159 Economics A2 Level Micro Revision Notes Book 3

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1 THEORY OF CONSUMER BEHAVIOUR 20
1.1 CARDINAL APPROACH 20
1.2 Law of Diminishing Marginal Utility 21
1.3 Law of Equi-marginal Utility 24
1.4 ORDINAL APPROACH 28
1.5 Budget line 28
1.6 Indifference Curves (AS) 34
1.7 Consumer Equilibrium through the Ordinal Approach 35
1.8 PAST PAPER QUESTIONS 42
2 PRODUCTION AND COST 46
2.1 THE LAW OF DIMINISHING RETURNS (LAW OF VARIABLE PROPORTIONS 47
2.2 LEAST-COST INPUTS COMBINATION IN THE LONG RUN 52
2.3 ISOCOST AND ISOQUANT APPROACH 52
2.4 SCALE OF PRODUCTION AND RETURNS TO SCALE 54
2.5 SHORT-RUN COSTS 55
2.6 RELATIONSHIP BETWEEN SHORT-RUN COSTS & LAW OF DIMINISHING RETURNS 64
2.7 ECONOMIES AND DISECONOMIES OF SCALE 67
2.8 SMALL FIRMS 73
2.9 PAST PAPER QUESTIONS 75
3 RULES OF FIRM'S BEHAVIOUR 78
3.1 TRADITIONAL ECONOMIC THEORY OF PROFIT MAXIMIZATION 78
3.2 BUSINESS CONTINUITY RULES 79
3.3 TYPES OF PROFITS 80
3.4 PAST PAPER QUESTIONS 82
4 PERFECT COMPETITION 84
4.1 PRICE AND OUTPUT DETERMINATION IN SHORT RUN 85
4.2 SHORT-RUN PRICE AND OUTPUT DETERMINATION 87
4.3 Types and Determination of Profit 89
4.4 The Shutdown case of a perfectly competitive firm 91
4.5 Derivation of the supply curve of a perfectly competitive industry in the short run 93
4.6 PRICE AND OUTPUT DETERMINATION IN LONG RUN 93
4.7 IS PERFECT COMPETITION A REALISTIC MODEL? 94
5 MONOPOLY 96
5.1 PRICE AND OUTPUT DETERMINATION IN SHORT RUN 98
5.2 Types of profits: 98
5.3 Types of losses 100
5.4 PRICE AND OUTPUT DETERMINATION IN LONG RUN 103
5.5 BARRIERS TO ENTRY 103
6 MONOPOLISTIC COMPETITION 106
6.1 PRICE AND OUTPUT DETERMINATION IN SHORT RUN 108
6.2 PRICE AND OUTPUT DETERMINATION IN LONG RUN 108
7 OLIGOPOLY 112
7.1 PRICE AND OUTPUT DETERMINATION IN OLIGOPOLY 112
7.2 Kinked Demand Curve 108
7.3 Price Leadership 115
7.4 Cartel 116
7.5 Game Theory 120
7.6 MERGER AND INTEGRATION (MCQS ONLY) 122
8 COMPARISON OF MARKET STRUCTURES 126
9 OBJECTIVES, DISCRIMINATION & CONTESTABILITY 130
9.1 OBJECTIVES OF FIRMS 130
9.2 PRICE DISCRIMINATION 134
9.3 CONTESTABLE MARKETS 136
9.4 THEORY OF EXCESS CAPACITY 138
9.5 PAST PAPER QUESTIONS 139
10 ECONOMIC EFFICIENCY AND MARKET FAILURE 144
10.1 PRODUCTIVE EFFICIENCY (PE) 149
10.2 ALLOCATIVE EFFICIENCY (AE) 151
10.3 MARKET FAILURE 154
10.4 Over-allocation of resources 155
10.5 Under-allocation of resources 157
10.6 Missing Markets of Public Goods 161
10.7 Imperfect knowledge 164
10.8 Factor immobility164 164
10.9 Short termism 164
10.10 GOVERNMENT MICROECONOMIC OBJECTIVES 164
10.11 POLICIES TO CORRECT MARKET FAILURE OF NEGATIVE EXTERNALITIES AND DEMERIT GOODS 165
10.12 Indirect Taxes 165
10.13 Regulatory bodies 167
10.14 Changes in property rights 167
10.15 Provision of Information 167
10.16 Pollution Permits 168
10.17 POLICIES TO CORRECT MARKET FAILURE OF POSITIVE EXTERNALITIES AND MERIT GOODS 168
10.18 Subsidies 168
10.19 Laws and Regulation 169
10.20 Provision of Information 169
10.21 The Direct Provision of Goods and Services 169
10.22 POLICIES TO CORRECT MARKET FAILURE OF PUBLIC GOODS 170
10.23 POLICIES TO CORRECT THE MARKET FAILURE OF IMPERFECT MARKETS 170
10.24 COST-BENEFIT ANALYSIS (CBA) 171
10.25 ARE MONOPOLIES ALWAYS BAD FOR CONSUMERS? 172
10.26 PAST PAPERS QUESTIONS 177
11 LABOUR MARKET 188
11.1 THE SUPPLY CURVE 188
11.2 Supply Curve for an Individual Worker 188
11.3 The Market Supply Curve for Labour 190
11.4 Supply of Labour for a Perfectly Competitive Firm 191
11.5 Supply of Labour in a Monopsony 192
11.6 Supply of labour with a Trade Union 193
11.7 DEMAND FOR LABOUR OR MARGINAL REVENUE PRODUCT (MRP) THEORY 194
11.8 WAGE DETERMINATION IN PERFECT MARKET 196
11.9 MONOPSONY 199
11.10 TRADE UNION 200
11.11 WAGE DIFFERENTIALS 204
11.12 TRANSFER EARNINGS& ECONOMIC RENT 207
11.13 PAST PAPER QUESTIONS 210
12 INEQUALITY AND POLICIES TO REDISTRIBUTE INCOME 216
12.1 MEASURING INEQUALITY 216
12.2 1. Lorenz curve 216
12.3 2. Gini coefficient 218
12.4 3. Kuznets curve 220
12.5 GOVERNMENT POLICIES TO REDISTRIBUTE INCOME AND WEALTH 220
12.6 1. Providing benefits (transfer payments) 220
12.7 2. Through the tax system 221
12.8 3. Other policies. 222