This post goes over the economic intuition of marginal,
average, and total product. In
economics, factors of production (inputs such as labor/capital) are used to
produce goods and services. Economists
measure the productivity of a variable input by the amount it can produce and
generally call it “product”. The “total
product” is the total amount of output produced with a given amount of inputs,
the “average product” is the average amount of output produced per unit of
input, and the “marginal product” is the amount of output that the next (or
last) input will (or has) produced. Note that the concepts of marginal, average and total products are short run phenomena and long run relationships will be different.
Showing posts with label microeconomics. Show all posts
Showing posts with label microeconomics. Show all posts
4/7/12
3/31/12
Budget constraints, utility functions and maximized utility
Jeff
01:10
This post goes over a question regarding the economics of utility functions and budget constraints:
Matt has the utility function U = √XY (where Y represents pears and X
represents hamburgers), income of $20, and is deciding how to allocate that
income between pears and hamburgers. Both hamburgers and pears cost $1.00 each.
(i) Write the equation for Matt’s budget line in slope, intercept form (y =
mx +
c).
3/28/12
Solving for equilibrium price and quantity after a shift in supply and demand
Jeff
02:07
This economics post goes over the tricky problem of determining the change in equilibrium price and quantity after a shift occurs. This changes both the supply and demand function. The trick is to know how to enter the shift into the supply and demand equations. Generally you need to solve the functions for quantity (Q) and change the intercept.
The question in this post is:
Assuming
Pd = 250  0.5Q and Ps = 100 + 0.25Q, then
What
if quantity demanded at every price level increases by 10 and quantity supplied
also rises by 5 at every price level?
3/24/12
Calculating the price elasticity of demand using the midpoint theorem
Jeff
01:42
In this question and answer we look at the following
question about elasticities in economics:
Suppose that the NZ government increases the taxes on air
travel and this increases the price of an airline ticket to NZ from $200 to
$280. As a result, the demand for hotel accommodation in NZ decreases . Q1 = 10
Q2 = 6
Using the midpoint formula and the information given, calculate the final price elasticity of demand of hotel services, OR explain why it cannot be determined.
3/15/12
Car market with tariffs, and export restraints
Jeff
22:06
Sometimes it can be difficult figuring out how tariffs and export restraints would impact a market. This article goes over the economics of America cars being sold in Cuba. It compares the outcome of two different possible government regulations, and how they would impact the market. Here is the question below:
Suppose that the demand function for American cars here
in Cuba was Q=604P, where P is the price charged in hundreds of thousands of dollars
and Q is the number of cars (in thousands) sold in Cuba each year.
(a) If the supply schedule is horizontal at a price of $1,000,000, how many American cars would be sold in Cuba?
3/13/12
Long run average total cost curve with economies and diseconomies of scale
Jeff
01:20
The economic relationship the short run average total cost (SRATC) and the long run average total cost (LRATC) is pretty straight forward if you understand these other concepts:
The short run average total cost curve has the U shape because of diminishing marginal product. Diminishing marginal product means that there are diminishing returns from the variable input in the short run. Remember that in the short run, at least one input in production is fixed. Diminishing returns implies an increasing marginal cost, and an increasing marginal cost gives the U shape to the short run average total cost curve.
The short run average total cost curve has the U shape because of diminishing marginal product. Diminishing marginal product means that there are diminishing returns from the variable input in the short run. Remember that in the short run, at least one input in production is fixed. Diminishing returns implies an increasing marginal cost, and an increasing marginal cost gives the U shape to the short run average total cost curve.
3/4/12
Solving for quantity demanded using price elasticity of demand
Jeff
23:32
The price elasticity of demand measure can be used for predicting consumer response to price changes. One of the most powerful tools in economics is using knowledge of consumer behavior to predict what will happen before the change actually takes place. The following question considers the consumer response to a price increase in gasoline. It is always a good thing to study behavior before making a change, otherwise you could potentially not only lose customers, but also go out of business.
2/29/12
How to find a Nash Equilibrium in a 2X2 matrix
Jeff
22:50
Getting to the Nash equilibrium can be tricky, so this post goes over two quick methods to find the Nash equilibrium of any size matrix, but uses a 2X2 matrix as an example.
Summary (dominant strategy method):
 Check each column for Row player’s highest payoff, this is their best choice given Column player’s choice. (if there are two high choices, then the result will be a mixed strategy outcome).
 Now check to see if Row’s choice for 1) would also be their choice given any choice by Column player.
 If Row always sticks with their choice regardless of Column’s choice, this is their dominant strategy.
 Repeat for Column player, and the Nash equilibrium is where the dominant strategies intersect.
2/21/12
What are oligopolies and oligopolistic markets? An introduction with examples
Jeff
23:35
An Oligopoly is a type of market where there are a
relatively small number of firms. The
important thing to remember about an oligopolistic market is that each firm’s
decision impacts another firm’s decision, so they are related or dependent on
each other. For example, if one airline
were to lower their ticket prices, all other airlines would lower their ticket
prices as well to stay competitive; this dependence on rival firms is unique to
the oligopoly market.
Imagine if you are in a perfectly competitive firm, you are
a price taker, so the decisions of other firms do not impact you. If you are in a monopolistically competitive
market you advertise, research, brand, change the quality of your product to make
an economic profit, you do not interact directly with competitors. Finally, in a monopoly market you have no
competition so rival firms do not impact your decisions.
Budget constraint and welfare/tax breaks
Jeff
01:33
Figuring out how government policy affects the budget
constraint is very easy if you know how to relate the particular policy to
either changes in income, or changes in prices.
For a review on how income and price changes affect the budget constraint read this past post.
2/20/12
What is the Y intercept and equilibrium quantity with these equations?
Jeff
23:01
Here is a question and answer about the economics of solving
for an equilibrium quantity value. The
question is:
2.In the equation Y = 6  2.0X the yintercept is?
Now remember that to solve for equilibrium price and quantity,
you need to set the quantity supplied equal to the quantity demanded, and solve
for price. You can then plug your price
into either quantity equation (or both to check your math) to solve for
equilibrium quantity. So first set your
Qs equal to your Qd:
2/17/12
Calculating equilibrium and surplus with a tax, a question and answer
Jeff
06:23
This intensive economics question goes over calculating equilibrium price and quantity, then using those numbers to get consumer and producer surplus, and finally implementing a tax to see how that will change the previous results:
1. The inverse demand curve (or average revenue curve) for the product of a perfectly competitive industry is give by p=800.5Q where p is the price and Q is the quantity. The shortrun industry marginal cost function is MC=50+0.25Q
a) Calculate the equilibrium price and quantity assuming perfect competition and profit maximization and hence calculate the consumer and producers' surplus.
2/16/12
Perfect competition, calculating marignal cost and equilibrium
Jeff
02:47
This post is a question an answer for the economics of a perfectly competitive firm.
Suppose the following data summarize the cost of a perfectly
competitive firm:
a) draw the firm's MC curve on a graph
b) draw the market supply curve on another graph
c) what is the equilibrium price in this market?
a) draw the firm's MC curve on a graph
b) draw the market supply curve on another graph
c) what is the equilibrium price in this market?
Perfectly Competitive Firm


Quantity

Total Cost

Marginal Cost

Fixed Cost

Variable Cost

0

100


1

101


2

103


3

106


4

110


5

115


6

121


7

128


8

136

2/11/12
Transaction/transportation cost and solving for equilibirum price and quantity part 1
Jeff
22:05
This is a long difficult economics question about transportation costs. This first part will go over the math for
calculating the equilibrium, and future posts will discuss the implications of
the other parts.
Assume that, when sellers have no transaction cost, buyers will pay the
market price plus $18 in travel cost. If transaction cost were zero, demand
would be D1 which intersect the SS curve at $19 and 31 units. With transaction
cost of $18 per unit, the net demand facing sellers is D2, which is $18 below
D1. The market clears at $19 units and sellers receive $13 for each unit. Now
also assume that, an outsider tells buyers that for $8 per unit she will go to
the market for them and eliminate their former $18 transaction costs. Sellers
now perceive demand curve D3, $8 below D1 and $10 above D2. Sellers get $16.33
for each of the 25.67 units transacted. Both sides of the market benefit from
lower transaction cost.
2/7/12
Finding consumer surplus without a graph
Jeff
14:15
This post goes over one example of finding consumer surplus, if you would like more information on consumer surplus, including what it is, and how to calculate it using a general form, check out this other post.
Here is the actual question we are going to discuss in this economics post:
Nick can purchase each milkshake for $2. For the first milkshake purchased Nick is willing to pay $4, for the second milkshake $3, for the third milkshake $2 and for the fourth milkshake $1. What is the value of Nick's consumer surplus?
a.$2
b.$9
c.$3
d.$10
Here is the actual question we are going to discuss in this economics post:
Nick can purchase each milkshake for $2. For the first milkshake purchased Nick is willing to pay $4, for the second milkshake $3, for the third milkshake $2 and for the fourth milkshake $1. What is the value of Nick's consumer surplus?
a.$2
b.$9
c.$3
d.$10
2/4/12
Examples of price elasticity of demand
Jeff
21:19
This post goes over some economic examples of the principle of price elasticity of demand. There are three different types of elasticities for the price elasticity of demand measure. These include elastic, inelastic, and unit elastic.
In order for a good to be elastic, the price elasticity of demand measure has to be less than 1. Sometimes textbooks and teachers will take the absolute value of the elasticity measure. The absolute value of a number is the distance that number is from zero. Another way to think of the absolute value measure it to take away the negative sign if there is one. So in the absolute value case, the price elasticity of demand measure will be greater than 1.
In order for a good to be elastic, the price elasticity of demand measure has to be less than 1. Sometimes textbooks and teachers will take the absolute value of the elasticity measure. The absolute value of a number is the distance that number is from zero. Another way to think of the absolute value measure it to take away the negative sign if there is one. So in the absolute value case, the price elasticity of demand measure will be greater than 1.
2/2/12
How to create a payoff matrix, and example of a 3x3
Jeff
20:45
This post is going to go over how to create a payoff matrix, associated with the game theory side of economics. The question associated with this is:
Write out a pay off matrix when two players are offered $100 bills. If one bids $2 and the other bids $1 they pay $3, and the higher bidder gets the money leaving him with net gain of $98 while the other with a net loss of $1. The possible are $0, $1, $2. Also, if they both bid the same amount, they split the $100.
We know that this payoff matrix will be 9 cells, and will be a 3x3 matrix because each player has three choices. They can either bid 0, 1, or 2 dollars. Since both players have 3 options, we know that their are nine possible outcomes. It is common practice to show the Row player's payoff first, and the column player's payoff second. With this in mind, we can create the matrix, and start to populate the different payoff cells.
Write out a pay off matrix when two players are offered $100 bills. If one bids $2 and the other bids $1 they pay $3, and the higher bidder gets the money leaving him with net gain of $98 while the other with a net loss of $1. The possible are $0, $1, $2. Also, if they both bid the same amount, they split the $100.
We know that this payoff matrix will be 9 cells, and will be a 3x3 matrix because each player has three choices. They can either bid 0, 1, or 2 dollars. Since both players have 3 options, we know that their are nine possible outcomes. It is common practice to show the Row player's payoff first, and the column player's payoff second. With this in mind, we can create the matrix, and start to populate the different payoff cells.
Can an upward sloping marginal revenue curve exist?
Jeff
15:56
I have been getting a lot of questions about the possibility of an upward sloping marginal revenue curve recently. The first few times I blew it off because it is one of those "possible" scenarios that never really happens. Unfortunately, it seems that a bunch of instructors have asked their students about this, and I don't blame them for being confused. This post will go over the economics of an upward sloping marginal revenue curve, including a numerical example and an example of where we may see it occurring in the real world.
In order to get an upward sloping marginal revenue curve, it is necessary for the demand curve to be upward sloping. This is because the marginal revenue curve always has twice the slope of the demand curve. Another way to think about this, is that the demand curve always follows, or chases the MR curve, so if the MR is upward sloping, the demand curve will have to be as well.
In order to get an upward sloping marginal revenue curve, it is necessary for the demand curve to be upward sloping. This is because the marginal revenue curve always has twice the slope of the demand curve. Another way to think about this, is that the demand curve always follows, or chases the MR curve, so if the MR is upward sloping, the demand curve will have to be as well.
1/23/12
A perfectly competitive firm competes with the government
Jeff
13:42
Here is a question I recently received about a perfectly competitive market and the introduction of government produced goods. What are the relevant economics???
"Assume that hotdogs are produced in a perfectly competitive industry where firms that currently operate and potential competitors both have identical cost curves. Current output is 1 million units a year. What happens to industry equilibrium if a public agency competes with existing producers of hotdogs and gives away 100,000 units per year to randomly selected people who would otherwise have purchased hotdogs. Does the output of hotdogs fall in the short run? In the long run?"
"Assume that hotdogs are produced in a perfectly competitive industry where firms that currently operate and potential competitors both have identical cost curves. Current output is 1 million units a year. What happens to industry equilibrium if a public agency competes with existing producers of hotdogs and gives away 100,000 units per year to randomly selected people who would otherwise have purchased hotdogs. Does the output of hotdogs fall in the short run? In the long run?"
Perfect competition and economic profit: a question about selling secrets
Jeff
11:48
Understanding how a perfectly competitive firm works is important for answering some of these "tricky" questions about perfect competition. To be quite honest, I don't know exactly what the instructor is looking for in this case but I can make a pretty good guess based on the properties of a perfectly competitive market in economics: