Chapters 2026 Summary

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Chapters 20-26 Summary

• Content Visuals from McConnell/Brues Economics

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Overview of the overview

• Economics is about making choices to maximize
  efficiency while dealing with scarcity
• Macro studied the relationship of the entire
  economy, ie. how the govt can influence things
  to put it where it wants
• Micro studies the way that consumers and
  individuals can maximize their own personal
  benefitdoesnt care about Joe next door

3
Start Small

• It all starts with the idea of SELF-INTEREST
• Both consumers and producers are looking to do
  what benefits THEM the most
• As a consumer this involves maximizing utility,
  or benefit, and as a producer you are maximizing
  your profit

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Already doesnt mattergain does

• Choices are based around your future gainit
  doesnt matter what you already have or the
  choices you have already made
• Consumers 1 goal is to maximize the MB or MU
• When making your choice, you do what produces the
  most MU for your money

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What results

• When we do this we see that the demand for items
  decreases with quantitywont pay as much for 2
• 3 reasons
• 1. Law of Diminishing Marginal Utility
• 2. Substitution Effect
• 3. Income Effect
• Bottom line is that 2 simply isnt worth as much

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End Result

• The overall goal is to reach CONSUMER EQUILIBRIUM
• This occurs when the value / dollar of all
  purchases is equal
• MU1/P1 MU2/P2
• We are ultimately happy when the dollar value
  gained is equal for all purchases
• When you go to lunch what would you buy first?
  If still hungry what would you buy second? At
  what point do you switch to something else.
• When that switch occurs, you have reached the
  point at which the MU/P of the new object is
  higher than that of the old

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Can change down the road

• Consumer purchases can also be affected by
  changes in prices (L of D)
• Elasticity of demand measures how responsive
  consumers are to a change in price
• If we always have to buy something, like gas, the
  good is INELASTIC (E
• If we can buy something else or decide we dont
  want it that bad stop buying it, the good is
  ELASTIC (E 1)

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Break
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Same Goalkinda

• Businesses follow the same general ideado what
  is good for me
• With them, however, they are looking to maximize
  their PROFIT
• Profit Revenue - Costs

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Different types of costs

• Unlike accountants, economists also consider the
  idea of an OPPORTUNITY COST
• A normal profit occurs when you are just covering
  all of your costs of production
• An accounting profit occurs when you have money
  left over after paying the bills
• An economic profit occurs when you are making
  more than you could at the next best job/market
  available
• Explicit costs are what you directly pay
  forimplicit costs are the opportunity costs, or
  what you give up
• Only economists consider the implicit costs

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Production Costs

• The biggest thing that will affect your potential
  profit is the cost of providing your good/service
• You will have some VARIABLE some FIXED costs
• Variable include the land labor componentsto
  increase output you need to buy more
• Fixed includes the capitalbuy it once and reuse

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Which is bigger?

• Typically the fixed costs will be bigger at low
  levels of production
• If you are making cookies and have to buy an oven
  the first batch is going to cost a lot of money
• However, when you get to the point that you are
  making your 10,000 batch of cookies the average
  cost of that oven is miniscule
• Your costs will continue to drop until you reach
  the capacity for that capital

13
Law of Diminishing Returns

• Eventually you will reach a point that you have
  to buy more capitalanother oven perhaps or maybe
  even a factory
• When that happens the amount that you can add to
  your output by adding an additional input goes
  down
• If you are making cookies 1 person might produce
  100 dozen, 2 people might produce 250 dozen, but
  3 people might only produce 300 dozen

14
Technicality

• MP is measured by looking at 1 more input being
  added (MP of another worker)
• Returns to scale is measured by adding ALL inputs
  in like quantities (double everything and see
  what happens)
• Eventually MP will always decrease at some
  pointonly so much Miracle Grow will help your
  tomatoes bloom
• Returns to scale could either increase, decrease,
  or stay constant

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Examples

• Consider the idea of Papa Johnsif they add
  another restaurant in Lewisburg would their sales
  double? All inputs double, but we know it
  wouldnt double sales (Decreasing returns to
  scale)
• What about haircuts? If there are 2 people
  cutting hair, can they cut twice as much?
  (Constant returns to scale)
• What about wireless internet providers in
  Lewisburg? If there is only one spot in town you
  can gain access are you going to have many
  customers? What if the entire town was made
  accessible by adding 5 more HUBS? (Increasing
  returns to scale)
• The key is that you are changing all resources
  equally

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Increasing becomes Natural

• If you see a market with increasing returns to
  scale, you might have a NATURAL MONOPOLY
• Situation in which it makes sense to only have 1
  provider since they can produce at a lower and
  lower cost as business grows (telephone service)
• Once cover cost of capital (fixed costs), adding
  another customer costs very little

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The Goal

• Overall as a producer you are trying to minimize
  costs while maximizing revenues
• However, not all producers have the ability to
  decide how much they want to charge
• 4 market structuresPC, MC, O, M

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Market Power

• Your ability to change the price will be
  determined by the number of competitors you have
• The less competition you face the more money you
  will make
• In any case your object is still the
  samemaximize profit
• Regardless of market structure, this always
  occurs using the same equationMR MC
• All market structures base output on this

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What about P MC?

• For a PC, who is a PRICE TAKER, the selling price
  is always the samemarket equilibrium price
• Since it doesnt change you are always going to
  increase revenue by the same amount, which is the
  selling price (horizontal demand curve)

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How much to make?

• You know the equation, but how do you know how
  much you should produce?
• Always go straight down to find quantity
• What about profit?
• Always go straight across from the demand curve
  to the y-axis

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What about Profit?

• Profit is always the difference between your
  costs of production and the selling pricein
  other words its always the section between the
  horizontal price level and the ATC
• If the ATC is above the price level, YOU ARE
  LOSING MONEY
• When would you continue to produce if you are
  losing money?
• Consumer surplus is the area on top
• Will you see Consumer surplus in a PC market?

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Yes and No

• The price you are willing to pay is DEMAND
• The demand represents what it is worth to you, MU
• Therefore, Demand curve price MU
• With downward sloping demand curves there is
  ALWAYS consumer surplus, but with horizontal PC
  there is not

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Efficiency again

• Idea of P MU MC results in ALLOCATIVE
  EFFICIENCY
• People gain exactly what they pay for
• Different from PRODUCTIVE EFFICIENCY (P min
  ATC), which is simply about producing cheaply

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Problem with Market Power

• The problem is that it always, by design,
  decreases efficiency
• Monopolists are not looking to produce
  efficiently, they are looking to maximize their
  profit
• In doing so, they WANT TO reduce output and raise
  the price
• Ideally you want to work less, but just charge
  more for the work you do

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Can be Efficient

• Ironically, the only way for a Monopolist to
  produce efficiently is to PRICE
  DISCRIMINATEcharge based on what willing to pay
• If can effectively segregate market prevent
  resale, you can increase your profit a lot but
  also increase efficiency as the consumers gain
  their exact value paid (MU MC)

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betweeners

• MC follows closely to PC, except the products are
  not identical, which means that the prices are
  not identical
• Face NONPRICE Competition since advertising,
  location, etc will determine product sold (cannot
  change price much)

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Oligopolies

• Closer to Monopolists but would really like to be
• Would choose to work together if possible,
  COLLUSIVE OLIGOPOLY, and sometimes even have
  agreements (cartels, OPEC)
• But if cannot work together, than have to fight
  to win
• Price Fixing helps them, Price Wars help us

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Game Theory

• When competing with someone else, you do not
  consider your best possible outcome by value
  alone
• You consider your best outcome based on what you
  think they will do
• Payoff matrix

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Summary

• 75 done with MICRO
• NEED TO GET THIS STUFF NOW BEFORE MOVING ON
• Will be finishing book within a few weeks then
  start reviewing everything
• DOESNT MATTER IF TAKING THE TESTEVERYBODY IS
  DOING THE SAME WORK FOR THE SAME GRADE
• YOU WILL BE READY FOR THE TEST SO YOU MIGHT AS
  WELL TAKE IT
• WE STOP PREPARING DO PROJECTS WHEN WE REACH
  THAT POINT

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Hard stuff

• If always want to do the same thing you have a
  DOMINANT STRATEGY
• If both people have a dominant strategy there is
  a DOMINANT EQUILIBRIUM
• If you cannot benefit from collusion, then there
  is a NASH EQUILIBRIUM (also called a
  NONCOOPERATIVE equilibrium)
• Bottom line its their choice that decides what
  you should do