Microeconomics: Taxes, Subsidies, and Utility Maximization
1. Taxes, Subsidies, and Deadweight Loss (DWL)
This topic analyzes how government intervention (taxes or subsidies) affects market equilibrium, consumer surplus (CS), producer surplus (PS), and total efficiency (DWL).
Key Formulas & Concepts
Tax Wedge:
A tax ($\tau$) drives a wedge between the price buyers pay ($P_d$) and the price sellers receive ($P_s$).$P_d = P_s + \tau$
The new equilibrium quantity ($Q_t$) is found where $Q_d(P_d) = Q_s(P_s)$.
Subsidy Wedge:
A subsidy ($s$) also creates a wedge,
Microeconomics: Costs, Market Structures, and Game Theory
Chapter 12 — Cost of Production
Cost Definitions and Key Formulas
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC).
Marginal Cost (MC) = ΔTC / ΔQ or ΔVC / ΔQ.
Average Fixed Cost (AFC) = Fixed cost / Quantity.
Average Variable Cost (AVC) = Variable cost / Quantity.
Average Total Cost (ATC) = Total cost / Quantity = AFC + AVC.
Profit Concepts
Accounting profit = Total revenue − Explicit costs.
Economic profit = Total revenue − Explicit costs − Implicit costs. (Economic profit = Accounting
Read MoreMarket Structures: Monopoly and Competition Analysis
Monopoly Market Structure: Key Concepts
What is *not* a barrier to entry in a monopolized market?
Answer: A single firm is very large.
Definition of a Natural Monopoly
A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a natural monopoly.
Marginal Revenue for a Monopolist
When a monopolist produces an additional unit, the marginal revenue generated by that unit must be below the price because the price effect outweighs the output
Key Concepts in Microeconomics: Consumer Theory and Market Welfare
Four Properties
1.
Higher indifference curves are preferred to lower ones.
2. Indifference curves cannot cross
3. Indifference curves are downward sloping.
4. Indifference curves are bowed inward –convexity-
Tangency Condition
MRS = P1 / P2
Consumer’s Optimal Choice
MU1 / MU2 = P1 / P2
Proportionality Rule
MU1 / P1 = MU2 / P2
Perfect Substitutes:
Indifference curves are straight lines. Optimal choice is at one extreme (all of one good).
Perfect Complements:
Indifference curves are L-shaped.
Understanding Market Elasticity: Demand, Supply, and Income Effects
Elasticity: Definition and Concepts
Elasticity measures the percentage change in quantity demanded or supplied in response to percentage variations in other dependent variables (such as price or income). When analyzing supply and demand curves, elasticity is present at each and every point. A curve is said to have constant elasticity if the value remains the same across all points.
Price Elasticity of Demand (PED)
The Price Elasticity of Demand (PED) measures the percentage variation in quantity demanded
Read MoreBehavioral Economics: Biases, Prospect Theory, Utility
Session 1: orthodox neo clsscl: based of rational choice, may not consider people deviate from this model ≠ Behavioral eco: behaviors deviates in systematic and predictable ways (irrational) ealry neo classlc: hedonic psych maximize pleasure minimize pain post-war neo:
refernces to unobservable mental states were unscientifc, they focused on choices of individudals that “mirrored preferences” / Methodo of Behavioral eco: laboratory experiments/field expirements/ process measures (brain scans&