the substitution effect. The substitution effect always is negative.

Giffen good If a good is so inferior that the net effect of a price decrease of good x, all else constant, is a decrease in consumption of good x, good x is a Giffen good. For Giffen goods, demand does not slope down.

Consumer surplus The net economic benefit to the consumer due to a purchase (i.e. the willingness to pay of the consumer net of the actual

expenditure on the good) is called consumer surplus.

Network externalities If one consumer's demand for a good changes with the number of other consumers who buy the good, there are network

externalities.

Bandwagon Effect If one person's demand decreases with the number of other consumers, then the externality is positive.

Increased quantity demanded when more consumers purchase Snob Effect If one person's demand decreases with the number of other

consumers, then the externality is negative.

Decreased quantity demanded when more consumers purchase

Chapter 6

Production function The production function Q=f(L,K,…) tells us the maximum possible output that can be attained by the firm for any given quantity of inputs.

Technology Technology determines the quantity of output that is feasible to attain for a given set of inputs.

Technically efficient firm A technically efficient firm is attaining the maximum possible output from its inputs

Production functions with single input

Single input production functions Q=f(L) Average product

AP=

Q

L

=

f (L)

L

Marginal product

MP=f

L=

dfL

dL

Production functions with multiple inputs

Production functions with multiple inputs Q=f(L,K)

M P

L , K =

∂ f L , K

∂ K

=

f

L , K

M P

L, K =

∂ f L , K

∂ L

=

f

L , K

Isoquant All combinations of L and K that yield the same output level

Returns to scale Let Q=f(L,K)

Globally increasing returns to scale ↔ for all (L,K) and for all λ>1:

f ( λL , λK )>λf (L , K)

Globally decreasing returns to scale ↔ for all (L,K) and for all λ>1:

f ( λL , λK )<λf ( L, K )

Globally constant returns to scale ↔ for all (L,K) and for all λ>0:

f ( λL , λK )=λf (L, K )

Scale By what % does output rise if all inputs are increased by 1%, starting from a given input combination:

ε

=

∂ f L , K

∂ L

∙

L

f L , K

+

∂ f L , K

∂ K

∙

K

f L , K

We have increasing, decreasing or constant returns to scale for a given input combination (L,K) if εscale is larger than, smaller

than, or equal to 1. Marginal Rate of Technical

Substitution

Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced ( − Δx2) when one extra unit of another input is used (Δx1 = 1), so that output remains constant ( ).

Technological progress Capital-saving: MRT SL, K= M P_L M PK rises Labor-saving:

MRT S

=

M P

M P

Chapter 7

Explicit costs Explicit costs require a direct outlay of money by the firm Implicit costs Implicit costs do not require an outlay of money by the firm. Economic profit Economists measure a firm’s economic profit as total revenue

minus total cost, including all opportunity costs (both explicit and implicit costs)

Accounting profit Accountants measure accounting profit as the firm’s total revenue minus the firm’s explicit cost.

Long-run Costs All inputs are variable

Short-run Costs Some inputs cannot be freely chosen

Total cost The cost of the optimal input choice for a given output level and given output prices is:

TC Q , w , r=wL

Q , w , r+rK

Q , w , r

Chapter 8

Total cost function The total cost function (TC) gives, for any set of input prices and for any output level, the minimum cost incurred by the firm.

Total cost = TC(w,r,Q)

Average cost function The average cost function (AC) is found by computing total costs per unit of output.

Average cost =

AC (w , r ,Q)=

TC (w ,r , Q)

Q

Marginal cost function The marginal cost function (MC) is found by computing the change in total costs for a change in output produced.

Marginal cost =

MC ( w , r ,Q)=

∂ TC (w , r , Q)

∂ Q

Economies of scale If average cost decreases as output rises, all else equal, the cost function exhibits economies of scale.

When the production function exhibits increasing returns to scale, the long run cost function exhibits economies of scale, so that AC(Q) decreases with Q, all else equal.

Diseconomies of scale If the average cost increases as output rises, all else equal, the cost function exhibits diseconomies of scale.

When the production function exhibits decreasing returns to scale, the long run cost function exhibits diseconomies of scale, so that AC(Q) increases with Q, all else equal.

Minimum efficient scale The smallest quantity at which the long run average cost attains its minimum is called the minimum efficient scale (MES).

Output elasticity of total cost The percentage change in total cost per one percent change in output is the output elasticity of total cost.

ε

=

dTC(Q)

dS

Q

TC(Q)

=

MC (Q)

AC (Q)

Short term costs of production Short term costs of production may be divided into fixed costs and variable costs.

Short-run average costs Short-run average costs (SAC) can be determined by dividing the firm’s costs by the quantity of output it produces.

SAC is the slope of a ray through the origin to STC. Average fixed costs

Average Fixed Costs (AFC) =

_Quantity

¿

cost

=

TFC

Q

Average variable costs

Average Variable Costs (AVC)

¿

Variable cost

Quantity

=

TVC

Q

Short-run average costs Short-run average Costs (SAC) =

Total cost

Quantity

=

STC

Q

=

¿

+

Variable cost

Quantity

=

AFC + AVC

Short-run Marginal cost Short-run Marginal cost (SMC) measures the increase in short term total cost that arises from an extra unit of production.

SMC =

dSTC

dQ

Economies of scope Consider two outputs Q1 and Q2. Let production costs (at given input prices) of producing the two products separately be given by TC(Q1,0) and TC(0,Q2). Let production cost of producing jointly in one firm be TC(Q1,Q2). Economies of scope exist if joint production of given quantities of the two products is cheaper than separate production of the same quantities.

TC(Q1,Q2) < TC(Q1,0) + TC(0,Q2)

Chapter 9

Perfectly Competitive Markets 1. There are many buyers and sellers in the market (market is fragmented)

*Each buyer’s purchases are so small that he/she has a negligible effect on market price.

*Each seller’s sales are so small that he/she has an negligible impact on market price. Each seller’s input purchases are so small that he/she perceives no effect on input prices

2. Firms produce undifferentiated products in the sense that consumers perceive them to be identical

3. Consumers have perfect information about the prices all sellers in the market charge

4. Free entry: all firms (industry participants and new entrants)have equal access to resources (technology, inputs).

Economic profit Profit = Total Revenue (TR) –Total opportunity Cost (TC) A firm maximizes economic profit.

Economic Value Added Economic Value Added is a measure of economic profit.

It is calculated as the difference between the Net Operating Profit After Tax and the opportunity cost of invested Capital.

Total Revenue Total revenue (TR) for a firm is the selling price times the quantity sold : TR(Q) = (P x Q). In competition, the price is exogenous to the firm.

Average Revenue Average revenue (AR) is total revenue per unit: equals price P Marginal Revenue Marginal revenue (MR) is the change in total revenue from an

additional unit sold. For competitive firms, MR equals the price of the good.

Optimal profit in short run 1.Output is such that price equals marginal cost 2. Marginal cost is increasing at the optimal output

is more profitable than temporarily shutting down production operations.

Shutdown A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market

conditions.

*The price at which the firm prefers to temporarily shut down operations and produce nothing is the shut down price, Ps

*Profit at zero output depends on nature of costs: how much of the fixed cost can be recovered if production is shut down?

Sunk Fixed Costs (SFC) The costs of the firm’s fixed input that are unavoidable at Q = 0 (i.e. sunk) and output insensitive for Q > 0 (i.e. fixed)

Non-Sunk Fixed Costs (NSFK) The cost of the firm’s inputs that are avoidable if the firm produces zero output (i.e. nonsunk) and output insensitive for Q > 0 (i.e. fixed)

Total Variable Costs (TVC) TVC(Q): Total Variable Costs (output sensitive costs)

Supply Curve In each case supply curve is the marginal cost curve to the extent that it lies above the curve (AVC+NSFC)

SRSC all fixed costs sunk Short Run Supply Curve when all fixed costs are sunk : NSFC = 0 *Shut down price is minimum average variable cost

*Supply zero if price below shut down price

*Supply curve coincides with marginal cost curve if price above minimum average variable cost (shut down price)

*Losses perfectly possible at optimal output SRSC some fixed costs are sunk STC(Q) = SFC + NSFC + TVC(Q)where NSFC > 0

ANSC = TVC(Q)/Q + NSFC/Q… average non-sunk cost

Shutdown if P < ANSC

SRSC all fixed costs non-sunk Section of the firm’s SMC-curve that lies above the SAC-curve is also the firm’s supply curve.

Short run supply curve of a competitive firm

*Coincides with vertical axis if price is below shutdown price *Coincides with marginal cost curve if price exceeds shutdown price

*Shut down price is minimum of (AVC+ANSFC)

*Average variable cost plus average fixed cost that is avoidable when not producing

*Losses may be consistent with optimal behavior when not all fixed costs can be avoided at zero production

Market supply The market supply at any price is the sum of the quantities each firm supplies at that price.

The short run market supply curve is the horizontal sum of the individual firm supply curves.

Long run The long run is the period of time in which all the firm’s inputs can be adjusted, and the number of firms in the industry can change. *Firms adapt capacities (capital investment or disinvestment) *Depending on short-run profitability, there is entry in or exit out of the industry

Long-Run Supply Curve The marginal cost curve above the minimum point of its average cost curve

Firm exits In the long run, the firm exits if the revenue it would get from producing is less than its total cost.

Exit if TR < TC Exit if TR/Q < TC/Q

Exit if P < AC

Firm enters A firm will enter the industry if such an action would be profitable. Enter if TR > TC

Enter if TR/Q > TC/Q Enter if P > AC

Long-run competitive equilibrium

All firms maximize profits, hence P=LMC(Q) Market demand equals supply

All firms make zero economic profit

Constant cost industry If input prices remain constant when the industry expands, then the long-run market supply curve is horizontal.

Increasing cost industry If input prices rise when an industry expands, the long-run supply curve is upward sloping

Decreasing cost industry If input prices decline when an industry expands, the long-run supply curve is downward sloping.

Economic rent Economic rent is the maximum willingness to pay for an input minus the reservation value of the input outside the industry Producer surplus Price P minus minimum price at which willing to supply ANSC

Chapter 10

Excise tax Specific tax

An excise tax(or a specific tax)is a tax per unit (denoted T) paid by either the consumer or the producer

Ad valorem tax An ad valorem tax is a % tax

Tax incidence Tax incidence is the manner in which the burden of a tax is shared among participants in a market

Deadweight loss A deadweight loss is the fall in total surplus that results from a market distortion, such as a tax.

Laffer curve The Laffer curve depicts the relationship between tax rates and tax revenue.

A tax cut would induce more people to work and thereby have the potential to increase tax revenues.

Price ceiling A legal maximum on the price at which a good can be sold. Price floor A legal minimum on the price at which a good can be sold. Price

floors sometimes are referred to as price supports.

World price The effects of free trade can be shown by comparing the domestic price of a good without trade and the world price of the good. The world price refers to the price that prevails in the world market for that good.

Tariffs Tariffs are taxes levied by a government on goods imported into the government's own country. Tariffs sometimes are called duties. Import quota An import quota is a limit on the total number of units of a good

that can be imported into the country.

Chapter 11

Monopoly A firm is considered a monopoly if …

*it is the sole seller of its product.

*its product does not have close substitutes.

Natural monopoy An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Market Power An agent (not just monopolist) has Market Power if s/he can affect, through his/her own actions, the price that prevails in the market.

Sometimes this is thought of as the degree to which a firm can raise price above marginal cost

Lerner Index of market power The Lerner Index of market power is the price-cost margin, (P*-MC)/P*. This index ranges between 0 (for the competitive firm) and 1 (for a monopolist facing a unit elastic demand)

¿

Q

¿

P

−

MC

¿

¿

Multi-plant monopoly The monopolist should make sure he allocates production so that the marginal costs in the two plants are equal at the optimal output levels, and that marginal cost equals marginal revenue Cartel A cartel is a group of firms that collusively determine the price and

output in a market. In other words, a cartel acts as a single monopoly firm that maximizes total industry profit. Monopsony A market consisting of a single buyer an many sellers

Chapter 12

Price discrimination Price discrimination is the business practice of selling the same good (i.e. identical products) at different prices to different customers, even though the production costs are the same. Monopolist : uniform price A monopolist charges a uniform price if it sets the same price for

every unit of output sold.

Monopolist : price discrimination A monopolist price discriminates if it charges more than one price for its output.

First-degree discrimination Perfect price discrimination

Individualized unit price

The monopolist has information about the willingness to pay of each customer and can charge each customer a different price. First-degree price discrimination means the firm wants to produce the quantity at which price is exactly equal to marginal cost Reservation price Customer’s willingness to pay

Second-degree discrimination Unit price depends on how much you buy

Block pricing Consumers pay different unit prices for different ‘blocks’ of output. Two part tariff The firm charges a lump sum fee for the right to buy the good plus

a price per unit.

Linear two part tariff Buyers must pay a fixed fee for the right to consume a good and a uniform price for each unit consumed :

Cost for consumer = S + PQ

If the firm knows the demand curve of the customer, an easy way to grasp all consumer surplus (and to maximize profit) is to *set P= MC

*set S equal to the full consumer surplus at that price

Third-degree discrimination Unit price depends on group you belong to or on when you buy Identify different groups or segments with different demand curves (or different elasticities of demand)

M R

(

Q

)

=

M R

(

Q

)

=

MC

Building ‘fences’ Sometimes the firm can identify different groups with different price elasticities, but it may be difficult to charge a different price for the different groups.

then one way is to offer the product in (maybe slightly) different qualities

Versioning Selling different versions of same product

Tie-in sale A tie-in sale occurs if customer can buy one product only if they agree to purchase another product as well.

A tie-in sale may be used in place of price discrimination when the firm cannot observe the relative willingness to pay of different customers.

Package tie-in sales Bundling

Package tie-in sales (or bundling) occur when goods are combined so that customers cannot buy either good separately.

Bundling may be used in place of price discrimination to increase producer surplus when consumers have different willingness to pay for the goods sold in the bundle.

Bundling pair of goods → only if demands are negatively correlated Mixed bundling Firms allow consumers to buy separate products as well as the

bundle

Optimal advertising Optimal advertising implies marginal benefit of advertising equals its (total) marginal cost

P

∂ Q

∂ A

=1+

∂ TC

∂ Q

∂ Q

∂ A

Chapter 13

Imperfect competition Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.

Oligopoly Only a few sellers; products can be homogeneous or heterogeneous; entry barriers

Each firm faces downward-sloping demand because each is a large producer compared to the total market size

Competitive interdependence Firm’s strategies and market outcomes depend on the behavior of competitors + the decisions of every firm affect the profits of competitors

The Cournot model of

homogeneous goods oligopoly

*Homogeneous Products, so there is only one price on the market *Non-cooperative behavior: firms determine strategies

independently, without colluding with other firms

*Simultaneous output decisions : each firm makes its strategic decision (at the same time) without prior observation of the other firm's decision.

*Market price is not known until both firms have made their output choice

Homogeneous Bertrand Oligopoly *Homogeneous product, so a single price will result in equilibrium *Non-cooperative

*Simultaneous price decisions : each firm makes its strategic decision without prior observation of the other firm's decision. Monopolistic Competition Many firms selling products that are heterogeneous ( i.e., similar

but not identical); no entry barriers.

Stackelberg model of oligopoly A situation in which one firm acts as a quantity leader, choosing its quantity first, with all other firms acting as followers.

leader has first-mover advantage (larger profit)

Dominant firm markets Market with 1 dominant firm (usually in terms of market share) and a „competitive fringe‟ (usually large number of smaller firms) The dominant firm takes into account the behaviour of the

competitive fringe in deciding the output it will put on the market Horizontal Product Differentiation (“Substitutability“) : at the same price, some consumers would

prefer the characteristics of product A while other consumers would prefer the characteristics of product B.

Vertical Product Differentiation (“Superiority”) : one product is viewed as unambiguously better than another so that, at the same price

Monopolistic competition Many Buyers Many Sellers

Free entry and Exit (>< oligopoly)

(Horizontal)Product Differentiation

Monopolistic competition ESR *Price exceeds MC

*Positive profits attract new entrants Market

Monopolistic competition ELR *New entry implies declining demand for individual firms *Long run economic profit goes down to zero

*Firms charge more than marginal cost

Chapter 14

Game theory The branch of microeconomics concerned with the analysis of optimal decision making in competitive situations.

Strategy A plan for the actions that a player in a game will take under every conceivable circumstance that the player might face.

Simultaneous-move, one-shot games

*Situations that occur once in a relation between actors/players *Players make their moves simultaneously

*The payoffs are the players‟ gains from a particular outcome of the game

Nash equilibrium A Nash equilibrium is a situation in which (economic) actors each choose their best strategy given the strategies that all the others have chosen.

Each player chooses a strategy that gives him/her the highest payoff, given the strategy chosen by the other player(s) in the game.

Prisoners’ dilemma The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation.

Often people (firms) fail to cooperate with one another even when cooperation would make them better off.

Dominant strategy A dominant strategy for a player is the best strategy for a player to follow, regardless of the strategies chosen by the other players. Dominated strategy A player has a dominated strategy when she has another strategy

that gives a higher payoff no matter what the other player does. Repeated games In many real-world settings, players play the same game over and

over again. Cooperation is much more likely in repeated games Trigger strategies Cooperate only as long as everyone else does

Revert to the harshest punishment possible

Tit-for-tat strategy Involves only one round of punishment for cheating Return to cooperation the next round

Sequential-move games Sequential-move games are games in which the order of moves matters

A player that can move later in the game can see how others have played up to that point

Game tree A game tree shows the different strategies that each player can follow in the game and the order in which those strategies get

chosen.

Backward induction Game trees are often solved by starting at the end of the tree and, for each decision point, finding the optimal decision for the player at that point:

Strategic moves A strategic move by a player A is a move early in a game that changes opponents‟ behavior later in the game in a way that is favorable to player A.

Predatory pricing The firm may charge an artificially low price to prevent potential rivals from entering.