Microeconomics
• Allocating Scarce Resources Across
Unlimited Wants
• Decision made by people individually and
in groups
We Want To Study
• “What choices do people actually make?”
– Positive Science
• versus “What choices should people make?”
– Normative Science
Assumptions
• People Are Rational
– act in own best self interest
• If B(X) > C(X), then Do X
– Be sure to consider time, risk, and the net
benefit of a foregone activity
– Be sure to consider psychological factors as
well as monetary factors
– Be sure to ignore cots that are already sunk
How Good Are Micro Models?
• Models are simplifications
• Do the Model’s Predictions Hold True in
Reality?
The Law of Demand
• As Price increases, Quantity demanded
decreases (assuming other factors are
constant)
• The Demand curve shows how much
quantity is demanded at different prices
• The Demand curve is downward sloping
The Law of Supply
• As Price increases, Quantity supplied
increases (assuming other factors are
constant)
• The Supply curve shows how much
quantity is supplied at different prices
• The Supply curve is upward sloping
Market Equilibrium
• Neither buyers nor sellers wish to change
their behavior
Applications
• Changes in other factors change the
equilibrium price and quantity by shifting
the demand curve
• Changes in other factors change the
equilibrium price and quantity by shifting
the supply curve
Applications
• The effect of an excise tax
• The effect of a quota
Price Elasticity of Demand
• % D QD / % D P
• Calculations
• Relationship to Demand Curve Shape
• Relationship to Marginal Revenue
Other Elasticities
• Income Elasticity
• Cross Price Elasticity
Price Elasticity of Supply
• % D Qs / % D P
• Calculations
• Relationship to Supply Curve Shape
Using Elasticities
• Excise tax revisited
• The true tax burden is independent of who
pays it!