MINISTRY OF EDUCATION AND SCIENCE OF UKRAINE TERNOPIL NATIONAL ECONOMIC UNIVERSITY Iryna Chyrak MICROECONOMICS Textbook Ternopil TNEU 2018 UDK 330.101.542 C-64 Reviewers: Kyrylenko Volodymyr Ivanovych – Doctor of Economic Science, Professor, Head of the Department of economic theory of Kyiv National Economic University named after Vadym Hetman. Strishenets Olena Mykolayivna – Doctor of Economic Science, Professor, Head of the Department of analytical economy and nature management of the Eastern European National University named after Lesia Ukrayinka. Kyrych Natalia Bohdanivna – Doctor of Economic Science, Professor, Head of the Department of management in the production area of the Ternopil National Technical University named after Ivan Pulyuy. Recommended for publication by the Academic Council of Ternopil National Economic University (Protocol No 5 dated December 21, 2018). Chyrak Iryna C-64 Microeconomics : Textbook / Edited by Iryna Chyrak. – Ternopil : TNEU, 2018. – 223 p. The textbook provides an integrated statement of the theoretical and methodological foundations of microeconomics as a science about the basic laws of the market economy functioning at the level of producer and consumer, which reveals the mechanism of decision-making by business entities who seek to achieve maximum needs satisfaction due to limited resources. By its structure and content, the textbook will help students to form the knowledge about the mechanisms and principles of the functioning of economic agents in market conditions, their incentive motives and economic decisions, the ability to analyze the functional relationships between the main economic parameters of the theoretical models and determine the expected results of the decisions, accepted by economic agents in different market situations, use the microeconomic analysis toolkit to evaluate the choice rationality of microsystem decisions, optimize their behavior and apply microeconomic research techniques in order to explain phenomena and analysis of economic results of the business systems. The main textbook’s task is to provide students with the knowledge of the fundamental theoretical and methodological principles of microeconomics and explain the internal relations and relations between economic phenomena, the implantation of skills to use and apply acquired knowledge in solving practical problems, the ability to perform technical and economic calculations related to justification of the optimality of the microeconomic systems decisions, use the microeconomic analysis tools in their further professional activity. Each chapter is devoted to the research of specific phenomena and processes occurring in the microsystem and ends with training which includes basic terms and concepts, questions and tasks for students’ self-control, tasks and tests. The textbook is recommended for students, postgraduates and lecturers of higher education institutions, as well as for anyone interested in microeconomics. UDK 330.101.542 © Iryna Chyrak., 2018 2 CONTENT INTRODUCTION ........................................................................... .........................7 Theme 1. The Subject and Methods of Microeconomics ...................................................... 8 1.1 Microeconomics as a science and historical stages of its development...... .........8 1.2. Essence and structure of the Microsystem...................................... ....................12 1.3. Subject and methods of microeconomic research.............................................. 15 Training .......................................................................................................................18 CHAPTER I. THE THEORY OF CONSUMER BEHAVIOR Theme 2. The Theory of Consumer Behavior. The Marginal Utility of Product ..................21 2.1. The humans needs: essence and structure. The law of increasing needs........... 21 2.2. Utility and its functions. Marginal utility of product. The Gossen’s first law ......25 2.3. The consumer’s equilibrium. The Gossen’s second law.................................... 31 Training ..................................................................................................................... 33 Theme 3. The Ordinal Theory of Consumer’s Behavior .................................................... .. 38 3.1. The Consumer’s choice from ordinal positions and the axiom of the rational consumer behavior............................................... ........................38 3.2. Indifference curves and their properties............................................................. 40 3.3. The budget constraints of consumer and its graphical representation................ 43 3.4 The consumer’s optimum in providing the rational consumer’s choice............. 46 Training ..................................................................................................................... 48 Theme 4. The Analysis of Consumer’s Behavior .................................................................. 53 4.1. The consumer’s reaction to the change of own income. Engel’s curves........... 53 4.2. The consumer’s reaction to the change of prices of goods. Curve “Price-consumption” and individual demand curve..................... ............56 4.3. The income and substitution effects. The Giffen paradox.................... .................59 Training ..................................................................................................................... 62 3 Theme 5. Demand, Supply and Market Equilibrium .................................... ........................67 5.1. Demand, factors of demand. The law of demand.............................. ................. 67 5.2. Supply, factors of supply. The law of supply................................... ...................70 5.3. The market equilibrium............................................................ .............................72 5.4. Elasticity of demand: indicators and factors of impact...................................... 74 5.5. Elasticity of supply................................................................. .............................77 Training ..................................................................................................................... 78 СHAPTER II. THE PRODUCER’S BEHAVIOR THEORY Theme 6. The Microeconomic Model of the Enterprise ....................................................... 82 6.1. Comparative features of the firm and enterprise............................................ .....82 6.2. The enterprise as a part of microeconomic system. Types of enterprises..............84 6.3. Instant, short-term and long-term market periods of the enterprise functioning.................................................................... ............87 6.4. The concept of production functions, their properties, types and forms of presentation...................... ...............................................................................89 Training ..................................................................................................................... 90 Theme 7. The Variation of Production Factors and the Producer’s Optimum ................. ..91 7.1. The production function with one variable factor. Total, average and marginal product............................................. ......................91 7.2. The production function with two variables. The curve of the same product – isoquant. Marginal rate of technical substitution of resources .............93 7.3. The choice of a combination of production factors due to the minimizing costs or maximizing output criterion. Isocost curve........................................... 96 7.4. The producer’s optimum: graphical, algebraic, economic forms of his equilibrium functioning................................ ............................................ 98 Training .......................................................................................... ............................100 Theme 8. Cost and Income of Enterprise .............................................................................. ..104 8.1. Cost of the enterprise. Economic and accounting approaches to cost determination.................................................................. .........................104 8.2. Cost of the enterprise in short-term market period........................... ...................106 8.3. Сost of the enterprise in long-term market period........................... ....................108 8.4. The concept of the minimal effective size of the enterprise and the structure of the industry......................................................................... 110 8.5. The essence and forms of income of the enterprise.......................... ..................112 Training ........................................................................................................................113 4 CHAPTER III. BEHAVIOR OF FIRM IN DIFFERENT MARKET STRUCTURES Theme 9. The Market of Perfect Competition ...................................................................... ..118 9.1. Peculiarities and conditions of the competitive market model.............. ..............118 9.2. Demand for products, income and profit of the competitive firm...................... 120 9.3. Maximization of the firm’s profit in conditions of perfect competition... ...........122 Training .......................................................................................................................125 Theme