Course Knowledge Demonstration 3 Topics

Welcome

This website is for extra credit, it demonstrates three important concepts I've learned in Economics.

Topics Covered:

• Topic 1: Labor, Financial Markets and Elasticity
• Topic 2: Consumer Choice, Production and Competition
• Topic 3: Monopolies

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Here are some of the basic points and vocabulary from this module

Equilibrium Price: The point where demand and supply meet.

Product Surplus: Occurs when supply exceeds demand (above supply level, below equilibrium price).

Consumer Surplus: Occurs when consumers pay less than they’re willing to (below demand level, above equilibrium price).

It benefits consumers by offering lower prices than expected, making purchases more favorable.

Consumer surplus reflects the advantage buyers gain when market prices are lower than their maximum willingness to pay.

Producer Surplus – Seller's benefit (price received minus minimum acceptable price).

Consumer Surplus – Buyer's benefit (maximum willingness to pay minus actual price).

Social Surplus – Total economic benefit (consumer + producer surplus).

Price Controls:

- Price Ceiling (max price): If set below market price → shortage.

- Price Floor (min price): If set above market price → oversupply.

Market:

- Prices are determined by supply and demand interaction, not just one.

- Deadweight loss occurs when markets produce inefficient quantities, reducing social surplus.

- In market-oriented economies, prices adjust naturally with minimal government intervention.

As salaries increase, more people seek those jobs. Higher wages in a city attract workers, moving the labor market toward equilibrium where supply meets demand at the market wage rate (full employment).

Labor Market Imbalances:

- Below equilibrium wage → worker shortage

- Above equilibrium wage → worker surplus

Demand for labor follows product demand: increased product demand raise labor demand (more hiring), while decreased demand reduces it (layoffs). Employers prioritize skilled workers, investing heavily in specialized training.

Some factors Affecting labor Markets:

- Technology: Can replace or require workers

- Competition: More companies → more job competition

- Regulations: Can increase/decrease labor demand

- Education: More requirements → fewer qualified workers

- Population: Changes affect labor supply

Government Roles in labor markets:

- Sets certification requirements

- Provides training subsidies

- Manages unemployment benefits

- Avoids salary ceilings

Minimum Wage:

- Federal-set floor near equilibrium

- Living wage covers basic needs (typically higher than minimum wage)

- Impacts few U.S. workers (mostly low-skilled)

Minimum Wage benefits:

- Reduces poverty

- Increases work incentive

- Stabilizes workforce

- Boosts local economies

Consumer Choice

Consumer make choices to maximize utility given budget constraints

Perfect competition

In a perfect competition, many firms sell identical products and productive efficiency is achieved in the long-run

A perfect competition assumes that there are many buyers/sellers, identical products, free entry/exit in the market and perfect information for the customers.

Consumer Equilibrium

Occurs where marginal uility per dollar is equal across all goods purchased

Elasticity measures how much the quantity demanded or supplied of a good changes in response to changes in price, income, or other factors.

Income Elasticity of Demand (measures how demand changes with income):

- High: Rising incomes significantly increase demand (e.g., luxury cars)

- Unitary: Demand changes exactly with income changes

- Low: Rising incomes cause small demand changes (e.g., groceries)

- Zero: Income changes don't affect demand (e.g., salt)

- Negative: Rising incomes decrease demand (e.g., cheap instant noodles)

Price Elasticity of Demand (measures how quantity demanded changes with price):

- Elastic (|E| > 1): Small price changes cause large quantity changes (e.g., restaurant meals)

- Inelastic (|E| < 1): Price changes cause small quantity changes (e.g., gasoline)

- Unitary (|E| = 1): Quantity changes match price changes

- Perfectly elastic: Any price increase drops demand to zero

- Perfectly inelastic: Quantity demanded never changes (e.g., life-saving drugs)

Why This Matters

Consumer Choice

Consumers aim to maximize utility (satisfaction) given budget constraints. Choices depend on:

• Personal preferences
• Income levels
• Price of goods

Income & Price Effects

Income changes:

• Normal goods: Demand increases with higher income
• Inferior goods: Demand decreases with higher income

Price changes:

• Substitution effect: Switch to cheaper alternatives
• Income effect: Reduced overall purchasing power

Behavioral Economics

Challenges traditional models by considering:

• Cognitive biases
• Habitual behaviors
• Decision framing effects

Indifference Curves

Graphical representation showing:

• Combinations of goods providing equal satisfaction
• Optimal choice at budget line-indifference curve tangent point

Costs and Profit

Cost types:

• Explicit: Direct payments (wages, rent)
• Implicit: Opportunity costs

Profit measures:

• Accounting profit: Revenue - explicit costs
• Economic profit: Revenue - (explicit + implicit costs)

Production & Costs

Short run:

• Fixed costs (capital)
• Variable costs (labor)
• Diminishing marginal returns

In the Long run:

• All costs are variable
• There are economies of scale

Perfect Competition

Characteristics:

• Many buyers/sellers
• Identical products
• Free entry/exit
• Perfect information

Firm decisions:

• Produce where MR = MC
• Long-run: P = minimum ATC (zero economic profit)

Entry/Exit effects:

• Profits attract new firms → supply increases → prices fall
• Losses cause exits → supply decreases → prices rise

Example

Why This Matters

Definitions

Definition of a Monopoly: A monopoly is a market structure with a single firm that controls the entire market (or assumes the dominant position.)

Definition of a Natural Monopoly: A natural monopoly is a monopoly that occurs due to 'natural circumstances' where "when a business has very high start-up production costs or they are conducting business in a specific market that prevents competitors."

Definition of an Oligopoly: When there are only a few producers or sellers in a market. There is limited competition in an oligopoly. It exists because of several reason, one reason being brand loyalty (e.g., Phone brands) and another being that small companies have higher production costs than large companies

A monopolistic competition: Such a competition involves competing companies who may or may not sell all of the same products or services. An example from calvert: A shopping center, with multiple retail stores with similar products, is an example of monopolistic competition.

Barriers to entry: The ways in which discourages, blocks or prevents potential competitors from entering a market. include high startup costs, patents, government regulations, or control of essential resources (e.g., De Beers controlling diamond supplies).

Regulation and deregulation: Deregulation may increase competition, but that could also allow businesses to commit fraud more easily. Small businesses are also at a higher risk of being driven out of the market by the larger companies as a result.

Anti-trust laws: Anti-trust laws (pretty self explanatory), are regulations or laws that constricts the power of any particular firm and promote competition.