Table of Contents
Review of main concepts and definitions
The opportunity cost of good X in terms of good Y is the number of units of good Y that one needs to give up in order to obtain one extra unit of good X
PPT Slide
PPT Slide
PPT Slide
Price elasticity of demand
PPT Slide
PPT Slide
PPT Slide
The production function associates with every combination of inputs (labor and capital) the amount of output that can be produced with those input quantities
The marginal product of labor is the increase in output that is obtained if the quantity of labor is increased by one unit (ceteris paribus)
Marginal cost is the amount by which total cost increases if output is increased by one unit
Average cost is (TC = total cost, Q = output) When MC < AC, AC decreases When MC > AC, AC increases When MC = AC, AC does not change
Revenue = P x Q (P is price per unit, Q quantity sold) Profits = Revenue -Total Cost
Marginal Revenue = change in revenue if quantity sold is increased by one unit
Profits are maximized at the level of output at which MR = MC
A firm is perfectly competitive if an increase in the quantity sold by the firm has no effect on the price (i.e. firm can sell any amount at the current market price) Thus for a perfectly competitive firm MR = P
A perfectly competitive firm maximizes profits at the level of output at which P = MC
A firm is a monopoly if it is the only firm in its industry For a monopoly MR < P The monopoly equilibrium is Pareto inefficient
A situation X is Pareto inefficient if there is an alternative situation Y such that: (1) Y is feasible (2) everybody considers Y at least as good as X and somebody strictly prefers Y to X
GAMES A strategy a of player 1 is a dominant strategy if, no matter what player 2 does, there is no other strategy of player 1 which gives him a higher payoff than strategy a. (Similar definition for player 2)
A pair of strategies (a,b) (a strategy of player 1 and b strategy of player 2) is a Nash equilibrium if: (1) against strategy b of player 2, a gives the highest payoff to player 1, and (2) against strategy a of player 1, b gives the highest payoff to player 2
When computing the tax paid by an individual, you need to decompose his income into different amounts and apply the relevant marginal tax rate to each amount separately
The Lorenz curve measures the degree of income inequality. Gini coefficient is equal to twice the area between the line of complete equality and the Lorenz curve. (= 0 if there is complete equality = 1 if there is maximum inequality)
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Author: Giacomo Bonanno
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