Guide and questions about microeconomics concepts

SUBSTITUTION EFFECT. - Variation experienced by the consumer when the price variation moves the consumer along an indifference curve to a point that has a new marginal substitution ratio. It is the change in quantity demanded that results from a change in relative price, once the consumer is compensated for the change in his real income. In other words, it is the change in quantity demanded that generates a change in price, when the change is limited to a movement along the original indifference curve, thus leaving real income constant. INCOME EFFECT.- It is the change in the quantity demanded that results exclusively from a change in real income, when all other prices and monetary income remain constant.WHAT IS THE TOTAL PRICE EFFECT

When the price of a good changes, the prices of other goods and income remain constant, the consumer moves from one equilibrium point to another, under normal circumstances, when the price of a good falls, more is bought and when the price rises. fewer units are purchased, at the global change in quantity demanded as one moves from equilibrium to another.

MARGINAL INCOME.- Variation that experiences total income when one more unit is sold. MARGINAL UTILITY.- The total satisfaction that an individual receives when consuming a specific quantity of an item per unit of time. It is the slope of the indifference curve. WHAT FEATURES DOES THE MARGINAL UTILITY HAVE

It could be described by means of a line with a negative slope, mathematically it is the slope of the total utility function, as a result of it increasing the marginal utility decreases.

MARGINAL SUBSTITUTION RATE.- It is the quantity of article Y that the consumer is willing to give up to earn an additional unit of article X and continue on the same indifference curve. The slope of an indifference curve is a point, with an opposite sign, gives us the marginal rate of substitution of that point which is only defined for movements along an indifference curve and never for movements between the curves. INDIFFERENCE CURVES.- It is the locus of the points -particular combinations or sets of goods- that yield the same utility, that is, the level of satisfaction to the consumer in such a way that the particular combination that they consume is indifferent. They are the ones that show different consumption baskets that report the same level of satisfaction to the consumer. CHARACTERISTICS OF THE INDIFFERENCE CURVES:

1. They have a negative slope, which means that when some quantity of the good decreases and the quantity of the other good x must increase so that the consumer remains at the same level of satisfaction.

2. Indifference curves cannot be intercepted, since if they did that would mean two different levels of satisfaction, which is impossible.

3. They are convex with respect to the origin, this implies that the slope of an indifference curve decreases, as we move along the curve from left to right, the marginal rate of substitution of goods decreases.

4. Some indifference curve passes through each of the points of the goods space.

5. The further from the origin the indifference curve is, the higher the level of utility it denotes, the goods that are on the highest indifference curve are preferred by consumers.

WHAT IS AN ECONOMIC MODEL.- It is a simplified representation of a real situation, it includes the main characteristics of the real situation it presents, a model implies an abstraction with respect to reality which is obtained through a set of significant and coherent hypotheses that tend to simplify the phenomenon that the model is intended to study. WHAT IS THE VERIFICABILITY OF A MODEL.- It is when they are susceptible to ratification, when compared to the true economic facts. MAIN CHARACTERISTICS OF AN ECONOMIC MODEL.- The realism of the assumptions and the explanatory power are important characteristics, the model should satisfy both criteria, that is, optimally predict the behavior of the system and provide the most complete explanation of this behavior. WHAT IS THE DEMAND. - It is a relation of multiple variables, this is determined by many factors simultaneously. Any change in the factors that determine it modifies the quantity demanded. WHAT ARE THE DETERMINANTS OF THE DEMAND:

1. The price of the merchandise

2. The prices of other goods

3. The tastes of consumers

4. The income

WHAT ARE THE DEMAND DISPLACEMENT FACTORS:

1. Price, represents a variation along the curve.

2. Consumer income

3. Prices of other goods

4. Likes

5. Expectations

6. Number of buyers

Any change that increases the quantity demanded will shift the curve to the right, and any change that reduces the quantity demanded will shift the curve to the left.

HOW THE MARKET DEMAND IS OBTAINED

Market demand for a given commodity is the horizontal sum of the demands of individual consumers, that is, the quantity demanded in the market for each price is the sum of the individual demands of all consumers corresponding to that price.

WHAT IS THE FACTOR THAT DETERMINES THE MOVEMENT ON IT?

The price

TRADITIONAL THEORY AS MANY DETERMINANTS INCLUDE

1. The price of the merchandise

2. The remaining prices

3. The income

4. Preferences

WHAT ARE THE MAIN CRITERIA FOR CHARACTERIZING THE MARKETS.

1. Criterion of product substitutability.- They are the existence and similarity of substitute products.

2. Interdependence criterion.- It is the extent to which the companies present in the industry take into account the reactions of their competitors, this is related to the number of companies operating in the industry and the degree of product differentiation.

3. The entry condition.- Which measures the entry condition to the various markets.

There are different types of markets such as:

The perfect competition.- There are a very large number of companies that operate in the industry and that the product is homogeneous, the competition is perfect in the sense that each company considers that it can sell the quantity of production that it wishes at the current price in the market, which cannot be affected by the individual product whose market share is very small. Each of the companies decides their level of production ignoring the other companies, the products are perfect substitutes for each other so that the elasticity with respect to the price of the demand curve is infinite, entry to the market is free and easy.

Monopoly.- In a monopoly situation there is only one company operating in the industry since there are no close substitutes for the monopolist's product, the monopolist's demand coincides with the industry's demand, which has a finite price elasticity, Market entry is blocked.

Monopolistic competition.- In a monopolistic competition market there are a very large number of companies, but their product is somewhat differentiated. For this reason, the demand curve faced by the individual company has a negative slope but its elasticity with respect to the price is high, due to the existence of close substitutes produced by the other companies, entry is free and easy.

Oligopoly.- In an olio-political market there are a small number of companies so that sellers are aware of their interdependence, therefore companies must be aware of what their competitors do, the competition is not perfect and therefore the Business rivalry is high. The products of the oligopolists can be homogeneous (pure oligopoly) or differentiated products (differentiated oligopoly), in this the elasticity of individual market demand is smaller than in the case of the pure oligopoly.

WHAT IS AN INDUSTRIAL BRANCH

The concept of industry was born out of the need to include companies that have some form of close relationship with each other, makes it possible to deduce a set of general rules on the basis of which we can predict the behavior of the members of the group that constitute the industrial one, and that they compete with each other. It serves as a framework to analyze the effects that entry into the industry has on the behavior of the company and on price and production in equilibrium.

WHAT ARE THE CRITERIA TO CLASSIFY AN INDUSTRIAL BRANCH

They are the product that it produces, which is the market criterion, the companies are grouped in an industry when their products are close substitutes, the degree of similarity is measured with the cross elasticity. And the production methods, which is the technological criterion here, the companies are grouped based on the similarity of the processes and / or raw materials used.

CARDINAL THEORY

Assumptions:

1. Rationality.- The consumer is rational, he tries to maximize his utility by submitting to the restriction imposed by his given personal income.

2. Cardinal utility.- The utility of each merchandise is measurable. Utility is a cardinal concept, the most convenient measure is money, utility is measured by the monetary units that the consumer is willing to pay for another unit of merchandise.

3. Constant marginal utility of money.- This assumption becomes necessary if it is used as a measure of monetary utility, the essential characteristic of a unit of measurement that serves as a constant standard, if the marginal utility of money changes as it increases or increases. income decreases the rod with which the utility is measured becomes elastic and is inappropriate for measurement.

4. Decreasing marginal utility.- The marginal utility of a merchandise decreases as the consumer acquires more of it.

5. The total utility of a "basket of goods" depends on the quantities of the individual goods.

CONSUMER BALANCE ACCORDING TO THE CARDINAL THEORY

With something simple, when the consumer can buy a merchandise X or keep his income Y, he is in equilibrium, when the marginal utility of X is equal to his market price (Px), symbolically we have:

MUx = Px

If the utility of X is greater than its price, the consumer can increase his welfare by acquiring more of the good X, if the utility of X is less than the price, the consumer can increase his satisfaction by reducing the quantity of X and leaving unspent a portion greater than that of their income, consequently achieve the maximization of their utility when MUx = Px. If there are more commodities, the condition for the consumer's equilibrium is that their quotients of the profits of each commodity and their respective prices are equal.

MUx / Px = MUy / Py…. MUn / Px

The utility provided by the expense of an additional unit of money must be the same for all merchandise, if the consumer extracts more utility from one of these, he will increase his welfare by spending more on it and less on the others, until the previous one is fulfilled. balance condition.

THEORY OF INDIFFERENCE CURVES

Assumptions:

1. Rationality.- The consumer is assumed to be a rational being, who seeks to maximize his utility based on his personal income and market prices, and it is assumed that he has all the relevant information.

2. The utility is ordinal, it is assumed that the consumer can order their preferences according to the satisfaction of each of the baskets that they provide, without needing to know exactly the amount of satisfaction, just express your preference for the different sets of goods, it is not necessary to suppose that the utility is measurable in cardinal form, only the ordinal measurement is required.

3. Decreasing marginal rate of substitution.- Preferences are ordered in terms of indifference curves that are assumed to be convex with respect to the origin of the coordinates, this implies that the slope of the curves increases, the slope of the indifference curve is called decreasing marginal rate of substitution.

4. Total consumer profit.- depends on the quantities consumed:

U = f (q1..q2….qx… qy… qn)

5. Congruence and transitivity of the election.-

CONSUMER BALANCE.

The consumer is in equilibrium when he maximizes his utility for a certain personal income and certain market prices, but he must meet two conditions:

1. The marginal rate of substitution is equal to the quotient of the prices of the merchandise. It is necessary but not sufficient for balance.

2. It is that the indifference curves are convex to the origin, this condition fulfills that the decreasing marginal rate of substitution, establishes that the slope of the indifference curve decreases in absolute terms when we move along the curve from left to right. Graphically, equilibrium is defined by the tangency of the budget line with the highest possible indifference curve.

PRICE-CONSUMPTION CURVE.- It is the geometric place of the equilibrium points that results when only the price of the item varies. BUDGET LINE.- The slope of the budget line is the quotient of the prices of the two goods that the consumer can buy WHAT IS THE INCOME CURVE OF THE COMPANY

If the demand for merado is linear, the total income curve will rise to its maximum point and then begin to decline.

WHAT IS PRINT-PRINT ELASTICITY

It is defined as the percentage change in quantity demanded resulting from a very small proportional change in price. dQ / Q / dP / p

CROSS ELASTICITY OF DEMAND. - It is the ratio of the percentage change in the quantity of item X purchased per unit of time due to the percentage change in the price of item Y. If exy is greater than zero, X and Y are substitutes if exy is less than zero, they are complementary and if exy is equal to zero they have no relation, that is, they are independent. With this, the degrees of interdependence of the companies can be measured. ELASTICITY PRICE OF THE DEMAND.- Measure of the degree to which the quantity demanded of a good responds to a variation of its price, it is calculated dividing the percentage variation of the quantity demanded by the percentage change in price. WHAT IS UNIT ELASTICITY.- If the elasticity is exactly 1 such that the quantity varies proportionally in the same quantity as the price, the demand is said to have unitary elasticity. ELASTICITY GREATER THAN 1.- It is called elastic so the quantity varies proportionally more than the price. ELASTICITY LESS THAN 1.- So the quantity proportionally less than the price. WHAT IS THE CONSUMER SURPLUS.

It was introduced by Marshall, where he says that it can be measured in monetary units and that is equal to the difference between the amount of money that a consumer actually pays to acquire merchandise X, and the amount that he would be willing to pay not to deprive himself of that commodity.