MICROECONOMICS

Get Started. It's Free
or sign up with your email address
Rocket clouds
MICROECONOMICS by Mind Map: MICROECONOMICS

1. DEMAND AND SUPPLY

1.1. The 'Market' is the place of transactions between firms (supply) and households (demand)

1.2. SUPPLY

1.2.1. LAW OF SUPPLY: the higher the price f a good the higher the quantity supplied (ceteris paribus)

1.2.2. SUPPLY CURVE: representing the total quantity supplied for a particular good at various prices.

1.2.3. REASONS FOR CHANGE IN SUPPLY

1.2.3.1. RISE IN SUPPLY: 1) a fall in cost of production 2) reached profitability of alternative products that could be supply 3) increased profitability of goods in supply 4) expectations of fall in price, more demand meaning more need to be supplied

1.3. DEMAND

1.3.1. LAW OF DEMAND: the higher the price of a good the lower the quantity demanded (ceteris paribus)

1.3.2. DEMAND CURVE: representing the total quantity demanded for a particular good at various prices.

1.3.2.1. There is a change in quantity due to change in price of goods.

1.3.3. The higher the price the less of a demand whereas the lower the price the more demand for the product.

1.3.4. REASONS FOR CHANGE IN DEMAND

1.3.4.1. DEMAND DROPS: 1) Substitute is in demand as cheaper 2) Inflation 3) Seasonal (christmas presents, wrapping paper)

1.3.4.2. DEMAND RISES: Tastes shift towards a product Rise in price of substitute goods Rise in income

1.4. EQUILIBRIUM

1.4.1. When the schedule of the demanders 'meets' the schedule of the suppliers then the market is in an equilibrium

1.4.2. an equilibrium is imposed through the price mechanism in a free so that; 1) there is no excess supply, 2) there is no excess demand, 3) quantity demanded is equal to quantity supplied

1.4.3. the point in a graph were supply and demand cross over

1.4.4. the section on the bottom is the shortage and the top is surplus (more/extra)

1.5. ELASTICITY OF DEMAND

1.5.1. price elasticity of demanded is the responsiveness of quantity demanded of a particular good to its own price;

1.5.1.1. PED= change in quantity demanded for good x / change in price of good x

1.5.1.1.1. creates absolute value

1.5.2. Change in QUANTITY and PRICE

1.5.2.1. Q final-Q initial / Q Initial

1.5.2.2. P final-P initial / P initial

1.5.3. VALUE OF PED:

1.5.3.1. Elastic if PED >1

1.5.3.2. Inelastic if PED <1

1.5.3.3. Unit Elastic if PED = 1

1.5.4. CHANGES ALONG THE DEMAND CURVE, USE PED

1.5.5. THE CHANGE IN FRIMS REVENUES ARE AFFECTED BY THE PED TR = P X Q

1.5.6. INCOME ELASTICITY OF DEMAND YED = change in demand for good x / change in income

1.5.6.1. Determinants; necessity of good, income of consumers, rate which desire satisfaction

1.5.6.2. Application to Business: Importance of perceptions of the product

1.5.7. CROSS PRICE ELASTICITY OF DEMAND: CED = change in demand for good x / change in price of good y

1.5.8. ARC METHOD:

1.5.8.1. Change in Q = Q final - Q initial / average Q

1.5.8.2. Change in P = P final - P initial / average P

2. PRODUCTION AND COST

2.1. PRODUCTION FUNCTION

2.1.1. LAND (LN)

2.1.2. CAPITAL (K)

2.1.2.1. PRODUCTION PROCESS (f)

2.1.2.1.1. TOTAL PRODUCT (TP)

2.2. TIME PERIOD ASSUMPTIONS

2.2.1. very short run: concerns todays decisions

2.2.2. short run: at least one factors is fixed and production can be varied by varying the variable factor (s)

2.2.3. long run: all factors are variable in quantity but not in quality (technology) or cost

2.3. SHOERT RUN AND LONG RUN

2.4. EQUATIONS

2.4.1. average fixed cost

2.4.1.1. AFC = TFC / Q

2.4.2. average variable cost

2.4.2.1. AVC = TVC / Q

2.4.3. average cost

2.4.3.1. AC = TC / Q

2.4.4. marginal cost

2.4.4.1. MC = change TC / change Q

3. MARKET STRUCTURES

3.1. 4 types of market

3.1.1. perfect competition

3.1.2. monopolistic competition

3.1.3. oligopoly

3.1.4. monopoly

4. MARKET FAILURE AND GOVERNMENT INTERVENTION

4.1. The 'Ideal or Perfect' Market

4.1.1. a market where all economic agents behave so nicely that you do not even need laws, restrictions or even monitoring.

4.1.2. a market where private actions (of firms or individuals) do not impact the society negativity)

4.1.3. laissez faire philosophy

4.1.4. Marginal Private Cost (MPC) or simply MC the additional costs incurred to the firm (private) by the production of an extra unit of the product Marginal Social Cost (MSB) the additional costs incurred to the society by the production of an extra unit of the product Marginal Private Benefit (MPB) or simply MB the additional benefits for the firm (private) by the production of an extra unit of the product Marginal Social Benefit (MSB) the additional benefits for the society by the production of an extra unit of the product

4.2. Market Failure

4.2.1. occurs when MPC is different than MSC or when the MPB is different than MSB; this could be due to; externalities, nature of public goods, market power and asymmetric information.

4.2.2. Market power: welfare analysis of monopoly versus perfect competition.

4.3. GOVERNMENT INTERVENTION

4.3.1. Way that the government can use to address market failure (to persuade firms and individuals to act different to benefit society)

4.3.1.1. taxes and subsidies

4.3.1.2. laws and regulations

4.3.1.3. changes in property rights

4.3.1.4. price controls

4.3.1.5. inform consumers (or producers)

4.3.1.6. direct provision of goods and services

4.4. Equilibrium Output in a free market may not always represent the socially desirable levels of Output. Desirable level of output is the when we have social efficiency (i.e. MSB = MSC). When social efficiency is not achieved, we say we have market failures. Four types of Market Failures: Externalities Merit, Demerit, and Public Goods Market Power Asymmetric Information. Governments can intervene using various instruments to correct these market failures. However, government intervention may have some drawbacks. Hence, governments have to be very careful regarding the extent of their intervention in the operations of a free market.