Mircroeconomics 3070-001

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   Lecture 1: Introduction
Syllabus and Website

 All assignments and solution keys will be
  posted on the web site.
 I will send you a notice when they are posted.

 Syllabus

Cover chapter 1
 What is microeconomics
       Economic models
   Tools for microeconomics
       Constrained optimization
       Marginal analysis
       Equilibrium analysis
       Comparative statics
   Next class are going over calculus
   Next week we will start chapter 2
What is mircoeconomics

Can you buy all the clothing, vacations, sport
 equipment, health care, food, beauty
 products, yoga classes, seasons tickets to
 sport event, donations to charity you want?
Mircoeconomics helps you decide how much to
 spend and on what.
What is mircoeconomics
Official Definitions:
 Microeconomics is the study of how individuals and
  firms make themselves as well off as possible in a
  world of scarcity and the consequences of those
  individual decisions on the markets and the entire
 Microeconomics is the study of the allocation of
  scarce resources.
 Mircoeconomics is also often called price theory.
     This is to emphasize the important role that price plays.
     Price not only thing studied – think of health care market
What is mircoeconomics

Because we can’t have everything, we need to
   make trade-offs and microeconomics helps
   us make those tradeoffs.
A society faces 3 key tradeoffs:
1. Which goods and services to produce
2. How to produce them
     •     How much labor and inputs should a firm use to
           produce a car
3.       Who gets the good and services (allocation)
What is microeconomics

   Workers need to choose how to allocate their
    time between labor and leisure.
   Firms need to choose how to allocate their
    investment between human capital and
   Households need to choose how to allocate
    their incomes between savings and
Micro versus Macroeconomics

What is the difference between micro and
 macro economics?
    Microeconomics: behavior of individual economic
     units like consumers, producers, landowners,
     families, etc. How and why do they make the
     decisions they make?
    Macroeconomics: analyzes how the entire
     national economy performs. It analyzes
     unemployment, inflation, price levels, interest
     rates (many things we take as given in
Economic Models

How do economists allocate resources?

They develop theoretical model.

“Everything should be made a simple as possible
  but not simpler” Albert Einstein
Economic Models

   The models are abstractions of the real world
       Too complicated to take into consideration all factors
       Without simplifications we would not be able to make
       Like a roadmap, does not give each house, but the bare
        essentials i.e. major streets, highways and sometime main
   It may appear that the model makes heroic
    abstractions (assumptions) from the complexities of
    the real world.
    Economic Models Example

Determinants of Poster Demand on Campus
You are advertising a big event for the freshman class how
  many posters will you need?
 Factors in your model:
       Price to make poster, size of freshman class
   Factors not in your model:
       Content of poster, placement of poster, relative size of poster
   Are there any constraints to this model?
       the amount of budget you have to spend on poster advertising.
Types of Variables in a Model

Exogenous Variable: one whose value is
 taken as given in a model.
Endogenous Variable: one whose value is
 determined within the model being studied
Which factor(s) would have you taken as given
 in the poster example?
    Price, size of freshman class (exogenous)
Which factor(s) are determined by your model?
    The quantity of posters needed (or demanded)
Tools of Microeconomic Analysis

1.   Constrained Maximization

2.   Equilibrium Analysis

3.   Comparative Statics
Constrained Optimization

Constrained optimization: an analytical tool
 used when a decision maker seeks to make
 the best (optimal) choice, taking into
 consideration possible restrictions on the
Constrained Optimization

This tool has two parts:
1. Objective function: is the relationship the
   decision maker seeks to optimize
   (maximize or minimize).
2. Constraint: limits or restrictions that are
   imposed on the decision maker
Constrained Optimization
You want to maximize your happiness during
   your second year at CU.

•    Objective function:
    Happiness=f(days skied per month, beers per week).

•    Constraints: s.t. (subject to)
     Income, time for leisure
Marginal Analysis
   Solution to a constrained optimization problem
    depends on the marginal impact of the decision
    variables on the value of the objective function.

But what is marginal?

   The term marginal tells us how the value of the
    objective function changes as a result of adding one
    unit of a decision variable.
Marginal Analysis

         Happiness      Marginal Happiness

  $     From   From      From     From
spent   beer   skiing    beer     skiing
  0       0      0
 25      80      4        80        4

 50      90     10        10        6
 75      92     15         2        5
100      94     20         2        5
Marginal Analysis

   $100 on beer = 94 units of happiness
   $75 beer plus $25 skiing = 96 units of
   $50 on beer and $50 on skiing = 100 units of
       Yes a day of skiing with a nice apres ski makes
        you very happy.
Marginal Analysis

   You just did a constrained optimization
       Optimize happiness (beer and skiing) subject to
        you $100 weekly entertainment budget.
 Max H(B, S) s.t. Ps*S + Pb*B=100
Where   B= quantity of beer; Pb=price beer
        S=days of skiing; Ps=price skiing.
   Equilibrium Analysis

Price (P)
Doctors visit   Qd: demand
                                            Qs Supply

  P*      50                      Equilibrium: Qd=Qs

          25                                            Demand

                 .           10     Q2
                                             Quantity (Q)
                                             Number of appointments
                                             per day
Equilibrium Analysis

   In a competitive market, equilibrium is
    achieved at a price at which the market
    clears – that is, at a price at which the
    quantity offered for sale just equals the
    quantity demanded by consumers.
   Since Qd = Qs at P*, there is no upward or
    downward pressure on price. Hence, price
    could stay at P* indefinitely.
   Equilibrium Analysis

Price ($)       Qd: demand
Doctors visit                            Qs Supply
                         Excess Supply


                     8              13   Quantity (Q)
                                         Number appointments
                                         per day
   Equilibrium Analysis

Price ($)       Qd: demand
Doctors visit                           Qs Supply



                        Excess Demand

                    5             13    Q Quantity
                                        Number of appointments
                                        per day per doctor
Comparative Statics

   Examine how a change in an exogenous
    variable will affect the level of an endogenous

       First, look at the value of the endogenous variable
        at the initial level of the exogenous variable

       Second, look at the value of the endogenous
        variable at the new level of the exogenous
   Comparative Statics Example

Price ($)       D
Doctors visit             S

  P*      50

                .   10
                    Q*    Number of appointments
                          per day per doctor
Comparative Statics Example

   Suppose we are in China and there is an
    outburst of the Avian Flu. A few weeks later
    there are some new regulations put on
    doctors and they are unhappy about it. So
    they do a rotating strike.

   How will these factors affect our Supply and
    Demand curve and the price?
   Comparative Statics Example

    P                                     Outbreak of avian flu,
Price ($)            D2
Doctors visit   D1                  S1 Moves demand to the right,
                                         but supply curve does not
  P2      60
  P1      50

                 .        10   13
                                     Number of appointments
                          Q1 Q2      per day per doctor
   Comparative Statics Example
                               The rotating strike will lead to
Price ($)            D2        S2
Doctors visit   D1                   S1     A reduction in supply
                                           This is a shift to the left

  P3      65

                                       Number of appointments
                          Q3           per day per doctor

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