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Microeconomics-formulas-1

Microeconomics (Universiteit van Amsterdam)

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Microeconomics – formulas

Name/Deiniion/explanaio Formula Example

n
Proit π =RT −CT
Proit maximizaion π ´ =MR−MC
Price Perfect Compeiion:
MR=MC=P
Monopoly:
MR=MC
And P is on the demand curve!
->

Total Revenue TR = P*Q

Marginal Cost MC=∆ C /∆ Q = C´(Q)
Marginal Revenue ∆R
=R´ ( Q )=P
∆Q
Producer Surplus PS=R−V C ) ½ * Exercise 5, Chapter 8
¿
base*height
To ind the output that MC= AC
maximizes AC (average cost) Exercise 7, Chapter 8
Posiive output as long as  P=MC > AVC Exercise 7, Chapter 8
Negaive output whenever P = MC < AC Exercise 7, Chapter 8

Market equilibrium Q (demanded) = Q (supplied) Exercise 10, Chapter 8
Output supplied/demanded MC = P MC = 2q/200 ; P= 5
2q/200 = 5
q = 500
Lerner index P−MC −1 Exercise 3, Chapter 10
LI = =
P El Exercise 11, Chapter 10
MC
↔ P=
1
1+( )
El
Monopoly: proit is π ´ =MR−MC
maximized when 
In the case of monopoly, the AR = P = a – bq So if P = 700 – 5Q
slope of MR is twice as steep  MR = a – 2bq MR = 700 – 10Q
as the slope of AR Because:
TR = P * q = aq – bq2
And MR = (TR)’ = q – 2bq
If one factory has higher Exercise 8, Chapter 10
labor costs (if labor costs
increase), MC is shiting to
the let, so MCT (total
marginal cost curve) as well,
quanity will go down, so
prices must increase
If average cost is constant, If AC = 20
then marginal cost is MC = AC
constant and equal to MC = 20

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average cost
If both markets are forced to
charge the same price 
Deadweight loss
No deadweight loss
Deadweight loss formula
Price discriminaion
Consumer Surplus
Q = Q1 + Q2 Exercise 4, Chapter 11
P > MC Exercise 5, Chapter 11
P = MC
½ * (Qc-Qm)(Pc-Pm) Suppose Q*=6; P*= 9; P=15-Q; MC= 3
 P > MC
 15-Q > 3
 Q < 12
DWL = ½ *(12-6)(9-3)
The monopolist chooses quaniies in
each market, such that marginal
revenue equals marginal cost
If C = a + 5q, MC = 5 (slope)
½ *height*base

Exercise 10 chapter 11
If MC= 0
TC = FC
If you have to compare two Exercise 2 Chapter 12
irms, you usually take MC of
the irm that has a lower MC
Cournot model: irm 1 takes Exercise 2, Chapter 12
irm 2´s output as given and
maximizes proit
Nash equilibrium: when
neither party has an
incenive to switch its
strategy, taken the other
strategy as given
Chapter 13
Dominant strategy: you do
not look at what the other
irm does
Maximin strategy: to
maximize the minimum gain
that can be achieved
The total supply curve for all
of the irms in on industry is
found by horizontally
summing the ive marginal
cost curves
If two irms collude, they Suppose: P=300-3Q
should each produce half the C(Q) = 30Q + 1,5Q^2
quanity that maximizes total
industry proit

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q 1,5∗Q2
30 + =270 Q−3,75Q2
2 2
π=300−3 Q¿ Q−2¿
Thus π ´ =270=7,5Q
Q = 36; Q1=Q2=18
Price Discriminaion 1-degree price discriminaion:
price at willingness to pay
(poor, rich,..)
2-degree price discriminaion:
price depends on total Q
3-degree price discriminaion:
group discriminaion (students,
elderly,..)
Income I = pxX + pyY
Increasing RTS Output more than doubles
when inputs double
Decreasing RTS Output less than doubles
when inputs double
Constant RTS Output doubles, when inputs
double
Laspeyres index (Pxt*Xb + Pyt*Yb)/
(Pxb*Xb+PYb*Yb)
Perfect subsitutes U=X+Y Graph: declining straight line

Perfect complements
Normal Uility funcion U = axy
MC in the short term MC = w/ MPL
Cost funcion in the long C(Q)=wL + rK
term
Output eiciency MRS = MRT
Output eiciency in MRTXY = w/r (for all
producion products)
Exchange eiciency MRSXY = PX/PY (for all
consumers)
Eiciency in output markets MRSXY = PX / PY = MCX / MCY
= MRTXY
Marginal social cost MSC = MC + MEC

Marginal External Cost MEC addiional cost imposed on

(also: Marginal Damage MD) ishermen downstream for
each addiional unit of
upstream producion
Social opimum MSB = MSC

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Marginal social beneit MSB

For a firm operating in MR=MC and P=AC

monopolistic competition, it
holds in the long-term
equilibrium that:

Inter-temporal Price Christmas, rush-hours on trains,..

Discriminaion
Two-part tarifs Entry fees = CS
Usage Fee = MC
Cournot Model Compeing in Q!

P = a – b(Q1 + Q2)
Q = Q1 + Q2

1) π 1 = P(Q1,Q2) * Q1 –
C(Q1)
π 2 = P(Q1,Q2) * Q2 –
C(Q2)

2) maximize π 1 given some

ixed Q2:
∂π 1
=0
∂Q 1
<-> Q1* = f(Q2) – reacion
curve

3) Similarly maximize π 2
assuming Q1 is ixed:
∂π 2
=0
∂Q 2
<-> Q2* = f(Q1)

4) Plug Q1 in Q2 and vice versa

to get their values.

5) Plug Q1 and Q2 into P to get

price.
Market eiciency If TS ↑ then ef. ↑
A market outcome is eicient
when it maximizes total
surplus

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Eiciency in producion w MP L
1) (¿
MRTS LK = )
r MPK
MC x
2) MRT =
MC y
(= MR of transformaion = how
much y↓ to ↑x by 1?)
Exchange eiciency Px MUx
MRS XY = =
Py MUy
Eiciency in output markets Px MCx
MRS XY = =MRT =
Py MCy

Market failures 1) Incomplete Info: either MC

or MB
- Adverse selecion
- Moral hazard
2) Externaliies
3) Public Good
 Reasons for
government
intervenion!
Adverse selecion Situaion where buyer and
seller have diferent
informaion about quality of a
product
 Soluion: market
signaling
Moral hazard when one’s behavior cannot be
controlled but afects the
others’ costs. (because of
incomplete informaion)
Externaliies MSC = MC + MEC Standard
(M social C = MC + M external
C)

- Emission Standard (can’t

produce more than xy)
- Emission Fee (the more you
pollute, the more you pay)
- Tradeable Emission Permits
- Property Rights Fee:

Proit maximising emission:

MSC = MCA
Or MEC = MCA

(MCA = M private cost of

abaing emission)

Public goods Price = willingness to pay =

marginal beneit = MB

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Each consumer consumes the

same amount but may value it
diferently (diferent MB)

MB1 + MB2 +.. = verical

summaion of individual
demand curves

Eiciency for public goods:

MB1 + MB2… = MC

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