|Hiltgunt Fanning: Microeconomics
Introduction to Microeconomics – Abstracts
Chapter 1 : Introduction
Chapter 1 is concerned with the subject, the purpose and the characteristics of economics. It explains that as a result of boundless human needs and limited resources, economics may be defined as the science studying how society manages its scarce resource. Economics shares with other sciences the scientific approach, the use of models and different levels of study. What differentiates it from natural sciences is the fact that economics cannot rely on laboratory tests for developing and verifying its theories. Chapter 1 explains one central economic model – the Production Possibilities Frontier and presents 7 assumptions about the economic behaviour of humans.
Chapter 2: Supply and Demand in Markets
Chapter 2 is dedicated to the central model of microeconomics, the perfectly competitive market. First, this market model is defined and compared with other market forms. Then, demand and supply as the two antagonists of markets representing the buyers and the sellers respectively are analysed regarding their determinants and interplay. Central elements dealt with are the law of demand / supply, the demand / supply schedules, the demand / supply curves and the market equilibrium.
Chapter 3: Supply, Demand and Elasticity
Chapter 3 deals with elasticity as a measure of how much buyers and sellers respond to changes in market conditions, which is necessary for assessing how total revenue will be affected by these changes. The central element of chapter 3 is the price elasticity of demand, its determinants, ranges and how to calculate it as well as the impact of price changes on total revenue. Income elasticity of demand, cross-price elasticity of demand and price elasticity of supply are also explained.
Chapter 4: Efficiency of markets and Elasticity
Chapter 4 uses the concepts of consumer surplus (= willingness to pay – actual price), producer surplus (= actual price – costs to sellers) and total surplus (consumer surplus + producer surplus) to show that the equilibrium of markets is the point at which total surplus is maximised.
Chapter 5: Externalities
Chapter 5 analyses cases in which people who are not participants of a particular market are affected by market outcomes without paying or being compensated. This impact may be beneficial (positive externalities) and thus supported by society or adverse (negative externalities) and thus punished by society.
Chapter 6: Supply, Demand and Government policies
Chapter 6 identifies externalities, markets with incomplete competition and political pressure (market outcomes perceived as unfair) as cases in which governments may decide to impose price controls or taxation. It shows that such interference always results in market imbalances between quantities supplied and demanded or in reduced market size. As regards taxation, chapter 6 also discusses tax incidence and elasticities.
Chapter 7: Public goods or Private goods?
Chapter 7 uses the criteria of excludability and rivalry for distinguishing 4 kinds of goods: private goods, public goods, common resources and natural monopolies. It shows why public goods are not offered by private markets and how and why goods / services may change their classification over time.
Chapter 8: The Costs of Production
Starting from the profit motive as the central consideration of firms, this chapter introduces central terms needed for calculating profit – total revenue, total cost, explicit costs, implicit costs, economic as opposed to accounting profit, fixed and variable costs, average costs and the shape of cost curves and the production function over time.
Based on cost-and-revenue analysis, chapter 9 explains when firms will enter or leave markets and at what point profits are maximised.
Chapter 10 shows why competition on monopoly markets, oligopoly markets and markets with monopolistic competition is imperfect. The main problem with monopoly markets is the fact that monopolies cannot set prices at the point where marginal cost equals marginal revenue, because for them marginal revenue is always smaller than average revenue. Instead, they have to use the demand curve, which depicts average revenue, for setting the price. As a result, monopoly prices are higher than prices on markets with perfect competition, which means a loss of welfare for consumers.
Firms on oligopoly markets may co-operate and act as one, in which case the market outcomes are identical to monopoly markets. The second situation on oligopoly markets is competition, in which case individual oligopolists try to achieve more profit by breaking the production agreement and producing more and thus achieving higher revenues than their competitors. A Nash equilibrium arises if all parties break the agreement and produce more. In this case, all parties concerned suffer losses of revenue as compared with the initial situation of oligopolists behaving as a monopoly.
What differentiates markets with monopolistic competition from markets with perfect competition is the fact that they try to create the impression that their products are unique. This strategy, if successful, allows them to behave like monopolies and charge monopoly prices.
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