Principles of Microeconomics (extension)

• Positive statements: statements that attempt to describe the world as it is
• Normaitve statements: statements about how the world should/ought be

• One seller who controls/influences the price
• High barriers to entry

• Few sellers
• Firms control the market
• Product differentiation may exist (does not have to)
• Barriers to entry

• Many sellers
• slightly differentiated products
• Free entry & exit
• Firms have no significant influence on the market
• High cost-price elasticities of demand

Sum of all individual demands for a particular good or service

• Substitutes: two goods for which an increase in the price of one --> increase in the demand of the other (e.g. Pepsi & Cola)
• Complements: two goods for which an increase in the price of one --> decrease in the demand of the other (e.g. coffee & sugar)

• Price
• Price of other goods - substitutes & complements
• Incomes - level & distribution
• Tastes and fashions
• Level and structure of population
• Advertising
• Expectations of consumers

• Price
• Profitability of other goods
• Technology
• Natural & social shocks
• Cost of Production
• Expectations of producers
• Number of sellers

Measure of the %-change in quantity demand given a %-change in the price of a good

\(E_p=\frac{\%\ change\ in\ quantity\ demanded}{\%\ change\ in\ price}\)

\(E_p<1 \)--> inelastic demand

\(E_p>1\)--> elastic dmenad

\(E_p=1\)--> unit elastic demand

\(E_p=\frac{dQ}{dP}\cdot\frac{P}{Q}\)

\(E_p=\frac{\Delta Q}{\Delta P}\cdot\frac{\overline{P}}{\overline{Q}}\)

\(\overline{P}\): price average

\(TR=P\cdot Q\)

• Explicit costs: input costs that require a direct outlay of money (e.g. material cost, energy, labor etc.)
• Implicit costs: input costs that require an indirect outlay of money (e.g. opportunity cost, externalities etc.)

• Accounting profit: only explicit costs considered
  \(Accounting\ Profit=total\ revenue-explicit\ cost\)
• Economic profit: explicit and implicit costs considered
  \(Economic\ profit=total\ revenue-total\ cost\)
  \(total\ cost=explicit\ cost+implicit\ cost\)

• \(AFC=\frac{FC}{Q}\)
• \(AVC=\frac{VC}{Q}\)
• \(ATC=AFC+AVC=\frac{TC}{Q}\)
• \(MC=\frac{dTC}{dQ}\ (\frac{\Delta TC}{\Delta Q})\)

Quantity where MC = ATC

• Fix costs remain constant
• Transaction costs do not increase proportionally with output
• Operating on large scale enables workers to specialize, which in return increases productivity

• Fixed costs can be allocated to several products
• Better load factor on machines
• Better labor utilization
• Risk diversification

The isocost line show the different combinations of factor inputs that can be purchases with a given fund.

firms fail to minimize production cost due to the use of more inputs than necessary

Causes:

• lack of incentives for an efficient behavior (e.g. selective rationality - often observed in public sector)
• lack of external pressure through competition
• incomplete labor contracts
• principle-agent-problem

sum of individual benefits --> vertical summation of demands

• Traditional regulations - command & control (e.g. emission limits, technology standards)
• Economic instruments - market-based-policies (e.g. environmental tax, targeted subsidies, tradable permits, assigning property rights)

Government payments not made in exchange for goods or services (e.g. pensions, education programs, transport, intergovernmental transfers within a federal state)

• Average tax rate: total tax paid per income
  \(ATR=\frac{tax\ liability}{taxable\ income}\)
• Marginal tax rate: extra tax paid on an additional $ of income
  proportional (flat rate) - independent of income
  progressive (common) - increases with increasing income
  regressive: decreases with increasing income
  \(MTR=\frac{change\ in\ tax\ liability}{change\ in\ taxable\ income}\)

• Administrative burden on both sides: tax payers spend time and money documenting and computing taxes, tax authority needs to organize payments
• deadweight loss (in case of competitive market): people allocate resources accordiong to tax incentives rather than the true costs and benefits

1. Equality: each person should pay according to their ability to pay
2. Certainty: tax payers need to know what taxes they need to pay; government should be able to estimate tax revenue
3. Convenience: in order to maximize tax revenue, paying taxes should be simple
4. Economic: tax system must be profitable --> tax revenues > administrative costs