can-celebi.github.io/micro-business/L02
microeconomics · lecture 2 · open on your laptop
microeconomics
040184 · ws 2026/27 · lecture 2
markets
before we start
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review · question 1
economic cost
the plan
one summer making YouTube videos instead of an internship
you pay
camera rental €200 · editing software €60
you give up
the internship: €2,400
economic cost of the YouTube summer?
answer
€2,660
Explicit: what you pay (€260). Implicit: what you give up (€2,400). Economic cost = both.
200 + 60 = 260 (explicit) + 2,400 (forgone internship pay) = €2,660
review · question 2
the cost of tying up your money
yearly gym pass
€400, paid now
or pay later
€430 at the END of the year
your savings
earn 5% a year
which is cheaper, and by how much?
answer
yearly, by €10
Paying now saves 430 − 400 = €30.
But the €400 paid now can no longer earn interest for the year: 5% × 400 = €20.
30 − 20 = €10.
review · question 3
marginal benefit ≥ marginal cost
each subscription
€10 a month
let's assume
you can put a € value on each one
worth to you
Netflix €15 · Spotify €12 · Disney+ €8 · Apple TV €5
which do you keep?
answer
Netflix and Spotify
Keep each subscription that is worth at least its €10.
Disney+ (€8) and Apple TV (€5) are worth less than they cost.
review · question 4
marginal vs average
a YouTuber
10 videos so far: 20,000 views on average
video 11
9,000 views
after video 11, the average views …
answer
fall (to 19,000)
The new video (9,000) is below the average (20,000), so it pulls the average down, but only a little: one video against ten.
(10 × 20,000 + 9,000) / 11 = 209,000 / 11 = 19,000
today
1 allocation mechanisms
2 perfect competition: five conditions
3 barriers to entry
4 bitcoin mining
5 taxi licences
6 building AI
7 selling inference
8 demand and inverse demand
9 law of demand
10 supply and inverse supply
allocation mechanisms
who gets the scarce thing?
Scarce means: not everyone who wants it can have it.
So someone or something decides who gets it.
That rule is an allocation mechanism.
So someone or something decides who gets it.
That rule is an allocation mechanism.
rule 1
price
rule 2
a test or contest
rule 3
a government rule
rule 4
the seller picks
rule 5
voting
what is the rule?
case 1 · ChatGPT Plus
the good
intelligence
who gets it
everyone who pays €20 a month
what is the allocation mechanism?
answer
price
Whoever is willing and able to pay gets it.
what is the rule?
case 2 · good grades
supply
teachers give out the good grades
demand
every student wants them
who gets them
those who do best in the exam
what is the allocation mechanism?
answer
a test or contest (the exam)
what is the rule?
case 3 · a job
the job
an internship at a tech firm in Vienna
applicants
200 applications for 2 places
who gets it
the firm reads the CVs, conducts interviews, and chooses
what is the allocation mechanism?
answer
the seller picks
The employer chooses among the applicants (CV, interview, tests).
The wage is a price too, but who gets the job is the employer's choice.
what is the rule?
case 4 · a taxi licence in Istanbul
the good
a taxi plate: the right to run a yellow taxi in Istanbul
the number
the city fixes how many plates exist: about 17,400, the same for decades
then
existing plates are bought and sold: about €200,000 each
what decides how many taxis there are?
answer
a government rule
The city decides how many plates exist; within that limit, a price decides who holds one.
Two mechanisms at once: a rule for the quantity, a market for the plates. More on this in a few slides.
markets
a market is an allocation mechanism too
the rule
sellers offer at a price; buyers decide whether to buy at that price
where
a farmers' market, a cryptocurrency exchange market
perfect competition
the benchmark market
A market is perfectly competitive when all five conditions hold.
1
many small buyers and sellers (fragmented industry)
2
price takers: no one can move the price
3
identical products: buyers don't care whom they buy from
4
perfect information: everyone knows prices and quality
5
free entry: anyone can start selling
what is bitcoin mining?
computers compete to write the next page of bitcoin's public ledger, and get paid for it
the ledger
every bitcoin payment is written into one public list; a new page (a block) is added about every 10 minutes
the competition
special machines (ASIC chips) guess numbers billions of times a second; the first correct guess wins and writes the page
the reward
the winner gets 3.125 new bitcoin + the fees that senders attached to their payments
the competition
try it on your phone
the page
the payments + the previous page's fingerprint + one number you choose
scramble it
a fixed formula (SHA-256) turns the page into a code, the hash
the rule
the page only counts if the hash starts with many zeros
the catch
no shortcut: change the number, scramble, check, again and again
the mining reward
case 5 · new bitcoin
the good
3.125 new bitcoin, every ~10 minutes (from about 2028: 1.5625)
who gets it
the first miner whose guess makes the hash start with enough zeros
what is the allocation mechanism?
answer
a contest: proof of work is the rule
Whoever first solves the guessing race gets the new coins.
Your chance of winning = your share of all guesses being made, so more machines (and more electricity) buy more chances.
bitcoin mining
you now know the market: check it against the five conditions
many miners
thousands, but most join one of a few pools
the price
3.125 BTC per page, the same for every miner
information
prices, difficulty and rewards are public
starting
anyone can plug in a machine, if they have cheap power and €1,000s for machines
which conditions fail? (tap all that apply, then submit)
answer
two weak spots: many small sellers and free entry
Many small sellers: 3 pools together control more than half of all mining.
Free entry: anyone may start, but cheap electricity and expensive machines are not available to everyone.
Price takers, identical product, information: all fine.
perfect competition
is bitcoin mining a perfect market?
| condition | a perfect market would need … | bitcoin mining has … |
|---|---|---|
| many small sellers | thousands of tiny miners, none big enough to matter | ~ thousands of miners, but 3 pools together control more than half |
| price takers | nobody can move the price | ✓ one world price for bitcoin; no miner can move it |
| identical product | every unit the same | ✓ a valid page is a valid page; one bitcoin = any other |
| perfect information | everyone knows prices and rules | ✓ price, difficulty and rewards are public, live |
| free entry | anyone can start, at the same cost | ~ anyone can plug in a machine, but cheap electricity and machines (€1,000–4,000 each) are not equally available |
| verdict | close to perfect competition |
barriers to entry
what keeps new sellers out
A barrier to entry is anything that makes it hard for a new seller to enter a market.
cheap electricity
miners pay ~€0.05 per kWh in Texas or Paraguay; you pay ~€0.25–0.30 in Vienna
capital
a professional bitcoin mine runs thousands of machines (ASIC chips) at ~€1,000–4,000 each
know-how and scale
cooling, buildings, contracts with power plants
better machines
every new generation makes older machines unprofitable
monero: the laptop coin
free entry: cheap to mine
monero
a cryptocurrency designed so that normal computer chips (CPUs) can mine it
your laptop
a few thousand guesses per second → roughly 10 cents of monero a day
your electricity
a laptop running all day ≈ 1 kWh ≈ €0.25–0.30 in Vienna
would mining monero on your laptop make you money?
answer
no
The coins are worth less than the electricity (and the laptop gets hot).
Entry is free, but still the same story as bitcoin: only miners with cheap power make money.
taxi licences
a market where the number of sellers is fixed
the market
taxi plates: a plate = the right to run one yellow taxi in Istanbul
buyers
people who want to run a taxi
sellers
people who own a plate
the number
fixed: about 17,400 plates, the same for decades: the city issues no new ones
the price
about €200,000 per plate (₺11.25 million, October 2026)
for scale
minimum wage ≈ €510 a month · average rent ≈ €820 · a latte ≈ €2.90 → a plate ≈ 33 years of minimum wage
taxi licences
2024
the city announced 2,500 extra plates · within days plate prices fell about 6%
new york
a taxi licence: $200,000 (2002) → $1.3 million (2014) → down about 90% when ride apps came
why is a plate worth so much?
answer
it lets you sell rides that others are not allowed to sell
The plate's price is the value of being protected from competition.
More plates or ride apps = less protection = the plate is worth less.
taxi licences
the market for taxi plates: which conditions fail?
sellers
thousands of plate owners, but a fixed number: too few for a city this size
the price
about €200,000: buyers and sellers of plates take it as given
the product
a plate is a plate
information
the going price is known (it is in the news)
starting
the city issues no new plates: you can only buy an existing one
which conditions fail? (tap all that apply, then submit)
answer
free entry, and partly many small sellers
No new plates: the only way in is to buy an existing plate for about €200,000.
Many sellers: thousands, but a fixed number, too few for the city.
Price takers, a plate is a plate, the price is known: fine.
taxi licences
is the market for taxi plates a perfect market?
| condition | a perfect market would need … | taxi plates have … |
|---|---|---|
| many small sellers | many sellers | ~ thousands of owners, but a fixed number: too few for a city this size |
| price takers | nobody can move the price | ✓ about €200,000, taken as given |
| identical product | every unit the same | ✓ a plate is a plate |
| perfect information | everyone knows the price | ✓ the going price is in the news |
| free entry | anyone can start | ✗ no new plates: only existing ones can be bought |
| verdict | not perfect competition |
taxi licences
what would make it a perfect market?
free entry
the city gives a plate to anyone with a safe car and a clean record, with no cap on the number: then there are as many sellers as the city needs
what follows
more taxis, and a plate worth ≈ €0: anyone can get one
building intelligence
who makes the AI models?
what is sold
access to a model: €20 a month, or a price per million words (tokens)
how it is made
training: months on tens of thousands of chips; a top model costs hundreds of millions to billions of dollars
who sells
a handful of labs: OpenAI, Anthropic, Google, xAI, Meta, and in China DeepSeek, Qwen
building intelligence
the market for top AI models: which conditions fail?
sellers
a handful of labs
prices
each lab sets its own (€20, €200 tiers)
the product
models differ in skill and style
starting
billions of dollars, chips, experts, data
which conditions fail? (tap all that apply, then submit)
answer
almost all of them
Few sellers, each sets its price, the products differ, and entry costs billions.
Information is only partly a problem (benchmarks exist). Far from perfect: the opposite of bitcoin mining.
building intelligence
is the market for top AI models a perfect market?
| condition | a perfect market would need … | top AI models have … |
|---|---|---|
| many small sellers | thousands of tiny sellers | ✗ a handful of labs |
| price takers | nobody can move the price | ✗ each lab sets its own prices (€20, €200 tiers) |
| identical product | every unit the same | ✗ models differ in skill and style |
| perfect information | everyone knows quality | ~ benchmarks exist, but quality is hard to judge |
| free entry | anyone can start | ✗ billions, chips, experts and data |
| verdict | far from perfect competition |
selling inference
the other AI market: inference as a service
inference
every time you send a prompt, a server computes the answer
open models
models that can be downloaded by anyone (DeepSeek, GLM, Kimi)
the sellers
a dozen or so firms run the SAME model and sell inference (e.g. Together AI, Cloudflare; OpenRouter lists them side by side), plus the lab's own service
you buy
from whoever is cheapest or fastest
selling inference
what do the sellers compete on?
the setup
how the GPUs are set up to run a model decides how fast and how cheap each answer is: hosts compete on this
the lab
knows its own model best, so it could run it fastest and cheapest
but
the lab puts most of its GPUs into training the next model: its own service is cheap, but not the fastest, and sometimes full
the hosts
bring more servers and their own know-how to make the model fast and cheap, and offer many models under one roof
the lab and a host sell the same model at the same price. why would anyone buy from the host?
answer
the host answers faster and has room for you
Same model, same price: what differs is speed and capacity.
The lab's GPUs go to training, so the hosts fill the gap with servers and know-how, and with all the models in one place.
That is what they compete on, and why the product is not quite identical.
selling inference
inference as a service: which conditions fail?
sellers
a dozen or so hosts per open model, plus the lab itself
the product
the same model, but some hosts answer faster and/or cheaper
prices
vary between providers, all information is public
starting
anyone may start, but GPUs are expensive, and so is the electricity
which conditions fail? (tap all that apply, then submit)
answer
many small sellers, and partly identical product and free entry
Many small sellers: no, a dozen or so is few.
Identical: the same model, but the speed differs.
Free entry: anyone may start, but GPUs are expensive and use a lot of electricity.
Price takers and information: fine. Still close to perfect.
selling inference
is inference as a service a perfect market?
| condition | a perfect market would need … | selling inference has … |
|---|---|---|
| many small sellers | many sellers | ✗ a dozen or so hosts per model: few, not many |
| price takers | nobody can move the price | ✓ charge more than the others and customers leave |
| identical product | every unit the same | ~ the same model, but the speed differs |
| perfect information | everyone knows the prices | ✓ prices listed side by side |
| free entry | anyone can start | ~ anyone may start, but GPUs are expensive to rent, or to buy and run (electricity again) |
| verdict | close to perfect competition |
demand
your answers from last week
last thursday
41 of you gave your reservation price for ChatGPT Plus
| price | €50 | €40 | €30 | €20 | €10 | €5 |
|---|---|---|---|---|---|---|
| of you buy | 4 | 6 | 9 | 20 | 30 | 38 |
demand
price ↓ → more buyers
Demand: what quantity do consumers want to buy at a given price?
as a function
QD = f(P): pick a price, get the quantity demanded
demand function
QD = f(P) for an AI subscription · price per month, thousand subscribers
Inverse demand: what price are consumers willing to pay for a given quantity?
demand
Q = 120 − 4P
120
if it were free, 120,000 would subscribe
− 4P
each €1 more a month: 4,000 fewer subscribers
at €20
120 − 4·20 = 40 → 40,000 subscribers
inverse demand
solve for P:
P = 30 − Q/4
P = 30 − Q/4
30
at €30 or more, nobody subscribes
− Q/4
to win 4,000 more subscribers, the price must fall by €1
inverse demand
market
printing at the campus copy shop (P in cents per page, Q in pages per day)
demand
Q = 160 − 4P
160
if printing were free, students would print 160 pages a day
− 4P
each extra cent per page: 4 fewer pages a day
what is the inverse demand?
answer
P = 40 − Q/4
Move the P-term to one side, then divide EVERY term by 4.
Check: Q = 0 gives P = 40 in both forms.
Read it: 40 = at 40 cents a page or more, nobody prints · − Q/4 = to sell 4 more pages a day, the price must fall by 1 cent.
Q = 160 − 4P 4P = 160 − Q P = 40 − Q/4
law of demand
price ↑ → quantity ↓
When a good's price rises, people buy less of it, all else equal.
demand form
price ↑ → quantity demanded ↓ (all else equal)
inverse form
the marginal willingness to pay decreases as the quantity increases
why
each extra unit is worth less to you than the one before
the picture
a downward-sloping curve
supply
price ↑ → quantity ↑
Supply: what quantity do sellers want to sell at a given price? It slopes up because each extra unit costs more to provide.
any firm
producing more needs overtime, extra staff, new machines: each extra unit costs more (rising marginal cost)
bitcoin miners
bitcoin price low → the reward barely pays the electricity: fewer miners
supply function
QS = f(P) for used mining machines · € per machine, machines per month
Inverse supply: what price do sellers need to offer a given quantity?
supply
Q = 3P − 1200 (for P ≥ €400)
3P
each €1 more: 3 more machines offered a month
− 1200
no meaning on its own; it only puts the start at €400: 1,200 = 3 × 400
at €500
3·500 − 1200 = 300 machines
inverse supply
P = 400 + Q/3
400
at a price below €400, nobody sells (Q = 0)
+ Q/3
the more machines you want offered, the higher the price must be: 300 machines need 400 + 300/3 = €500; 600 machines need €600
inverse supply
market
dog-walking by students (P in € per walk, Q in walks per week)
supply
Q = 5P − 15
what is the inverse supply?
answer
P = 3 + Q/5
Bring 15 to the other side (it becomes +15), then divide every term by 5.
Check: at P = 3 nobody offers a walk (Q = 0).
Q = 5P − 15 5P = Q + 15 P = 3 + Q/5
summary
allocation mechanisms
the rule for who gets scarce things: price, a test, a government rule, the seller picks · markets use prices
perfect competition
many small sellers · price takers · identical · informed · free entry
barriers to entry
what keeps new sellers out (cheap power, capital)
demand
what quantity consumers want to buy at a given price; slopes down
inverse demand
what price consumers are willing to pay for a given quantity
supply / inverse supply
what quantity sellers want to sell at a given price · what price they need for a given quantity
before you go
how well do you know it now? 1 · not at all … 5 · very well
perfect competition
barriers to entry
in your own words · 1/2
what is perfect competition?
(English, 1–2 sentences, without looking at the slides)
anonymous · your text is checked by an AI model (Jev, TypeSafe, USA) · don't write your name · ungraded
in your own words · 2/2
what is a barrier to entry?
(English, 1–2 sentences, without looking at the slides)