Microeconomics Profit Maximization: Shutdown Point

Determining the Shutdown Point of a Firm This continues a previous post on profit maximization. The question we want to continue with is when should a firm shutdown? Then answer is when P (price) = AVC (average variable cost). This is the output where firms are indifferent between producing the profit-maximizing quantity (ie. loss-minimizing quantity) … Continue reading Microeconomics Profit Maximization: Shutdown Point

Microeconomics Cost Formulas

Here is a list of some of basic microeconomics formulas pertaining to revenues and costs of a firm. Remember when you’re using these formulas there are a variety of assumptions, namely, that the the firm is profit-maximizing (making as much money as they can.) Here are total cost formulas, average variable, marginal cost, and more, … Continue reading Microeconomics Cost Formulas

Trade Offs and Indifference Curves

Before we talk about choices, preferences, trade-offs and indifference curves, we should briefly look over some key terms. We assume people are rational decisions makers and that there is almost nothing someone is unwilling to trade for correct compensation. Non-Satiation Assumption: If some is good, more is better. Consumers always prefer more of any good … Continue reading Trade Offs and Indifference Curves

Shapes of Indifference Curves

The shapes of indifference curves are smooth with unique tangent at any bundle we have well define marginal rate of substitution (MRS). MRS is undefined if m (slope) = kinked. 1. Strictly convex: Using the example of any 2 bundles on (A & B) the indifference curve and construct a line segment between them. With … Continue reading Shapes of Indifference Curves

Intro to Demand Theory – How to Manage Constraints

Welcome to the next section following a discussion on utility and indifference curves (preferences of consumers). We are now into a discussion on demand theory; the previous posts are linked chronologically at the bottom of this post. Demand theory wants to explore the concept of: given constraints we must make choices among competing alternatives. Budget … Continue reading Intro to Demand Theory – How to Manage Constraints

Cobb Douglas Function – Demand Theory

In the past installments from DiscussEconomics on demand theory, now we’re venturing into the graphical and mathematical expressions of the Cobb Douglas demand function. Graphically expressed (utility maximizing) with the assumption well-behaved preferences. The interior solution characterized by two statements (the equals sign is really supposed to be three lines thus ‘is equal to): 1. … Continue reading Cobb Douglas Function – Demand Theory

Demand Theory – Consumer Choice Problem

Normal, Inferior, Neutral, Luxury, Necessary Goods There are three fundamental questions about a consumer’s consumption response: 1. How will demand change for a good i change in response to a increase or decrease in the price of i? 2. How will demand for good i change in response to an increase or decrease in M … Continue reading Demand Theory – Consumer Choice Problem

The Economics of Property Law – Coase Law

Here is an article that deals with Coase laws and the economics of property law. The lack of defined property rights leads to the abuse of certain activities as a result of a differing perceptions regarding how choices affect marginal private benefits and social costs. How does this impact society and what does this say … Continue reading The Economics of Property Law – Coase Law

Utility Functions (Mathematical Representation of Preference)

The following section from DiscussEconomics on microeconomics and preferences discusses the mathematical representation of preference using utility functions. Using utility function : U(x) = U (x1, x2, x3…….xn) (Where U is in fact mu.) This assigns a number (utility number to every consumption bundle in a person’s preference ordering. 1. Now if someone is indifferent … Continue reading Utility Functions (Mathematical Representation of Preference)