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Summary Intermediate Microeconomics VUB - Business Economics
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Summary Microeconomics
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ECS2601 BMZ ASSESSMENT 4 SEMESTER 2 2024 MASTER In a perfectly competitive industry, the amount of output that a rm decides to sell has no effect on the market price, because… a. the rm’s output...
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ECS3708 ASSESSMENT 2 SEMESTER 1 2024
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Intermediate microeconomicsChapter 1 : Preliminaries
Microeconomics
branch of economics that deals with the behavior of individual economic units as well as the
markets that these units comprise
- Limits : the limited incomes the consumers can spend on goods and services, the limited
budgets and technical knowledge that firms can use to produce things, and limited
numbers of hours a week that workers can allocate labor or leisure
• Micro is about ways to make the most of these limits ; it’s about the allocation of
scarce resources
Trade-Offs
Microeconomics describes the trade-offs that consumers, workers, and firms face and shows
how these trade-offs are best made (optimal trade-offs!!)
CONSUMERS
• Trade-offs in the purchase of more of some goods for less of others
• Trade-off between current consumption and future consumption
WORKERS
• Whether and when to enter workforce (working now, or continued education)
• Choice of employment (large corporations or small companies)
FIRMS
• Trade-offs in what to produce
• Trade-offs in the resources to use in production
Markets
A market is the collection of buyers and sellers that, through their actual or potential
interactions, determine the price of a product or set of products.
- So market is divided into buyers and sellers
• ≠ industry Market for personal
Sellers
computers
Buyers (example computer market)
• Students
• Households
• Business firms
= consumers who purchase G&S and
PRICE
firms which buy labor, capital and raw materials
that they use to produce G&S (buyers)
,Sellers
• Firms : which sells their products and services
• Workers : who sell their labor services
• Resource owners: who rent land or sell mineral resources to firms
Most people and most firms act as both buyers and sellers, but we will think about it ->
buyers are those who buy something, sellers when they are selling something
In the market of personal computers, for example, the buyers are business firms,
households, and students. The sellers are Hewlett-Packard, Lenovo, Dell, Apple,…
A market includes more than an industry. An industry is a collection of firms that sell the
same or closely related products. Industry is the supply side of the market.
Market definition identifies which buyers and sellers should be included in a given market,
but before doing that we must determine the extent of a market; the extent of a market are
the boundaries of a market, both geographical and in terms of range of products produced
and sold within it.
- Example : market of gasoline for example, we must be clear about its geographical
boundaries. Are we referring to Los Angeles, California or the entire United States?
We must be clear about the range of products that we are referring. Should regular-
octane and high-octane premium gasoline be included? Gasoline and diesel fuel in
same market?
Geographic boundaries: Highly localized market versus global market
• Chicago housing market: Most people who work in downtown Chicago will look for
housing within commuting distance LINK 1
o They will not look at homes 200 or 300 miles away, even though those homes
might be cheaper
o Downtown market : accumulated a lot of inventory during the pandemic but that
changed and slowed down after pandemic
o It is not the same as in Cleveland, Houston, Atlanta or Philadelphia. Likewise the
retail gasoline market; less geographical but still regional, because of the expense
of shipping gasoline over long distances. Thus market of gasoline in southern
California is distinct from that in northern Illinois
• Global gold market: Gold is bought and sold in a world market. The cost of
transporting gold is small relative to its value LINK 2
o The possibility of arbitrage prevents the price from differing significantly from
one location to another
o Price crashed during pandemic, then it went so high. Volatility in gold ->
investors are interested, more risk because of volatility. The price of gold is
tight to physical assets. Gold is mostly produced in China, Russia and Australia
-> then shipped all over the world (mostly in London, Bank of England). You
have the physical market, but also there are future contracts related to gold
(exchange at a later date). During pandemic, they feared that physical
, movement of gold won’t be possible; this caused physical gold purchase to
soar, leading to a shortage that drove up the prices of futures.
o As such they tried to stabilize the prices of transportation of gold
o Gold could face more volatility moving forward, if the economy is recovering.
If there are more stable political and economic environment.
Exercise:
Decide whether the following statement is true or false and explain why: Fast-food chains
like McDonald’s and Burger King operate all over the United States. Therefore, the market for
fast food is a national market.
This statement is false, people generally buy fast food locally and do not travel large
distances across the USA just to buy cheaper fast food meal. There is not one national
market for fast food; there are multiple markets for fast food across the United States.
To prove this, one can refer to an example: there are people in a certain region who
prefer spices, and then there are people who don't prefer spices. If the market is on a
national level, it has to be governed by national preferences. If people, on average, like
spices, fast food companies would make their food spicy; however, this will reduce their
demand regionally. Therefore, fast food companies prefer to formulate their policies
keeping regional preferences in mind, and hence there are multiple markets located in
different regions of the country.
Product range: are products used for the same or a different purpose?
For example; there is a market for single-lens reflex (SLR), digital cameras and many brands
compete in that market. But what about compact “point-and-shoot” digital cameras? Should
they be considered part of the same market? Probably not, because they are being used for
different purposes and so do not compete with SLR cameras.
Decathlon Elops Urban Bike 520 --> 350 EUR Canyon Triathlon Bike Speedmax Frodissimo --> 9,999 EUR
- Are you a serious cyclist or not? There are actually two markets for big cycles, markets
that can be identified by the type of store in which the bicycle is sold.
o Mass market bicycles (the one sold in decathlon), are priced low and costs are
low. These companies are focused on producing functional bicycles as cheaply as
possible, and typically do their production in China.
o Dealer bicycles (the one sold in local bicycle store). For these companies the
emphasis is on performance, as measured by weight and the quality of the
brakes, gears, tires and other hardware.
, Exercise:
Decide whether the following statement is true or false and explain why: Some consumers
strongly prefer Pepsi, and some strongly prefer Coke. Therefore, there is no single market for
colas.
The markets for Cola and Pepsi do not depend on people's preferences of these two.
These products are homogenous since both are soft drinks with a similar taste. Some
people may have set preference between these two, but then some people are
indifferent between the two. Therefore, these two cannot have different markets.
Hence, the statement is false.
Why is market definition important important?
1. Company decisions -> Who are the actual and potential competitors of our
company? It must know the product and geographical boundaries of its market on
order to set price, determine advertising budgets, and make capital investment
decisions.
2. Public policy decisions -> Should we allow this merger? LINK 3 Public policy reasons.
Should the gvt allow mergers or acquisitions involving companies that produce
similar products, or should it challenge it? The answer : it depends on the impact of
those mergers and acquisitions on future prices and competition.
Chapter 2 : The basics of supply and demand
SUPPLY CURVE
Relationship between the quantity of a good that producers are willing to sell and the price
of the good
- The higher the price the more firms are able and willing to produce and sell (upward
sloping)
- Curve shifts to the right when production cost falls, they can produce the same quantity
at lower price or larger quantity at the same price. When production costs decreases,
output increases no matter the market price happens to be. So wages, price of raw
materials affect the supply curve.
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