Key Concepts in Microeconomics
Microeconomics Concepts and Principles
Production Functions with Perfect Substitute Inputs
For perfect substitute inputs, the production function is: X = Y1 + Y2
Constant Returns to Scale
With constant returns to scale, proportional increases in all factors lead to a proportional increase in output.
Zero Fixed Costs
If fixed costs are zero, average variable costs and average total costs will be equal.
Demand Curve with Positive Price Elasticity
A demand curve with a positive direct price elasticity (not absolute value) equal to 5 corresponds to Giffen goods or Veblen goods.
Minimum Operating Point in Perfect Competition
The point where the marginal cost curve intersects the average variable cost curve in perfect competition is called the minimum operating point.
Cournot Duopoly Solution
The solution to the Cournot Duopoly problem implies that each company does not change its behavior based on the outcome of its predictions about the rival firm’s behavior.
Excess Capacity Theorem in Monopolistic Competition
The theorem of excess capacity in monopolistic competition is a property of long-run equilibrium in this type of market.
Product Differentiation: Cereal Market Example
If a company sells four different kinds of breakfast cereal, equidistant in a product space, with consumer preferences evenly distributed, how many varieties should a competitor introduce to contest the mid-market? Four intermediate varieties.
Voting Paradox
The situation in which majority voting in a democracy does not necessarily lead to a consistent decision in terms of economic theory is called the voting paradox.
Law of Weighted Marginal Utility
The law of weighted marginal utility is satisfied when utility cannot be increased by reallocating spending from one good to another.
Spider Web Market
In a “spider web” market, the activity is referred to the previous period’s price, indicating a delay.
Contestable Market
A contestable market with free entry and exit means that the company incurs no sunk costs, or can fully recover them.
Stigler’s Definition of Barriers to Entry
George Stigler’s definition of a barrier to entry refers to advantages of established companies over those seeking to enter the market.
Median Voter Theorem
The median voter theorem states that the voting outcome will be preferred by the median voter.
Marginal Rate of Technical Substitution (MRTS)
The marginal rate of technical substitution can be defined as the relationship between the marginal physical products of inputs.
Hicksian Income and Substitution Effects
To analyze income and substitution effects, Hicks compensates consumer income for the new price to maintain the initial utility level.
Rival and Excludable Goods
Goods that are rivalrous and excludable are private goods.
Logrolling
The process by which political representatives exchange votes when bargaining with an absolute majority is called logrolling.
Normal Good and Income Elasticity
A normal good has a positive income elasticity; its demand curve is always decreasing.
Bertrand Model: Standards of Behavior
In each iteration of the Bertrand model, the standard of behavior is to establish a lower price than the rival.
Utility Function for Substitute Goods
A utility function U = 2X1 + X2 represents substitute goods.
Law of Diminishing Returns
In the context of the law of diminishing returns, the technical optimum coincides with the maximum average yield and intersects the marginal return.
Price Elasticity of Supply
The price elasticity of supply, ceteris paribus, will be between 0 and +∞ if the supply function is linear with a positive slope.
Average and Marginal Costs
When total average costs are below marginal costs, an increase in the quantity produced will increase average costs.
Homogeneity of Demand Functions
The fact that demand functions are homogeneous of degree zero in prices and income implies that changes in prices and income, proportionally, will not alter consumer demand.
Demand Curve Facing an Industry in Perfect Competition
The demand curve facing an industry in perfect competition is decreasing.
Backward-Bending Labor Supply Curve
A backward-bending labor supply curve implies that, from a certain wage level, further wage reductions increase labor supply.
Price-Taking Firms
In price-taking firms, the price is determined by the quantity produced.
Bilateral Monopoly Equilibrium
The solution of the equilibrium of bilateral monopoly is indeterminate between theoretical solutions, limited by monopoly and monopsony.
Marginal Costs of a Company
A company’s marginal costs are always equal to average variable costs and total average costs at their respective minimums.
Long-Term Average Variable Cost Curve
The long-term average variable cost curve is increasing from its minimum, assuming inefficiencies.
Galbraith’s Countervailing Power
Galbraith defined countervailing power as the emergence of other powers, such as unions, that counterbalance the enormous power of multinational corporations.
Expansion Path of a Company
The expansion path of a company indicates the combination of optimal inputs at different levels of output.