ECONOMICS NOTES
Full Summary
RSM BT1210
The document contains all the relevant information from the Microeconomics Book used in
the Economics Course at RSM. The notes are color coded and well-structured and include
additional explanations. Grade obtained by studying with this material: 10 (maximum)
,Economics Block 3 RSM
Contents
Chapter 3: Using Supply and Demand to analyse markets ................................................................................. 8
Consumer and Producer Surplus: Who benefits in a market? ................................................................................. 8
Consumer surplus ................................................................................................................................................ 8
Consumer surplus ................................................................................................................................................ 8
Calculate the producer and consumer surplus .................................................................................................... 9
The distribution of gains and losses from changes in market conditions .......................................................... 10
Calculate the shifts in consumer and producer surpluses ................................................................................. 11
Price regulations .................................................................................................................................................... 11
Price ceilings....................................................................................................................................................... 11
Analysing surplus changes due to regulations using equations ......................................................................... 12
Chapter 4: Consumer Behaviour .................................................................................................................... 13
The consumer’s preferences and the concept of utility ........................................................................................ 13
Assumptions about consumer preferences ....................................................................................................... 13
The concept of utility ......................................................................................................................................... 14
Marginal utility ................................................................................................................................................... 14
Utility and comparisons ..................................................................................................................................... 14
Indifference curves................................................................................................................................................. 14
Characteristics of indifference curves ................................................................................................................ 15
The marginal rate of substitution ....................................................................................................................... 16
The marginal rate of substitution and marginal utility....................................................................................... 16
The steepness of indifference curves ................................................................................................................. 17
The curvature of indifference curves: Substitutes and complements ............................................................... 17
Perfect substitutes ............................................................................................................................................. 18
Perfect complements ......................................................................................................................................... 18
The consumer’s income and the budget constraint .............................................................................................. 19
The slope of the budget constraint .................................................................................................................... 20
Factors that affect the budget constraint........................................................................................................... 20
Nonstandard budget constraints ....................................................................................................................... 20
Implications of utility maximization ................................................................................................................... 26
Chapter 5: Individual and Market demand ..................................................................................................... 31
How income changes affect an individual’s consumption choices ........................................................................ 31
Assumptions about consumer preferences ....................................................................................................... 31
Income elasticities and types of goods .............................................................................................................. 31
The income expansion path ............................................................................................................................... 32
The Engel Curve ................................................................................................................................................. 32
How price changes affect consumption choices .................................................................................................... 33
,Economics Block 3 RSM
Deriving a demand curve ................................................................................................................................... 33
Shifts in a demand curve .................................................................................................................................... 34
Consumer responses to price changes: Substitution and income effects ............................................................. 35
Isolating the substitution effect ......................................................................................................................... 36
Isolating the income effect................................................................................................................................. 38
The total effects ................................................................................................................................................. 38
What determines the size of the substitution and income effects? .................................................................. 38
Giffen Goods ...................................................................................................................................................... 39
The impact of changes in another good’s price: substitutes and complements.................................................... 39
A change in the price of a substitute good ........................................................................................................ 39
Indifference curve shapes, revisited .................................................................................................................. 40
Combining individual demand curves to obtain the market demand curve ......................................................... 41
The market demand curve ................................................................................................................................. 42
The market demand curve ................................................................................................................................. 42
Chapter 6: Producer Behaviour ...................................................................................................................... 43
The basics of production ........................................................................................................................................ 43
Simplifying assumptions about firms’ production behaviour ............................................................................ 43
Production functions .......................................................................................................................................... 44
Production in the short run ................................................................................................................................... 44
Marginal product ............................................................................................................................................... 44
Average product ................................................................................................................................................. 45
Production in the long run ..................................................................................................................................... 45
The Long-Run Production Function.................................................................................................................... 45
The firm’s cost-minimizing problem....................................................................................................................... 46
Isoquants ............................................................................................................................................................ 46
Substitutability ................................................................................................................................................... 47
Isocost lines ........................................................................................................................................................ 48
Identifying minimum cost: Combining isoquants and Isocost lines ................................................................... 50
Input price changes ............................................................................................................................................ 51
Returns to scale...................................................................................................................................................... 51
Factors affecting returns to scale ....................................................................................................................... 52
Technological change ............................................................................................................................................. 52
The firm’s expansion path and total cost curve ..................................................................................................... 53
Chapter 7: Costs............................................................................................................................................ 53
, Economics Block 3 RSM
Costs that matter for decision making: Opportunity costs .................................................................................... 53
Costs that do not matter for decision making: Sunk costs..................................................................................... 54
Sunk costs and decisions .................................................................................................................................... 54
Costs and cost curves ............................................................................................................................................. 54
Flexibility and fixed versus variable costs........................................................................................................... 55
Deriving cost curves ........................................................................................................................................... 55
Average and marginal costs ................................................................................................................................... 56
Average cost measures ...................................................................................................................................... 56
Marginal cost...................................................................................................................................................... 56
Relationships between average and marginal costs .......................................................................................... 57
Short-run and long-run cost curves ....................................................................................................................... 57
Short-run production and total cost curves ....................................................................................................... 57
Short-run versus long-run average total cost curves ......................................................................................... 59
Short-run versus long-run marginal cost curves ................................................................................................ 60
Economies in the production process .................................................................................................................... 60
Economies of scale ............................................................................................................................................. 60
Economies of scale versus returns to scale ........................................................................................................ 61
Economies of scope ........................................................................................................................................... 61
Where Economies of scope come from ............................................................................................................. 62
Chapter 8: Supply in a competitive market ..................................................................................................... 63
Market structures and perfect competition in the short run ................................................................................ 63
Perfect competition ........................................................................................................................................... 63
Profit maximization in a perfectly competitive market.......................................................................................... 64
Total revenue, total cost, and profit maximization ............................................................................................ 64
How a perfectly competitive firm maximizes profit ........................................................................................... 65
Measuring a firm’s profit .................................................................................................................................... 66
Perfect competition in the short run ..................................................................................................................... 68
A firm’s short-run supply curve in a perfectly competitive market .................................................................... 68
The short-run supply curve for a perfectly competitive industry ...................................................................... 69
Producer surplus for a competitive firm in the short run .................................................................................. 70
Producer surplus and profit ............................................................................................................................... 71
Producer surplus for a competitive industry...................................................................................................... 71
Perfect competition in the long run ....................................................................................................................... 72
Entry ................................................................................................................................................................... 72
Exit ..................................................................................................................................................................... 73
Graphing the industry long-run supply curve .................................................................................................... 74
Adjustment between Long-run Equilibria .......................................................................................................... 75
Full Summary
RSM BT1210
The document contains all the relevant information from the Microeconomics Book used in
the Economics Course at RSM. The notes are color coded and well-structured and include
additional explanations. Grade obtained by studying with this material: 10 (maximum)
,Economics Block 3 RSM
Contents
Chapter 3: Using Supply and Demand to analyse markets ................................................................................. 8
Consumer and Producer Surplus: Who benefits in a market? ................................................................................. 8
Consumer surplus ................................................................................................................................................ 8
Consumer surplus ................................................................................................................................................ 8
Calculate the producer and consumer surplus .................................................................................................... 9
The distribution of gains and losses from changes in market conditions .......................................................... 10
Calculate the shifts in consumer and producer surpluses ................................................................................. 11
Price regulations .................................................................................................................................................... 11
Price ceilings....................................................................................................................................................... 11
Analysing surplus changes due to regulations using equations ......................................................................... 12
Chapter 4: Consumer Behaviour .................................................................................................................... 13
The consumer’s preferences and the concept of utility ........................................................................................ 13
Assumptions about consumer preferences ....................................................................................................... 13
The concept of utility ......................................................................................................................................... 14
Marginal utility ................................................................................................................................................... 14
Utility and comparisons ..................................................................................................................................... 14
Indifference curves................................................................................................................................................. 14
Characteristics of indifference curves ................................................................................................................ 15
The marginal rate of substitution ....................................................................................................................... 16
The marginal rate of substitution and marginal utility....................................................................................... 16
The steepness of indifference curves ................................................................................................................. 17
The curvature of indifference curves: Substitutes and complements ............................................................... 17
Perfect substitutes ............................................................................................................................................. 18
Perfect complements ......................................................................................................................................... 18
The consumer’s income and the budget constraint .............................................................................................. 19
The slope of the budget constraint .................................................................................................................... 20
Factors that affect the budget constraint........................................................................................................... 20
Nonstandard budget constraints ....................................................................................................................... 20
Implications of utility maximization ................................................................................................................... 26
Chapter 5: Individual and Market demand ..................................................................................................... 31
How income changes affect an individual’s consumption choices ........................................................................ 31
Assumptions about consumer preferences ....................................................................................................... 31
Income elasticities and types of goods .............................................................................................................. 31
The income expansion path ............................................................................................................................... 32
The Engel Curve ................................................................................................................................................. 32
How price changes affect consumption choices .................................................................................................... 33
,Economics Block 3 RSM
Deriving a demand curve ................................................................................................................................... 33
Shifts in a demand curve .................................................................................................................................... 34
Consumer responses to price changes: Substitution and income effects ............................................................. 35
Isolating the substitution effect ......................................................................................................................... 36
Isolating the income effect................................................................................................................................. 38
The total effects ................................................................................................................................................. 38
What determines the size of the substitution and income effects? .................................................................. 38
Giffen Goods ...................................................................................................................................................... 39
The impact of changes in another good’s price: substitutes and complements.................................................... 39
A change in the price of a substitute good ........................................................................................................ 39
Indifference curve shapes, revisited .................................................................................................................. 40
Combining individual demand curves to obtain the market demand curve ......................................................... 41
The market demand curve ................................................................................................................................. 42
The market demand curve ................................................................................................................................. 42
Chapter 6: Producer Behaviour ...................................................................................................................... 43
The basics of production ........................................................................................................................................ 43
Simplifying assumptions about firms’ production behaviour ............................................................................ 43
Production functions .......................................................................................................................................... 44
Production in the short run ................................................................................................................................... 44
Marginal product ............................................................................................................................................... 44
Average product ................................................................................................................................................. 45
Production in the long run ..................................................................................................................................... 45
The Long-Run Production Function.................................................................................................................... 45
The firm’s cost-minimizing problem....................................................................................................................... 46
Isoquants ............................................................................................................................................................ 46
Substitutability ................................................................................................................................................... 47
Isocost lines ........................................................................................................................................................ 48
Identifying minimum cost: Combining isoquants and Isocost lines ................................................................... 50
Input price changes ............................................................................................................................................ 51
Returns to scale...................................................................................................................................................... 51
Factors affecting returns to scale ....................................................................................................................... 52
Technological change ............................................................................................................................................. 52
The firm’s expansion path and total cost curve ..................................................................................................... 53
Chapter 7: Costs............................................................................................................................................ 53
, Economics Block 3 RSM
Costs that matter for decision making: Opportunity costs .................................................................................... 53
Costs that do not matter for decision making: Sunk costs..................................................................................... 54
Sunk costs and decisions .................................................................................................................................... 54
Costs and cost curves ............................................................................................................................................. 54
Flexibility and fixed versus variable costs........................................................................................................... 55
Deriving cost curves ........................................................................................................................................... 55
Average and marginal costs ................................................................................................................................... 56
Average cost measures ...................................................................................................................................... 56
Marginal cost...................................................................................................................................................... 56
Relationships between average and marginal costs .......................................................................................... 57
Short-run and long-run cost curves ....................................................................................................................... 57
Short-run production and total cost curves ....................................................................................................... 57
Short-run versus long-run average total cost curves ......................................................................................... 59
Short-run versus long-run marginal cost curves ................................................................................................ 60
Economies in the production process .................................................................................................................... 60
Economies of scale ............................................................................................................................................. 60
Economies of scale versus returns to scale ........................................................................................................ 61
Economies of scope ........................................................................................................................................... 61
Where Economies of scope come from ............................................................................................................. 62
Chapter 8: Supply in a competitive market ..................................................................................................... 63
Market structures and perfect competition in the short run ................................................................................ 63
Perfect competition ........................................................................................................................................... 63
Profit maximization in a perfectly competitive market.......................................................................................... 64
Total revenue, total cost, and profit maximization ............................................................................................ 64
How a perfectly competitive firm maximizes profit ........................................................................................... 65
Measuring a firm’s profit .................................................................................................................................... 66
Perfect competition in the short run ..................................................................................................................... 68
A firm’s short-run supply curve in a perfectly competitive market .................................................................... 68
The short-run supply curve for a perfectly competitive industry ...................................................................... 69
Producer surplus for a competitive firm in the short run .................................................................................. 70
Producer surplus and profit ............................................................................................................................... 71
Producer surplus for a competitive industry...................................................................................................... 71
Perfect competition in the long run ....................................................................................................................... 72
Entry ................................................................................................................................................................... 72
Exit ..................................................................................................................................................................... 73
Graphing the industry long-run supply curve .................................................................................................... 74
Adjustment between Long-run Equilibria .......................................................................................................... 75
