Capstone: The Course in Forty Views

This is Unit Seventeen of Principles of Microeconomics, part one of two: the course seen from its end, in the first twenty-three of forty views. Every earlier unit built one tool and used it once. This unit walks the tools back in order and stops at the exam's own sample questions to work them. Part one runs from scarcity to the shutdown test; part two carries on from the industry to the failures and closes the course. By the end you will be able to restate the first ideas. To classify a point against the frontier and run the four steps. To shift the right curve and say who bears a wedge. To separate income from substitution. And to define profit, minimize cost, and apply the marginal rule and the shutdown test.

Four entries on the first ideas: scarcity, the frontier, advantage, and what the course claims.

The first idea, seen from its end.

MIC 1601 Scarcity, Choice and the Margin

Scarcity forces choice, every choice has an opportunity cost, and choices are made at the margin: one more hour, one more worker, one more ton is the same question. Sunk costs are not marginal, and averages mislead.

The picture of opportunity cost.

MIC 1602 The Frontier

The frontier's slope is what one good costs in the other; it bows because resources are specialized, and growth shifts it out. Trade moves consumption beyond it; nothing moves production beyond it.

The two advantages.

MIC 1603 Advantage and Trade, Restated

Absolute advantage is producing more with the same resources; comparative advantage is producing at lower opportunity cost, and trade follows it. No country holds it in both goods. Compute it by dividing, since comparing raw outputs gives absolute advantage again.

What kind of statements this course makes.

MIC 1604 Positive, Normative, and What This Course Claims

A positive statement describes; a normative one judges. This course reports contested results with both sides attributed and no verdict, and separates efficiency from equity. An exam asks what a model predicts, not what the student prefers, so answer the model.

Four entries on the market model: the first sample question, the four steps, the shifters, and equilibrium.

The first sample question.

MIC 1605 Sample Question One: Inside the Frontier

On the frontier is attainable and efficient; inside is attainable but inefficient, from idle or misallocated resources; outside is unattainable now. The exam's point lies inside, and the answer is attainable but inefficient. Forty guitars with twenty drums, when sixty guitars with twenty drums is possible: the missing twenty are idle workers. The frontier did not move; the economy did.

The model every later unit uses.

MIC 1606 Demand, Supply, and the Four Steps

Demand and supply are curves; quantity demanded and supplied are points on them. A price change moves along a curve, anything else shifts it. Draw the market, decide which curve shifts and which way, find the new equilibrium, compare.

The shifters.

MIC 1607 The Shifters

Demand shifts with income, related prices, tastes, population and buyer expectations; supply with input prices, technology, the number of sellers, seller expectations, and natural conditions or taxes. The good's own price is on neither list.

Where the curves meet.

MIC 1608 Equilibrium, Surplus, Shortage, Both Curves

Equilibrium is where quantity demanded equals quantity supplied; a surplus pushes price down, a shortage up. When both curves shift, one of price and quantity is certain and the other depends on the larger shift. Report the ambiguous one as ambiguous.

Four entries: the second sample question, elasticity restated, controls, and who bears a wedge.

The second sample question.

MIC 1609 Sample Question Two: A Substitute's Price Falls

Name the related good's relation and shift the right curve of the market asked about. A substitute's price falls: demand for the good shifts left, and both its price and quantity fall. A tea harvest cuts tea's price, coffee drinkers switch some cups, and coffee's price and quantity fall; supply did not move. The exam's key is the fall in both.

Responsiveness.

MIC 1610 Elasticity, Restated

Price elasticity of demand is the percentage change in quantity over the percentage change in price, by the midpoint method. Substitutes, budget share and time make demand elastic, and revenue rises with price only where demand is inelastic. Elasticity is not slope.

Prices held off equilibrium.

MIC 1611 Price Controls and the Loss

A ceiling binds below equilibrium and makes a shortage; a floor binds above and makes a surplus. Both cut quantity, the units not traded are deadweight loss, and what moves between sides is a transfer. Check that the control binds.

Who ends up paying.

MIC 1612 Who Bears It: Elasticity Decides

Who bears a wedge is decided by elasticity, whether it is a tax, a tariff, a control or a monopsonist's markdown: the side that can least escape pays most, and who writes the check does not matter. A payroll tax lands mostly on workers, a small country's tariff on consumers, a minimum wage's job loss on the elasticity of labor demand. With supply equal to quantity, a six-dollar tax under inelastic demand has buyers bearing four; under elastic demand, two. Same tax, same start, opposite incidence. The deadweight loss is smallest where the burden is heaviest, and a control transfers surplus but collects no revenue.

Three entries on the consumer: the third sample question, one rule in two languages, and market demand.

The third sample question.

MIC 1613 Sample Question Three: Income or Substitution

A price change changes relative prices, the substitution effect, and buying power, the income effect. Relative price and switch from mean substitution; buying power and real income mean income. A rider who buys an extra coffee with the fare saved shows the income effect, which is the exam's answer. For an inferior good the two conflict and substitution almost always wins.

The consumer's rule in two languages.

MIC 1614 One Rule, Two Languages

The consumer's rule is marginal utility per dollar equal across goods; on the indifference diagram it is the tangency, the marginal rate of substitution equal to the price ratio. Move spending toward the higher ratio, and never compare utility across people.

How demand comes out of it.

MIC 1615 From Utility to Market Demand

Lowering a good's price raises its marginal utility per dollar, so the consumer buys more, and the points traced out are the individual demand curve. Market demand adds the individual quantities at each price, never the prices; the vertical sum belongs to public goods.

Eight entries on the firm: profit, the fourth sample question, costs, scale, the price taker, and the eighth and fifth sample questions.

The firm's side.

MIC 1616 Profit, Three Ways

Accounting profit is revenue minus explicit costs; economic profit subtracts implicit costs too. Zero economic profit is a normal profit, and a positive accounting profit can be an economic loss. Entry and exit respond to economic profit.

The fourth sample question.

MIC 1617 Sample Question Four: The Cost-Minimizing Combination

A firm producing at least cost equalizes marginal product per dollar across inputs. The last worker yields two units per dollar and the last machine-hour three, so use more capital and less labor until the ratios match. Compare per dollar, never marginal product alone; the rule is the consumer's rule with output in place of utility.

Why costs rise.

MIC 1618 Diminishing Returns and Rising Marginal Cost

With a fixed input each added worker eventually adds less, and since marginal cost is the wage over marginal product, falling marginal product means rising marginal cost: one fact from two sides. Diminishing returns are short-run; diseconomies of scale are long-run.

The cost curves together.

MIC 1619 The Cost Family

Total cost is fixed plus variable. Average total cost is the U, average variable cost sits below it by average fixed cost, and marginal cost cuts both averages at their minimums. Read marginal cost from the change between rows.

The long run.

MIC 1620 The Long Run: Scale

In the long run every input varies. Economies of scale lower average cost, constant returns hold it flat, diseconomies raise it, and minimum efficient scale against market size decides how many firms fit. Constant-cost industry is about input prices, constant returns about one firm's scale.

The firm that takes the price.

MIC 1621 The Price Taker and the Marginal Rule

A competitive firm takes the market price, so marginal revenue equals price, and it produces where marginal revenue equals marginal cost. The rule holds for every firm, only marginal revenue differs, and the crossing that counts is where marginal cost rises through it.

The eighth sample question.

MIC 1622 Sample Question Eight: Quantity from a Total-Cost Table

Compute marginal cost as the change in total cost between rows, produce every unit whose marginal cost is at most the price, and check by profit. Marginal cost of five through fifteen dollars at a price of thirteen means produce six, for a profit of ten; at nine, produce four at a loss of ten, which beats the fixed cost of twenty. Never divide a row by its quantity, and a loss is not a reason to produce less.

The fifth sample question.

MIC 1623 Sample Question Five: The Shutdown Test

A firm losing money compares price with average variable cost at its best quantity: covered, produce; not covered, shut down and lose only the fixed cost. Average variable cost is eight dollars; at a price of nine producing loses twenty against thirty, so produce; at seven it loses forty against thirty, so shut down. The exam's price is below average variable cost, and the key is shut down. Shutting down is not exiting.

Look at what you can now do. You can restate scarcity and the margin, read opportunity cost off the frontier, compute comparative advantage by dividing, and answer an exam with the model. You can classify a point inside the frontier as attainable but inefficient, and run the four steps with the ambiguous variable reported as ambiguous. You can shift demand left when a substitute gets cheaper, keep elasticity apart from slope, check that a control binds, and read who bears a wedge from who moved least. You can tell the income effect by its key words, state the consumer's rule two ways, and sum quantities into market demand. And you can define economic profit, equalize marginal product per dollar, read marginal cost between rows, and apply the marginal rule and the shutdown test. Part two carries on from the industry over time.