Introduction to Microeconomics

Transcription

1 Introduction to Microeconomics 1 Dr. Matan (matan.tsur@univie.ac.at) Office hours: Firdays 16:30-17:30 or by appointment. Lectures: Thursdays 11:30-13:00 (HS 6) and Fridays 15:00-16:30 (HS 6) Tutorials: Tuesdays 18:30-20:00 (class room may change). You can go to the tutorials of the other group Wednesdays 15:00 to 16:30 (H12) Grading: Weekly Quizzes and problem sets (15%) Midterm exam (36%): 30/11, 15:00-16:30 Final exam (49%): 28/01, 18:30-20:00 Main textbook: Microeconomics by David Besanko and Ronald R. Braeutigam Wiley, 4 th edition. Website: Matan s homepage, Moodle

2 What is Economics? 2 The branch of knowledge concerned with the production, consumption, and transfer of wealth Online dictionary Economics is the study of people in the ordinary business of life Alfred Marshall Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people Paul Samuelson Economics is organized common sense Thomas Sargent

3 Course Outline: Roadmap 3 Price 1. Construct demand curve (behavior of consumers) Supply 2. Construct the supply curve (behavior of firms) P Demand 3. Study properties of an equilibrium in competitive markets 4. What happens when the market is not competitive? 0 Q Quantity

4 Introduction to Microeconomics 4 Microeconomics: start with individual behavior of consumers and producers, and then study markets. Main Topics: 1. Consumer Theory 2. Producer Theory 3. Competitive Equilibrium 4. Noncompetitive Markets Technical tools: Basic algebra and multivariable calculus

5 First Topic: Consumer Demand 5 Key questions: What determines consumer demand? How do consumers make choices?

6 Consumer Preferences 6 Definition: A bundle of goods (or basket) is a combination of different goods and different quantities. Units of Clothing Bundle A Bundle B Bundle C 12 Units of Food

7 Consumer Preferences 7 Definition: Consumer preferences tell us how a consumer ranks any two bundles of goods, assuming these bundles are available at no cost. Preferences are answers to all possible questions like: Do you prefer 10 apples and 7 oranges, to 7 apples and 10 oranges? a. Yes b. No, I prefer 7 apples and 10 oranges c. I m indifferent Preferences are subjective. Preferences are independent of the price. Preferences are set for a specific time and circumstances.

8 Consumer Preferences 8 Everyone has their own taste, but we assume that preferences satisfy some properties: 1. Preferences are complete: The consumer can rank any two bundles of goods - A preferred to B; - B preferred to A; - Indifferent between A and B. 2. Preferences are transitive: If a consumer prefers bundle A to bundle B, and bundle B to bundle C, then she must prefer bundle A to bundle C. 3. Preferences are monotonic: more is better. If bundle A has at least as much of each good as bundle B, with more of at least one good, then A is preferred to B: (10 apples, 3 oranges) is preferred to (10 apples, 2 oranges).

9 Monotonicity 9 Monotonicity implies more of all goods is better Units of Clothing Less preferred to A 7 F C A B More preferred to A E 0 3 Units of Food

10 Consumer Preferences 10 Definition: Preferences are rational if they are complete and transitive.

11 Indifference Curves 11 Definition: An indifference set contains all the bundles that the consumer is indifferent between. An indifference curve is the curve connecting the points in an indifference set. Units of Clothing Bundle A Bundle B Bundle c 12 Units of Food

12 Indifference Curves 12 Definition: An indifference set contains all the bundles that the consumer is indifferent between. An indifference curve is the curve connecting the points in an indifference set. Units of Clothing Bundle A Bundle B Bundle c 12 Units of Food

13 Indifference Curves 13 Definition: An indifference map is a set of all indifference curves. Units of Clothing Units of Food

14 Indifference Curves 14 Property 1: Indifference curves are downward-sloping. Implied by monotonicity ( more is better ) Units of Clothing Less preferred to A 7 F C A B More preferred to A E 0 3 Units of Food

15 Indifference Curves 15 Property 2: Preference increases as we move north-east. Units of Clothing 0 A F D C B Units of Food

16 Indifference Curves 16 Property 3: Indifference curves cannot cross. Implied by transitivity and monotonicity Bundle A is indifferent to C and C indifferent to B, which (by transitivity) implies that A is indifferent to B. But by monotonicity B is preferred to A.

17 Indifference Curves 17 Key Properties: 1. Indifference curves have negative slope (Monotonicity) 2. Indifference curves are not thick (Monotonicity) 3. Indifference curves do not cross (Monotonicity and transitivity) 4. Each basket lies on a single indifference curve (Monotonicity and transitivity)

18 X Marginal Rate of Substitution 18 Key property: the indifference curve tells us how the consumer is willing to exchange good y for good x (and vice versa). That is, the amount of good y that the consumer is willing to trade for an additional amount of good x. Y How much Y is the consumer willing to give up for additional x? A x y B

19 Marginal Rate of Substitution 19 Key property: the indifference curve tells us how the consumer is willing to exchange good y for good x (and vice versa). That is, the amount of good y that the consumer is willing to trade for an additional amount of good x. Y How much Y is the consumer willing to give up for additional x? A x y B X

20 X Marginal Rate of Substitution 20 Key property: the indifference curve tells us how the consumer is willing to exchange good y for good x (and vice versa). That is, the amount of good y that the consumer is willing to trade for an additional amount of good x. Y A x y B

21 Marginal Rate of Substitution 21 Definition: At bundle A, the marginal rate of substitution between good x and good y, denoted MRS x,y (A), is the the negative of the slope of the indifference curve that goes through bundle A. Y A x y B X

22 Marginal Rate of Substitution 22 The marginal rate of substitution measures the willingness to exchange good y for good x at a given bundle The MRS depends on the level of consumption.

23 Marginal Rate of Substitution 23 Properties of MRS: If the MRS diminishes along an indifference curve as we increase the consumption of x, then the more of good x you have, the less of y you are willing to substitute for it. The indifference curves get flatter as we increase x. In other words, ICs are bowed towards the origin.

24 Marginal Rate of Substitution 24 Properties of MRS: If averages are preferred to extremes then the MRS diminishes and indifference curves are bowed towards the origin (convex to the origin).