• <b>United States Federal Reserve</b>

Intermediate Microeconomics


1. Supply and Demand


The supply-demand model is generally the starting point for any economic analysis. The supply and demand curves represent the behavior of sellers and buyers, respectively, and the model allows us to examine how interactions between buyers and sellers determine prices and quantities. The supply-demand model can easily be augmented to examine the impact of public policies, such as price controls, quantity controls, taxes and subsidies, on market outcomes. In the Screencasts/Pencasts for this topic, we develop the supply-demand model, determine market equilibrium, examine "shocks" to the equilibrium (shifts in supply and/or demand), and how government interventions affect market outcomes.


2. Efficiency of Competitive Markets


The supply-demand model can be used to determine price and quantities, but we have yet to consider whether these prices and quantities are the "right" ones. Put differently, is there a price and quantity that generate more welfare than the free-market price and quantity? In these Pencasts, we define measures of consumer and producer welfare, illustrate how to calcluate consumer and producer welfare (in dollars), and use the tools of welfare economics to make a judgement about whether the competitive equilibrium is welfare maximizing. To examine the efficiency of free-market outcomes, we examine a variety of different government interventions, including limits on the number of firms, per-unit taxes, per-unit subsidies, price supports, bans on foreign imports and tariffs on foriegn imports.


3. Utility Maximization


Utility is the amount of satisfaction that a consumer derives from consuming a bundle of goods. While utility is not directly measurable, it is a useful abstraction that can be used to describe optimal consumer behavior. The model that we develop is an individual model, which helps us to better understand how individuals make choices based on their preferences and the constraints that they face. In the Pencasts for this topic, we define utility, explore its properties, and make predictions for optimal consumer behavior.


4. Production


Firms use a process to transform inputs into outputs. The Pencasts in this series focus on this process. In general, firms use three inputs to make their output(s): labor, capital and raw materials. Because some inputs are difficult to change over a relatively short period of time, we separate our coverage of production into short- and long-run analyses. The substitutabiliy of inputs, innovation, technical change, and returns to scale are also covered.


5. Costs


Economic cost includes both explicit and implicit costs. Put differently, economic cost measures opportunity cost. In these Pencasts, we cover the different ways costs are measured, short-run costs, long-run costs, how per-unit and lump-sum taxes affect firms' costs, cost minimization, and changes in factor prices. While examining a representative firm's costs is somewhat dry and technical, a thorough understanding of a firm's costs helps us to understand subsequent topics, such as perfect competition, monopoly, oligopoly, and monopolistic competition.


6. Perfect Competition


Competitive markets are composed of many firms selling identical products. Firm in such market settings take the market price as given; that is, they are unable to influence it with their output decisions. Competitive firms are unable to affect the market price for two reasons: (1) They represent a very small share of the total output produced in that market, and (2) the firms in the market are selling identical goods. In the Pencasts in this series, we cover the derivation of a representative firm's demand curve, profit maximization, the shutdown decision, the impact of government interventions on output and profits, the derivation of the market supply curve, and changes in short- and long-run equilibria.


7. General Equilibrium


It is typically the case that when one market is impacted by an environmental change other markets are affected as well. Thus far, we have conducted what is referred to as partial-equilibrium analysis; that is, we have only considered the effect of an exogenous event on the outcome in a single market. General-equilibrium analysis considers the effect of an event on the equilibrium in all markets. Sometimes partial-equilibrium analysis is sufficient, but that depends on the question of interest. A tax on oranges is unlikely to have a meaningful effect on the equilibrium in the market for airplanes. However, there are instances in which a general-equilibrium analysis is warranted. It is often the case that economists examine several markets at once, rather than all markets. A tax on oranges might not affect the market for airplanes, but such a tax likely affects the equilibrium outcomes in the markets for kiwi, grapefruit, apples, and so on. In these Screencasts/Pencasts, we cover pure exchange (trade without production), depict an Edgeworth box, use an Edgeworth box to illustrate that trade between two people can benefit both, describe the meaning of Pareto-efficient allocations, illustrate a set of Pareto-efficient allocations using a contract curve, and examine market exchange.


8. Monopoly


A monopoly is the sole seller of a good that does not have close substities. As a result, the demand curve facing a monopolist is the market demand curve, which is downward sloping. Thus, the monopoly is able to set its price. A monopolist charges a price that exceeds their marginal cost, which differs from a firm in a competitive market. The higher price charged results in a reduction in trades between buyers and sellers that would, under perfect competition, be desirable for both parties. In the Screencasts/Pencasts for this topic, particular aspects of monopolistic markets are covered, including profit maximization, market power, how the extent of market power depends on the elasticity of demand, how taxes affect outcomes in markets controlled by a monopoly, the welfare effects of monopolies, natural monopolies, and policies designed to combat the harm caused by monopoly power.


9. Pricing


Firms with market power, such as monopolies, are sometimes able to use nonuniform pricing to increase their profits. In particular, such firms can use price discrimination, quantity discrimination, two-part tariffs and tie-in sales to target consumers with different willingnesses to pay. It can be shown that nonuniform pricing benefits society, as larger quantities are sold than when a single price is charged. In the screencasts and pencasts in this series, the following types of nonuniform pricing are covered: perfect price discrimination, quantity discrimination, a comparison of single prices and block pricing, multimarket price discrimination, two-part tariffs when consumers have the same and different willingnesses to pay, tie-in sales and the decision to advertise and how much to invest in advertising.


10. Oligopoly


An oligopoly is a small group of firms in a market with substantial barriers to entry. Because the number of firms in an oligopoly is small, each firm can influence the market price with their actions. Furthermore, the actions of one firm in an oligopoly affects rival firms. It is possible for firms in an oligopoly to act independently or collectively. When firms in an oligopoly collude, they collectively behave like a monopolist. In the majority of countries, explicit collusion among firms is illegal. Furthermore, private incentives make the cartel arrangements difficult to maintain. The Pencasts for this topic focus on non-cooperative oligopoly. In particular, the Pencasts cover three different models: the Cournot model, the Stackelberg model and the Bertrand model. In the Cournot and Stackelberg models, firms set quantities, and firms set prices in the Bertrand model.


11. Monopolistic Competition


Firms in monopolistically competitive markets have features of both monopolies and competitive firms. Given that monopolistically-competitive firms sell goods that are differentiated from those of their competitors, they face a downward-sloping demand curve, which allows them to charge a price that is above their marginal cost. The aspect of a monopolistically competitive market that is consistent with a competitive market is the fact that there are no barriers to entry. As such, whenever a firm is earning economic profit, there is an incentive for other firms to enter that market by producing a similar but differentiated version of the good. As a result, the monopolistically-competitive equilibrium requires that firms in an industry earn zero economic profit. Monopolistic competition is a prevalent form of industry structure. However, such an industry structure is difficult to analyze in the abstract, as we have done with competitive and monopolistic firms. It is often the case that the particular aspects of the products and available technologies matter a great deal when analyzing monopolistically competitive industries. There are a few interesting features, however, that we can cover, including a characterization of the monopolistically-competitive equilibrium and how economic profit prompts entry and results in a new monopolistically-competitive equilibrium.


12. Game Theory


Game theory is a set of tools that are useful for analyzing stategic interactions, which includes parlor games, political negotiations, engaging in war, bargaining between unions and management, and economic behavior. In these Screencasts/Pencasts, we discuss the basics of game theory, define some key terms, provide payoff matrix examples for particular games, show how to find a Nash Equilibrium (when it exists), demonstrate a mixed-strategy Nash Equilibrium, discuss repeated games that are played a fixed and indefinite number of times and illustrate how the equilibrium of a game that is played sequentially is found.


13. Uncertainty


Uncertainty is a part of life. Will you have enough retirement income to retire at age 65? Will the Social Security program be solvent in 50 years? Will a stock that you increase or decrease in value over the next year? Will the business you would like to start be successful or will it fail? How much life insurance should you buy? In the Screencasts/Pencasts for this topic, we extend the model of consumer decision-making to include uncertainty. We will cover the topic of risk, how to measure and how to avoid it. In addition, we will cover expected utility theory, how to determine risk premiums, and explain why insurance companies will never take a fair bet.


14. Externalities


An externality is the uncompensated impact of one person's actions on the well-being of a bystander. For example, a polluting firm confers a negative externality on society, as its output produces an external cost that it does not take into account when determining how much to produce. An example of a positive externality is education. Increased levels of educational attainment produce positive spillover effects, as people with higher levels of educational attainment are less likely to commit crime, more likely to work, less likely to receive public assistance and are more likely to vote (this list is not exhaustive). In the Screencasts/Pencasts that follow, we will cover implications of negative and positive externalities on market outcomes, demonstrate mathematically how to solve for the social optimum in the presence of externalities, investigate the welfare consequences associated with externalities, and discuss policies designed to combat the inefficiency caused by externalities.