Price Elasticity of Demand = percentage change in quantity demanded ÷ percentage change in price. |PED| > 1 = elastic (sensitive). |PED| < 1 = inelastic (insensitive).
|PED| > 1
Elastic — quantity changes more than price
|PED| = 1
Unit elastic — proportional change
|PED| < 1
Inelastic — quantity changes less than price
|PED| = 0
Perfectly inelastic — quantity never changes
📊 Microeconomics
MR = MC → Profit maximized
Profit Maximization Rule
Every firm maximizes profit where MR equals MC
Marginal Revenue = Marginal Cost is the profit-maximizing output for any firm, in any market structure. Produce more if MR > MC. Produce less if MC > MR.
📊 Microeconomics
"4 Market Structures: PC, M, O, PC"
Market Structure Types
The 4 market structures and how to tell them apart
Perfect Competition: many firms, identical products. Monopolistic Competition: many firms, differentiated products. Oligopoly: few firms. Monopoly: one firm.
PC
Perfect Competition — many firms, identical products, price takers
MC
Monopolistic Competition — many firms, differentiated products
O
Oligopoly — few large firms, interdependent decisions
M
Monopoly — one firm, price maker, barriers to entry
📊 Microeconomics
Consumer Surplus = Willingness to Pay − Price Paid
Consumer Surplus
Consumer surplus — the benefit above what you paid
If you'd pay $50 for a shirt but it costs $30, your consumer surplus is $20. It's the area above the market price and below the demand curve.
📊 Microeconomics
"Diminishing returns kick in fast"
Law of Diminishing Marginal Returns
Adding more input eventually produces less output
Each additional unit of input (while others are fixed) eventually adds less and less output. A factory with 1 worker and 10 workers produces very differently than 1 worker and 11 workers.
The benchmark market structure — theoretical but useful
Characteristics: many buyers and sellers, homogeneous (identical) products, perfect information, free entry and exit, firms are price takers (can't set price). Long-run: economic profit = 0 (competition eliminates it). Examples don't perfectly exist but agriculture comes close.
Monopoly
Monopoly: one seller, unique product, price maker, high barriers to entry. MR < P.
Monopoly
When one firm controls the entire market
Monopolist faces the entire downward-sloping demand curve → marginal revenue < price. Profit maximize where MR=MC but price is on demand curve above MC → deadweight loss. Sources of monopoly power: patents, natural monopoly (utility), control of key resource.
Fixed vs Variable Costs
Production costs: Fixed costs don't change with output. Variable costs do. Total = Fixed + Variable.
Fixed vs Variable Costs
Understanding the cost structure of a firm
Fixed costs: rent, equipment leases, insurance — paid regardless of output. Variable costs: labor, materials — change with production level. Average total cost (ATC) = TC/Q. Marginal cost (MC) = change in TC from producing one more unit.
Elastic demand (>1): price increase → revenue falls (luxury goods, many substitutes). Inelastic demand (<1): price increase → revenue rises (necessities, few substitutes, addictive goods). Elastic supply: producers respond quickly to price changes. Inelastic: slow to respond.
Positive vs Negative Externalities
Externalities: negative (pollution — producer doesn't pay full cost). Positive (education — society gets benefit).
Positive vs Negative Externalities
When market prices don't capture all social costs and benefits
Negative externality: third parties bear costs (factory pollutes river → neighbors harmed, not in factory's price). Government response: tax (Pigouvian tax). Positive externality: third parties get benefits (vaccination protects unvaccinated neighbors). Government response: subsidy.
Prisoner's Dilemma
Game theory: Prisoner's Dilemma — individually rational choices lead to collectively bad outcome
Prisoner's Dilemma
The classic game theory scenario that explains oligopoly behavior
Two suspects: each better off confessing regardless of what the other does. Both confess → both get 5 years. If both stayed silent → both get 1 year. Individual rationality leads to a collectively worse outcome. Explains why oligopolies struggle to maintain cartels.
Marginal Analysis
Marginal thinking: make decisions at the margin — continue if MB > MC, stop when MB = MC
Marginal Analysis
How rational decision-makers think about every extra unit
Should you study one more hour? If the marginal benefit (better grade) exceeds the marginal cost (tiredness, missed sleep), yes. Every economic decision at the margin: hire one more worker if MRP > wage. Produce one more unit if MR > MC.