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Microeconomics 12/10/22

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  The theory of consumer choice People face tradeoffs - Buying more of one good leaves less income to buy other goods Budget constraint:  - The limit on the consumption bundles that a consumer can afford Example: - Hurley divides his income between two goods: fish and mangos. - A “consumption bundle” is a particular combination of the goods, e.g., 40 fish & 300 mangos A fall in the price of fish has two effects on Hurley’s optimal consumption of both goods -  Substitution effect     -  A fall in PF makes mangos more expensive relative to fish: Hurley buys fewer mangos and more fish - Income effect     -  A fall in PF boosts the purchasing power of Hurley’s income: buy more mangos and more fish The net effect on mangos is ambiguous
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Microeconomics 5/10/22

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  Consumer Surplus Welfare Economics The study of how the allocation of resources affect economic well-being     - Benefits buyers and sellers receive from market transactions     - How society can make benefits as large as possible     - Equilibrium of supply and demand maximizes the total benefits Willingness to pay - Max amount a buyer will pay for a good - How much that buyer values the good Consumer surplus - Amount a buyer is willing to pay for a good minus amount the buyer actually pays - Willingness to pay minus price paid - Measures benefit buyers receive from participating in a market - Closely related to the supply curve - Derived from the costs of the suppliers - Closely related to demand curve Demand schedule - Derived from the willingness to pay of the possible buyers At any quantity, the price given by the demand curve - Shows the willingness to pay of the marginal buyer - Buyer would leave the market first if the price we...
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Microeconomics 28/9/22

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  Elasticity and its application Elasticity = measure of the responsiveness of quantity demanded/supplied to a change in one of its determinants Price elasticity of demand - How much the quantity demanded of a good responds to a change in the price of that good - percentage change in quantity demanded divided by the percentage change in price - PED = |(Q2-Q1)/((P2-P1)| Elastic demand Quantity demanded responds substantially to price change Inelastic demand Quantity demanded responds only slightly to price change Determinants of PED - Availability of close substitutes (more substitutes = more elastic) - Necessities vs luxuries (necessities = inelastic, luxuries = elastic) - Definition of the market (narrowly defined markets = more elastic) - Time horizon (longer time horizon = more elastic) Computing PED - Percentage change in quantity demanded divided by percentage change in price - Midpoint method Variety of demand curves - Demand is elastic (PED > 1) - Demand is inelastic (PED...
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Microeconomics 21/9/22

 Markets and Competition Supply and Demand - Words economists use most often - The forces that make market economies work Market - A group of buyers and sellers of a particular good or service Buyers as a group = determine the demand Sellers as a group = determine the supply Markets take many forms - Highly organized - Less organized Competitive Market - Many buyers and sellers - Each has negligible impact on market price - Price and quantity are determined by all buyers and sellers Monopoly - The only seller in the market = seller sets the price Other markets - Between perfect competition and monopoly Demand Quantity demanded = amount of goods buyers are willing and able to purchase Law of demand - When the price of a good increases, the quantity demanded falls Individual demand = demand of individual for product Market demand = sum of all individual demand Shifts in the demand curve - Increase in demand = demand curve shifts to the right - Decrease in demand = demand curve shifts...
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Microeconomics 14/9/22

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Lecture Notes on Microeconomics 14/9/22 Thinking Like an Economist Economists play 2 roles: Scientists: Try to explain the world Policy Advisors: Try to improve it Economists employ the scientific method Scientific method: observation, theory, more observation In economics, conducting experiments is often impractical Natural experiments are offered by history Assumptions and Models Assumptions simplify the complex world Economists use models (highly simplified representation) to study economic issues Circular flow diagram: Shows how money flows through markets among household and firms Includes 2 actors: Household: Own factors of production, buy and consume Firms: buy/hire factors of production, sell goods and services Factors of production are the resources that the economy uses to produce goods and services. They include: labor, land, capital (buildings and machines used in production) The faster the economic wheel turns, the better (faster turnover) Production Possibilities Frontier...
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Microeconomics 7/9/22, Introduction

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  Lecture Notes on Microeconomics 7/9/22 Part 1, Introduction Economy -> Oikomonos (Greek), meaning "one who manages a household." The management of society's resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Economics is the study of how society manages its scarce resources. Microeconomic vs Macroeconomic Importance of Microeconomics Efficient allocation of resources Understand working of market economy Provide tools for economic analysis Examine condition of social & economic welfare Helpful in international trade Useful in business decision making a. Pricing policy b. Optimal allocation of resources c. Optimal production decision d. Demand analysis and forecasting e. Analysis of cost of production 10 Principles of Economy How People Make Decisions 1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rat...
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