Econ 201: Microeconomic Principles, V. Tremblay
Review Sheet for Test 1
1. Introduction
Economics – definition, micro/macro, positive/normative, opportunity cost
Marginal Analysis – marginal benefit, marginal cost, and MB = MC Rule
Important Goals of an Economic System – efficiency, equity, progress, macro stability
Law or Principle of Comparative Advantage and Gains from Trade
2. Basics of Demand and Supply
Definitions – very short run (VSR), short run (SR), and long run (LR)
Definitions – demand and supply curves
Demand Determinants: price and demand shifters [other prices (substitutes and
complements), income, tastes, and number of consumers]
Supply Determinants: price and supply shifters [other prices (substitutes and
complements), technology, and number of competitors]
Market Equilibrium and Disequilibrium Conditions (excess D and S)
Comparative Statics (i.e., how p* and Q* change with changes in D and S shifters)
Market Constraints: price ceilings and floors, minimum wage law
3. Consumer Choice and Demand
Definitions – total utility (U) and marginal utility (MU)
Utility Optimization Rule: MU1/p1 = MU2/p2
Law of Demand
Market Demand
Total and Net (Consumer) Surplus
Modern Approach to Consumer Demand – indifference curve and budget line analysis
Budget Line: p1 q1 + p2 q2 = m where p is price, q is quantity, and m is income.
Indifference Curve: identifies all bundles of goods where the consumer’s utility is the
same.
Optimal Bundle: Where indifference curve is tangent to budget line.
Motives of Consumer Demand – functional and non-functional (speculative and external
effects).
4. Elasticity (η)
Demand Elasticity: ηD = | (%ΔQD)/(%Δp) | ; point and arc (midpoint) formulas
elastic, unit elastic, and inelastic
Relationship between price elasticity of demand and total revenue
Demand Elasticity with respect to income, other prices
Elasticity – with respect to income and other prices
Supply Elasticity: ηS = | (%ΔQS)/(%Δp) |
Econ 201: Microeconomic Principles, V. Tremblay
Review Sheet for Test 2
1. Elasticity (η)
Demand Elasticity: ηD = | (%ΔQD)/(%Δp) | ; point and arc (midpoint) formulas
Supply Elasticity: ηS = | (%ΔQS)/(%Δp) |
2. Short-Run (SR) Production and Cost Theory
Profit: economic vs accounting
Production Function: describes the relationship between inputs and production – q = f(L, K)
SR Production Relationships: TPL = q, APL = q/L, MPL = Δq/ΔL
Law of Diminishing Returns (MP): the MP will eventually fall (i.e., have a negative slope).
SR Cost Relationships:
TC = PL L + PK K
║
║
TVC
TFC
SATC = TC/q = TVC/q + TFC/q
║
║
SAVC
SAFC
SMC = ΔTC/Δq
SR Production & Cost Relationships (Duality): SAVC = PL /APL, SMC = PL/MPL
2. Long-Run (LR) Production and Cost Theory
Cost-Minimizing Condition: MPL/PL = MPK/ Pk
Principle of Substitution: Profit maximizers will attempt to use more of the relatively cheaper input.
LR Costs: LTC, LAC, LMC
Economies of Scale, Constant Returns to Scale, and Diseconomies of Scale.
Technological Change and Its Impact on Production and Cost Relationships
3. Perfect Competition
Profit Maximizing Rule: Produce where P = MC
Shut-Down Condition: Shut down (q* = 0) when P < SAVC
Firm’s SR Supply: SMC above the minimum SAVC
SR Industry Supply
Firm’s LR Equilibrium Condition: P = LMC, P = minimum LAC
LR Industry Supply: constant, increasing, and decreasing cost cases
4. Monopoly
Profit Maximizing Rule: Produce where MR = MC, charge maximum price to sell that output
Monopoly Profits: may be positive in the LR
P-Discrimination
Tax Incidence – Perfect Competition vs Monopoly
Social Welfare (Efficiency): perfect competition is allocatively efficient because P = MC; monopoly is
allocatively inefficient because P > MC
5. Oligopoly
Game Theory
Profit Maximizing Rule: Produce where MR = MC
Types of Equilibria: (1) Static – cartel, dominant strategy, Nash; (2) Dynamic -- sub-game perfect
Cournot Limit Theorem
Econ 201: Microeconomic Principles, V. Tremblay
Review Sheet for Final Exam
1. Introduction
Economics – definition, micro/macro, positive/normative
Marginal Analysis (MB = MC)
Goals of an economic system – efficiency, equity, progress, macro stability
2. The Basics of Demand and Supply
Definitions for very short run (VSR), short run (SR), and long run (LR)
Demand Determinants – price and demand shifters (m, Pother , N, Tastes)
Supply Determinants – price and supply shifters (Pother, Pinputs, Technology, N)
Market Equilibrium and Disequilibrium Conditions
Applications – price ceiling and price floor, minimum wage law
3. Consumer Choice and Demand
Utility, Utility Maximization, and Consumer Demand
Market Demand and Consumer Surplus
Price Elasticity of Demand (ηD)
4. Production and Cost Theory
Profits – economic v. accounting
Production Function and SR Production Relationships – TPL, APL, MPL
Costs and SR Cost Relationships –
TC = PL L + Pk K
║
║
TVC
TFC
SATC = TC/q = TVC/q + TFC/q
LR Cost Minimizing Condition, LTC, LAC, LMC, and Technological Change
Economies of Scale, Constant Returns, and Diseconomies of Scale
5. Output Markets and Supply
Perfect Competition – π-maximization rule (P = MC), firm demand, firm supply, LR equilibrium
condition, VSR, SR, & LR industry supply, p-elasticity of S (ηS)
Tax Incidence – impact of ηD and ηS
Monopoly – π-maximization rule (MR = MC), efficiency loss, p-discrimination
Oligopoly – cartel, Nash Equilibrium, Cournot Limit Thm, subgame perfect equilibrium
6. Market Success and Failure
Efficiency and the First Welfare Theorem (“Invisible Hand Theorem”)
Equity – distribution of income/wealth, Rawls’ Principle of Social Justice
Market Failure – Monopoly, Externalities or spillovers (MCS  MBS), Public Goods (free rider
problem), and Risk/Uncertainty (asymmetric information and the lemons example)
Government Solutions – antitrust, pollution legislation, provision of public goods, mitigate
problems with risk, government failure (measurement and bureaucracy problems)
Strengths and Weaknesses of Capitalism – efficiency, equity, progress, macro stability
7. Labor Markets and Poverty (TIME PERMITTING)
Demand [VMPL (MRPL)] and Supply of Labor
Labor Market Equil – “Black Death in Europe,” minimum wage law, discrimination
Poverty – definition, causes, solutions
List of Main Symbols Used in Class
Econ 201
Demand and Supply
D = market demand (d = individual consumer or firm demand)
QD = quantity demanded
P = price
M = money income
POG = price of other goods (substitutes and complements in consumption)
T = consumer tastes
POP (or N) = number of consumers
S = market supply
QS = quantity supplied
POG = price of other goods (substitutes and complements in production)
PIN = price of inputs (labor, capital, and materials)
Tech Δ = technological change
n = number of firms
Consumer Choice and Demand
U = total utility
qi = quantity of good i (f = food, c = clothing, ...)
Pi = price of good i
MU = ΔU/Δqi = marginal utility
CS = consumer surplus
PS = producer surplus
IC = indifference curve
BL = budget line
η = elasticity
TR = P Q = total revenue
AR = TR/Q = P = average revenue
MR = ΔTR/ΔQ = marginal revenue
Production and Cost Theory in the Short Run (SR) and the Long Run (LR)
L = labor
K = capital (which sometimes includes materials)
TPi = q = total product of input i (L or K)
APi = q/i = average product of input i
MPi = Δq/Δi = marginal product of input i
PL = price of labor
PK = price of capital
TC = PL L + PK K = total cost
TVC = PL L = short-run total variable cost
TFC = PK K = short-run total fixed cost
SATC = TC/q = SAVC + SAFC = short-run average total cost
SAVC = TVC/q = short-run average variable cost
SAFC = TFC/q = short-run average fixed cost
SMC = ΔTC/Δq = short-run marginal cost
LTC = long-run total cost
LAC = LTC/q = long-run average cost
LMC = ΔLTC/Δq = long-run marginal cost