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MICROECONOMICS - Coggle Diagram

- - - - Externalities: External costs or benefits that affect third parties who did not choose to incur that cost or benefit
      - Public Goods: Goods that are non-excludable and non-rivalrous
      - Merit and Demerit Goods: Merit goods (e.g., education. are under-consumed, while demerit goods (e.g., tobacco) are over-consumed in a free market
    - - Taxes: Levies on income, consumption and property
      - Privatisation: Selling state-owned enterprises to private entities
      - Licenses and Fees: Charging for the right use certain resources or operate in certain markets
    - - Progressive Taxation: Higher tax rates on higher income brackets
      - Welfare Programs: Financial assistance to low-income households
      - Minimum wage laws: Ensuring workers receive a living wage
    - - Subsidies: Financial assistance to reduce production cost
      - Trade Protection: Tariffs and quotas to limit foreign competition
      - Tax Breaks: Reductions in tax liabilities to encourage investment
    - - Welfare Payments: Direct financial assistance to low-income individuals and families
  - - - Specific Taxes: Fixed amount per unit of the good or service (e.g., excise duty on cigarettes
      - Can be used to discourage consumption of goods (demerit goods) and to generate revenue
        
        Tax Revenue = Tax Rate x Quantity Sold
      - Ad Valorem Taxes: Percentage pf the price of the good and service (e.g., VAT)
    - - Production Subsidies: Lowers the costs of production of firms
      - Consumption Subsidies: Lower the price for consumers
  - - - Price Ceilings: (Maximum Prices) Set below the equilibrium price to make goods more affordable
      - Price Floors: (Minimum Prices) Set above the equilibrium price to ensure producers receive a minimum income
    - - Public Goods: Non-excludable and non-rivalrous goods provided by the government (e.g., army)
      - Merit Goods: Goods that are under-consumed in a free market (e.g., education, healthcare)
    - - Consumer Protection Laws: Ensuring product safety and fair trading practices
      - Environmental Regulations: Limits on pollution and resource use
      - Labor Laws: Protecting workers' rights and ensuring safe working conditions
- - - - Price Mechanism: In a free market, prices are determined by the forces of supply and demand (should lead to an efficient allocation of the scarce resources)
  - - - Negative Externalities: These are harmful effects, such as pollution
        
        Occur when the production or consumption of a good imposes costs on third parties.
        
        Negative production externalities refer to external costs created by products
        
        POLICIES TO CORRECT
        
        INTERNATIONAL AGREEMENTS
        
        COLLECTIVE SELF-GOVERNANCE
        
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        Montreal Protocol, EU Emission Trading System, EU Allowance, Kyoto Protocol, Paris Agreement
        
        Negative consumption externalities refer to external costs created by consumers
        
        POLICIES TO CORRECT
        
        MARKET BASED POLICIES
        
        Tax and Subsidy
        
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        GOVERNMENT LEGISLATION AND REGULATION
        
        Advantage: Can be very effective in reducing the external costs of certain consumption activities
        
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        EDUCATION AND AWARENESS CREATION
        
        Anti-smoking campaigns, unhealthy food, reduce fossil fuels, etc
        
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        NUDGES
        
        The free-market equilibrium is where MPC=MSB
        The socially optimal equilibrium is where MSC=MSB
        The gap between MPC and MSC is the external costs
      - Positive Externalities: These are beneficial effects, such as vaccinations
        
        Occur when the production or consumption of a good provides benefits to third parties.
        
        Positive production externalities refer to external benefits created by producers
        
        Positive consumption externalities refer to external benefits created by consumers
        
        Benefits the person who receives the education - more productive workforce, lower unemployment, higher rate of growth, more economic development, lower crime rate
        
        GOVERNMENT LEGISLATION AND REGULATION
        
        To promote greater consumption of goods with positive externalities
        
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        GOVERNMENT PROVISION
        
        Engagement in R&D for new technology, medicine and pharmaceuticals. Training for workers.
        
        SUBSIDIES
        
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        The free-market equilibrium is where MPB=MSC
        The socially optimal equilibrium is where MSB=MSC
        The gap between MPB and MSB represents the external benefit
      - MARGINAL ANALYSIS
        
        Marginal Private Benefit (MPB): The additional benefit received from consuming or producing one more unit.
        
        Marginal Private Cost (MPC): The additional cost incurred from consuming or producing one more unit.
        
        Marginal Social Benefit (MSB): The total benefit to society, including both private and external benefits.
        
        Marginal Social Cost (MSC): The total cost to society, including both private and external costs.
        
        Socially Optimum Output occurs where MSB = MSC. At this point, the allocation of resources is considered efficient from society's perspective.
      - Taxes and Subsidies to internalize externalities
        
        Regulation to limit harmful activities
      - Government Intervention
    - - 3) COMMON POOL RESOURCES
        
        4) ASYMMETRIC INFORMATION
        
        occurs when one party has more or better information than the other, leading to an inefficient market outcome
        
        Adverse Selection
        
        Situation when one party in a transaction has more information about quality of product being sold than the other party
        
        Information is available to sellers but not buyers
        
        Consumers are likely to be aware of possible dangers to themselves
        
        POSSIBLE SOLUTIONS
        
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        Moral Hazard
        
        Situation where one party takes risks but does not face the full costs of these risks because the full costs of the risks are borne by other party
        
        RESPONSES
        
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        resources that are non-excludable but rivalrous, leading to overuse and depletion
        
        Example: Fisheries
        
        Non-excludable: It's difficult to prevent people from using the resource
        
        Rivalrous: One person's use of the resource reduces its availability for others
        
        Government Intervention
        
        Property Rights to manage common pool resources
        
        Unsustainable production refers to the production that uses resource unsustainably leading to depletion or degradation
      - goods that are non-excludable and non-rivalrous, leading to under-provision in a free market.
        
        Example: National defense
        
        Free rider problem refer to when some people take advantage of a shared resource without paying their fair share
        
        Non-excludable: It's not possible to exclude individuals from consuming the good
        
        Non-rivalrous: One person's consumption does not reduce availability for others
        
        Government Intervention
        
        Provision of Public Goods to ensure adequate supply
        
        Contracting out to the private sector
        
        When a government makes an agreement or contract with a private firm to carry out an activity that the government was previously doing itself
        
        SUMMARY
        
        Rivalrous & Excludable
        
        Non-rivalrous & Excludable
        
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        Computers, books, clothes, education, petrol
- - - - Law of demand : there is a negative relationship between price of a good and quantity demanded. eg = as the price of the good increases, the quantity of the good demanded falls (vice versa)
      - Market Demand : is the sum of individual demand for a good.
    - - Income in the case of normal goods = an increase in income leads to a rightward shift in the demand curve (vice versa)
      - income in the case of inferior goods = an increase in income leads to a leftwardshift in the demand curve because consumer switch to more expensive alternatives. (vice versa)
      - Preference and taste = if the preference and taste change in favour of a product ( it becomes more popular ) Demand increases and demand shift to the right (vice versa)
      - prices of substitute goods (satisfy similar needs) = A fall in the price of Coke results in a fall of demand of Pepsi (vice versa) consumer substitute to good b
      - Prices of complementary goods(they tend to be used together) = a fall in price of computer leads to an increase of demand for the computer software.
      - The numbers of consumers = if there is an increase in the number of consumers(demanders) demand will increase and demand curve shift to the left.
  - - - Law of supply ; there is a positive relationship between price of a good and quantity supplied. eg = as the price of the good increases, the quantity of the good supplied increases (vice versa)
- - - - OLIGOPOLY
        
        MONOPOLY
        
        one large firm, one product with close substitute, high barrier to entry, very significant control over price, no competition
        
        Short run: abnormal profit, normal profit loss
        
        Long run: normal profit
        
        few large number of firms, differentiated/undifferentiated product, high barrier to entry, significant control over price, some degree of competition
        
        Short run: abnormal profit, normal profit loss
        
        Long run: abnormal profit
      - relatively many firms, differentiated product, no barrier, some control over price, good amount of competition
        
        Short run: abnormal profit, normal profit loss
        
        Long run: normal profit
    - - Short run: abnormal profit, normal profit loss
        
        Long run: normal profit
  - - - COST CONCEPT
        
        PROFIT CONCEPT
        
        ADDITIONAL CONCEPT
        
        long run (LR)
        
        short run (SR)
        
        economies of scale
        
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        period of time when firm have one resources is fixed
        
        period of time when firms changes all resources
        
        PROFIT MAXIMISATION
        
        abnormal profit
        
        normal profit
        
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        P > AC
        
        profit
        
        normal profit
        
        abnormal profit
        
        negative profit (loss)
        
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        revenue is greater than normal profit
        
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        minimum amount of revenue required for firm to continue running
        
        TR = TC
        
        total revenue minus total cost
        
        TR - TC
        
        explicit cost
        
        implicit cost
        
        total costs (TC)
        
        average cost (AC)
        
        marginal cost (MC)
        
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        total cost per unit of output
        
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        explicit + implicit cost
        
        income sacrifice by firm that use as resources
        
        payment made to outsider to buy input
      - total revenue (TR)
        
        marginal revenue (MR)
        
        average revenue (AR)
        
        revenue per unit of output
        
        AR - TR / Q
        
        additional revenue arise from sale of additional unit of output
        
        MR = ∆ TR / ∆ Q
        
        total earnings of firm from sale of output
        
        TR = P X Q