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Krister Ahlersten Essentials of Microeconomics KRISTER AHLERSTEN ESSENTIALS OF MICROECONOMICS DOWNLOAD FREE TEXTBOOKS AT BOOKBOON.COM NO REGISTRATION NEEDED Krister Ahlersten Microeconomics Download free books at BookBooN.com 2 Microeconomics © 2008 Krister Ahlersten & Ventus Publishing ApS ISBN 978-87-7681-410-6 Download free books at BookBooN.com 3 Microeconomics Contents Contents 1 Introduction 10 1.1 Plan 11 2 Supply, Demand, and Market Equilibrium 12 2.1 Demand 12 2.1.1 The Demand Curve 12 2.1.2 When do We Move along the Demand Curve, and When Does It Shift? 13 2.2 Supply 14 2.2.1 The Supply Curve 14 2.3 Equilibrium 16 2.3.1 How to Find the Equilibrium Point Mathematically 17 2.4 Price and Quantity Regulations 17 2.4.1 Minimum Prices 17 2.4.2 Maximum Prices 19 2.4.3 Quantity Regulations 19 3 Consumer Theory 21 3.1 Baskets of Goods and the Budget Line 22 3.2 Preferences 25 3.3 Indifference Curves 26 3.4 Indifference Maps 27 3.5 The Marginal Rate of Substitution 28 WHAt‘s missing in this equaTION? 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Moller - Maersk. www.maersk.com/mitas Download free books at BookBooN.com 4 Microeconomics Contents 3.6 Indifference Curves for Perfect Substitutes and Complementary Goods 29 3.7 Utility Maximization: Optimal Consumer Choice 31 3.8 More than Two Goods 32 4 Demand 34 4.1 Individual Demand 34 4.1.1 The Individual Demand Curve 34 4.1.2 The Engel Curve 35 4.2 Market Demand 36 4.3 Elasticity 38 4.3.1 Price Elasticity 38 4.3.2 Income Elasticity 39 4.3.3 Cross-Price Elasticity 40 5 Income and Substitution Effects 41 5.1 Normal Good 42 5.2 Inferior Good 43 6 Choice under Uncertainty 46 6.1 Expected Value 46 6.2 Expected Utility 46 6.3 Risk Preferences 48 6.4 Certainty Equivalence and the Risk Premium 49 6.5 Risk Reduction 50 7 Production 51 7.1 The Profi t Function 51 7.2 The Production Function 52 Please click the advert Download free books at BookBooN.com 5 Microeconomics Contents 7.2.1 Average and Marginal Product 52 7.2.2 The Law of Diminishing Marginal Returns 53 7.3 Production in the Short Run 54 7.3.1 The Product Curve in the Short Run 54 7.4 Production in the Long Run 57 7.4.1 The Marginal Rate of Technical Substitution 58 7.4.2 The Marginal Rate of Technical Substitution and the Marginal Products 58 7.4.3 Returns to Scale 59 8 Costs 60 8.1 Production Costs in the Short Run 61 8.2 Production Cost in the Long Run 63 8.3 The Relation between Long-Run and Short-Run Average Costs 66 9 Perfect Competition 68 9.1 Introduction 68 9.2 Conditions for Perfect Competition 68 9.3 Profi t Maximizing Production in the Short Run 69 9.3.1 Strategy to Find the Optimal Short-Run Quantity 71 9.3.2 The Firm’s Short-Run Supply Curve 71 9.3.3 The Market’s Short-Run Supply Curve 72 9.4 Short-Run Equilibrium 72 9.5 Long-Run Production 73 9.6 The Long-Run Supply Curve 75 9.7 Properties of the Equilibrium of a Perfectly Competitive Market 76 10 Market Interventions and Welfare Effects 77 10.1 Welfare Analysis 79 Please click the advert www.job.oticon.dk Download free books at BookBooN.com 6 Microeconomics Contents 11 Monopoly 80 11.1 Barriers to Entry 80 11.2 Demand and Marginal Revenue 80 11.3 Profi t Maximum 81 11.4 The Deadweight Loss of a Monopoly 83 11.5 Ways to Reduce Market Power 84 12 Price Discrimination 85 12.1 First Degree Price Discrimination 85 12.2 Second Degree Price Discrimination 87 12.3 Third Degree Price Discrimination 87 13 Game Theory 88 13.1 The Basics of Game Theory 88 13.2 The Prisoner’s Dilemma 89 13.3 Nash Equilibrium 91 13.3.1 Finding the Nash Equilibrium in a Game in Matrix Form 91 13.4 A Monopoly with No Barriers to Entry 92 13.4.1 Finding the Nash Equilibrium for a Game Tree 93 13.5 Backward Induction 94 14 Oligopoly 96 14.1 Kinked Demand Curve 96 14.1.1 How does the Price in the Kinked Demand Curve Arise? 97 14.2 Cournot Duopoly 98 14.3 Stackelberg Duopoly 99 14.4 Bertrand Duopoly 100 Please click the advert Download free books at BookBooN.com 7 Microeconomics Contents 15 Monopolistic Competition 102 15.1 Conditions for Monopolistic Competition 102 15.2 Market Equilibrium 102 15.2.1 Short Run 102 15.2.2 Long Run 102 16 Labor 104 16.1 The Supply of Labor 105 16.2 The Marginal Revenue Product of Labor 106 16.3 The Firm’s Short-Run Demand for Labor 107 16.3.1 Perfect Competition in both the Input and Output Market 107 16.3.2 Monopoly in the Output Market 108 16.3.3 Monopsony in the Input Market 109 16.3.4 Bilateral Monopoly 110 17 Capital 111 17.1 Present Value 112 17.1.1 Bonds 112 17.1.2 Stocks 113 17.2 Correction for Risk 113 17.2.1 Diversifi able and Nondiversifi able Risk 113 17.3 CAPM: Pricing Assets 115 17.4 Pricing Business Projects 115 18 General Equilibrium 117 18.1 A “Robinson Crusoe” Economy 117 18.2 Effi ciency 117 Turning a challenge into a learning curve. 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Visit accenture.com/bootcamp Download free books at BookBooN.com 8 Microeconomics Contents 18.3 The Edgeworth Box 117 18.4 Effi cient Consumption in an Exchange Economy 119 18.5 The Two Theorems of Welfare Economics 120 18.6 Effi cient Production 120 18.7 The Transformation Curve 121 18.8 Pareto Optimal Welfare 123 18.8.1 A Defi nition of Pareto Optimal Welfare 124 19 Externalities 125 19.1 Defi nition 126 19.2 The Effect of a Negative Externality 126 19.3 Regulations of Markets with Externalities 127 20 Public Goods 128 20.1 Defi nition of Public and Private Goods 128 20.2 The Aggregate Willingness to Pay 128 20.3 Free Riding 129 21 Asymmetric Information 130 21.1 Adverse selection 130 21.1.1 Insurance 130 21.1.2 Used Cars 130 21.1.3 Signaling and How to Reduce Problems with Adverse Selection 131 21.2 Moral hazard 131 21.2.1 How to Reduce Problems with Moral Hazard 132 22 Key Words 133 In Paris or Online International programs taught by professors and professionals from all over the world BBA in Global Business MBA in International Management / International Marketing DBA in International Business / International Management Please click the advert MA in International Education MA in Cross-Cultural Communication MA in Foreign Languages Innovative – Practical – Flexible – Affordable Visit: www.HorizonsUniversity.org Write: [email protected] Call: 01.42.77.20.66 www.HorizonsUniversity.org Download free books at BookBooN.com 9 Microeconomics Introduction 1 Introduction Economics is often defined as something along the lines of “the study of how Economics: The study of society manages its scarce resources.” The starting point of most such studies how society manages its is that individuals allocate their resources such that they themselves will get scarce resources the highest possible level of utility. An individual has an idea of what the con- sequences of different actions will be, and she chooses that action she believes will produce the best result for her. She is, in other words, selfish and rational. Note that she is also forward-looking. She acts so that she in the future will get the highest possible level of utility, independently of what she has already done. That she is selfish does not have to mean that she is an egoist. However, it does mean that she will only voluntarily share with others if she believes that she thereby will maximize her own utility. We often call this simplification of human beings Homo Economicus. Homo Economicus: A The resources that we are talking about here could be labor, capital (such as model of human beings.
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