Economics

Efficient market hypothesis: market prices reflect fully all available information

Opportunity cost is the value of the best alternative you must give up

Demand curve: relationship between price and quantity demanded

Demand influenced by: prices of substitutes and complements, income, tastes and preferences and expectations

Responsiveness of demand = Elasticity

Elasticity determined by number of substitutes, time, definition of the market

Elasticity = %-change in quantity demanded / % change in price

Consumer surplus: price you are willing to pay - actual price

Income elasticity = %-change in quantity demanded / %-change in income

Cross price elasticity = %-change in quantity demanded x / %-ch. in quantity demand y

Price discrimination

• 1st degree: different for each customer (not possible)
• 2nd degree: e.g. by volume (bulk)
• 3rd degree: grouping (business, economy)

In short run, one factor of production is fixed

In long run, all factors of production are variable (capital and labour)

Total product = total output produced

Marginal product = additional output after adding one more unit of input

SATC = STC / Output

SAVC = SVC / Output

SAFC = SFC / Output

SMC = Change in STC / Change in output

SMC always intersect with SATC in the minimum of SATC

The supply curve represents the positive relationship between the price of a product and the willingness of a firm to supply it

Productivity and costs are driven by return to scale (measures change in output for a given change in input)

• Increasing returns = output grows at a faster rate than input
• Decreasing returns = input grows at a faster rate than output
• Constant returns = input and output grow at same rate

Economies of scale: production techniques, indivisibilities, geometric relations (storage tanks)

Diseconomies of scale: bureaucracy, decreasing labour motivation

lowest point in LATC curve

Cost advantage over rivals, firms may merge to achieve MES

cross of supply and demand (unique)

occur when production or consumption of a good results in costs or benefits being passed onto individuals not involved in production or consumption (doing something, w/o bearing all the cost or consequences)

• Neg. cost externalities: marginal social cost > marginal private cost (e.g. production pollution)
• Neg. benefit externalities:  marginal private benefit > marginal social benefit (e.g. banker, minimum wage)
• Pos. cost externalities: marginal private cost > marginal social cost
• Pos. benefit externalities: marginal social benefit > marginal private benefit

Separating Equilibrium: good and bad products are sold in different markets

Pooling Equilibrium: good and bad products are sold in the same pooled market

Pigs cycle = Input price changes over time (e.g. market for IT-specialists); x=quantity, y=wage, price

AR = Total revenue / output

MR = change in total revenue / change in output

Profit Maximization: Marginal revenue = Marginal cost

MR > MC = increase output

MC > MR = reduce output

Many buyers, many sellers

Firms have no market power

Homogeneous products

No exit / entry barriers

Perfect information

Normal profits are required to keep the firm in the industry

Supernormal profits = Profits in excess of normal profits

Economic costs are accounting profits + return to shareholders

Allocative efficiency = only use resources for production of goods that are actually demanded (no overproduction)