1. Week: Consumer Demand (Part l)
1.1. Market demand curve: market demand for a good is the sum of all the individual demand curves for it
1.2. Law of demand
1.2.1. As price increases, quantity demanded decreases
1.2.2. Demand curve is downward-sloping
1.2.3. =Obervation & predicition
1.3. Individual demand curve
1.3.1. Individual consumer‘s problem
1.3.1.1. Consumer‘s limited resources: budget -> X*pX + Y*pY = B
1.3.1.1.1. Budget constraint: For each quantitiy of X, what is the quantity of Y we can buy? -> X= B/pX - pY/pX * Y
1.3.1.2. Consumer‘s unlimited wants: preferences
1.3.1.2.1. Preferences are relatively stable over time
1.3.1.2.2. Consumers like more rather than less of a good
1.3.1.2.3. Diminishing marginal utility: value of an extra unit of good becomes smaller the more of the good you have
1.3.1.2.4. Graphical representation of preferences: -> indifference curve of bundle A; all combinations of market baskets on it provide the consumer with the same level of statisfaction
1.3.1.2.5. Math represent of preferences: utility function
1.3.1.3. Consumer‘s choice problem
1.3.1.3.1. How to solve?
2. Week 6: Market equilibrium & Welfare
2.1. Market equlibrium
2.1.1. Demand equals Supply: Qs(P)=Qd(P)
2.1.2. Long vs Short Run
2.1.2.1. Long Run
2.1.2.1.1. Price (P*), Quantity (Q*), Number of firms (n*)
2.1.2.1.2. Individual consumers maximize utilities
2.1.2.1.3. Individual firms maximize profits: each firm produces q* such that P*=MC(q*)
2.1.2.1.4. The market clears n*qs=Qd
2.1.2.1.5. No firm wants to exit or enter the market p=TC(qs)/qs=AC(qs)
2.1.2.2. Short Run
2.1.2.2.1. Price & Quantity Pair (P,Q)
2.1.2.2.2. Given p, for each producer: the individual supply is optimal
2.1.2.2.3. Given p, for each consumer: the individual demand is optimal
2.1.2.2.4. Market supply equals market demand
2.2. Welfare
2.2.1. Market surplus
2.2.1.1. Consumer surplus
2.2.1.1.1. Difference between the price that the consumer is willing to pay and the price that someone actually pays
2.2.1.1.2. =the area below the demand curve & above the price
2.2.1.2. Producer surplus
2.2.1.2.1. Difference between the price that the producers receives & the cost of production
2.2.1.2.2. =the area above the supply curve & below the price
2.2.2. Welfare change
2.2.2.1. Price Cap
2.2.2.1.1. Producer surplus decreases
2.2.2.1.2. Consumer surplus can increase or decrease
2.2.2.1.3. Total surplus decreases (Deadweight loss)
2.2.2.2. Quota
2.2.2.2.1. Producer surpluse can increase or decrease
2.2.2.2.2. Consumer surplus decrease
2.2.2.2.3. Total surplus decreases (Deadweight loss)
2.2.3. Maximized total surplus
2.2.3.1. At the perfectly competitive market equilibrium price & quantity
2.2.3.2. Market should be left with minimal intervention
3. Week 5: Producer Supply (Part ll)
3.1. Supply Curve
3.1.1. Optimal output leads to the supply curve
3.1.2. The firm‘s short run supply curve is given by
3.1.2.1. 1. When p < p_s the firm produces nothing, q=0
3.1.2.2. 2. When p > p_s the firm produces q such that MC(q) = p
3.1.3. Steps to Supply Curve
3.1.3.1. a) How many cases should it take on given some price p?
3.1.3.1.1. Setting p=MC(q) and re-arranging gives -> q* = p/w
3.1.3.2. b) When should it shut-down?
3.1.3.2.1. Shut-down if p<AC(q) = (q/2)*w
3.1.3.2.2. => shut down only if p </=0
3.1.3.3. c) derive the supply curve
3.1.3.3.1. MC(q) = q*w
3.1.3.3.2. If price is >/=0 then p= MC(q), so p=q*w
3.1.4. Increase in wage
3.1.4.1. Wage increases = MC(q) shifts upwards
3.2. Improvement technology
3.2.1. Recall
3.2.1.1. Supply Curve: P=MC(q)
3.2.1.2. Cost Function: C(q) = w*L(q) + r*K(q)
3.2.1.3. Marginal Cost Function: MC(q) = w* ∂C(q) / ∂q + r* ∂K(q) / ∂q
3.2.2. Improvement in technology = marginal cost shifts down
3.3. Choice of inputs: Minimize costs
3.3.1. = a producers objective of choosing inputs K and L: for a given output quantity q, how to combine K & L to achieve the minimum costs
3.3.1.1. MRTS(L,K) = w/r
3.3.1.2. Min C = w*L + r*K
3.4. Choice of outputs: Maximize profits
3.4.1. =a producers objective of choosing outputs q: maximize total profit, given the market price of the product p
3.4.1.1. Profits= Revenue - Costs -> π(q) =p*q - C(q)
3.4.1.1.1. Cost= the cost of producing q units
3.4.1.1.2. Revenue = the money received by the firm for selling q units = unit price times the production quantity q
3.4.1.2. Two useful concepts
3.4.1.2.1. Marginal revenue = MR(q) = ∂R(q) / ∂q
3.4.1.2.2. Marginal cost = MC(q) = ∂C(q)/∂q
3.4.1.3. Profit maximization
3.4.1.3.1. MR(q)=MC(q)
3.4.1.4. Optimality condition
3.4.1.4.1. Produce q* such that p=MC(q*)
3.4.1.5. Shut-Down condition
3.4.1.5.1. P > min AC(q)
4. Week 4: Producer Supply (Part l)
4.1. Law of supply (all other factors being equal) -> as price increases, the quantity offered by the producer increases
4.1.1. Producers inputs ->outputs
4.1.1.1. Producer‘s choices ->to operate or not? ->which inputs to use and how many? ->how many units to produce (when price of inputs,price of outputs & technology that turns inputs into output is are fixed)
4.1.1.1.1. Producer‘s objective ->maximizing profits
4.1.1.2. Consumer‘s choices ->the budget ->price ->preference as fixed ->the quantity of two goods as a consumer‘s choices
4.2. Economic Profit = Revenue - Economic Costs
4.2.1. Economic costs ≠ accounting costs
4.2.2. The economic costs include the opportunity costs
4.2.2.1. Opportunity cost: the value of the good in its next best use
5. Week 3: Consumer Demand (Part ll)
5.1. Demand with two goods
5.1.1. Marginal benefit: increasing consumption of good X -> increases utility
5.1.1.1. MU(X) = ∂U(X,Y)/∂X
5.1.2. Marginal cost: cost of consuming more units of good X -> less money for good Y
5.1.2.1. MC= pX/pY* ∂U(X,Y)/∂Y
5.1.3. Marginal rate of substitution: ratio of marginal utilites
5.1.4. Optimal consumption: MRS(X,Y) = pX/pY
5.1.5. Needs to satisfy budget constraint: X*pX + Y*pY = B
5.1.6. Solving the two equations: X=Function (pX,pY,B) Y=Function (pX,pY,B) gives demand curves for each good
5.1.7. Indifference curve: what combination of good X and good Y give me the same utility?
5.1.7.1. Slope tells you how much of Y you have to give up to increase X by one unit without reducing utility
5.2. How does the demand change?
5.2.1. Change in preference
5.2.1.1. Preferences change with certain conditions (demand increase for the preferred good)
5.2.1.1.1. Good x becomes more valuable
5.2.2. Change in budget
5.2.2.1. As income decreases ->demand decreases
5.2.2.2. Income-consumption curve: traces the utility maximizing combinations of two goods as a consumer‘s income changes
5.2.2.3. Engel curve: relates quantity of a good consumed to the income level
5.2.2.3.1. Normal good: consumption increases as income rises =>Engel curve is upward sloping
5.2.2.3.2. Inferior good: consumption falls when income rises
5.2.3. Income & Substitution Effects
5.2.3.1. Price of one good y goes up ->demand for y should then go down
5.2.3.2. Decreases in demand can be broken into two effects
5.2.3.2.1. Income effect: higher price ->have to give up something (budget not large enough to consume the same amount as before)
5.2.3.2.2. Substitution effect: higher price, so good x becomes more attractive then good y
5.2.3.2.3. Total effect: income effect + substitution effect
5.2.4. Measures how sensitive demand is to price change
5.3. Price elasticity: measures the percentage change in quantity that results from a percentage change in price
5.3.1. =unit-free measure: compare across goods
5.3.2. Inelastic: increase price by a lot, little effect on demand
5.3.3. Elastic: increase price a little, big effect on demand
6. Week 1: Introduction
6.1. Microeconomics: individual agent‘s (consumers & producers) behaviors
6.2. Economics: the study of the allocation of scarce resources
6.2.1. Scarcity: limited resources & unlimited wants
6.2.1.1. Economizing problem (must make choices)
6.2.1.1.1. Trade-offs
6.2.1.1.2. Opportunity-cost
6.2.2. Allocation: through institutions
6.2.2.1. Pure market economy
6.2.2.2. Mixed economy
6.2.2.3. Planned (or command) economy
6.3. Real-world economic problems
6.3.1. Distribution of wealth & inequality
6.3.2. Environment & climate change
6.3.3. Digital economics
6.3.4. Health-care reform in the US & in Europe
6.4. Models
6.4.1. Talk about important questions
6.4.2. Use mathemathics as a language to go from assumptions to results
6.4.3. Simple,structured & rigorous
6.5. Perfectly Competitive Markets
6.5.1. Markets as allocation mechanisms
6.5.1.1. Allocation mechanism: a rule to distribute s scarce resource among agents
6.5.1.2. Market: producers & consumers
6.5.1.2.1. Allocation rule: who gets what quantities of goods?
6.5.2. Conditions
6.5.2.1. 1. Fragmented industry: many small buyers & sellers
6.5.2.2. 2. Buyers & sellers are price takers
6.5.2.3. 3.Sellers produce identical products
6.5.2.3.1. Not realistic!Most industries will fail at least one of the conditions
6.5.2.4. 4.Buyers have perfect information about prices
6.5.2.5. 5.All sellers can freely enter the market
6.5.3. How to model?
6.5.3.1. Consumer side -> demand curve
6.5.3.2. Producer side -> supply curve