Intermediate Micro

1
Intermediate Micro

• Review

2
Overview

• Competitive Markets Demand and Supply,
  Equilibrium
• Behind Demand Consumer Choice
• Preferences, Utility functions and Budget
  constraints
• Behind Supply Producer Choice
• Production technology, Cost minimization, Profit
  maximization
• Adjustments and Efficiency
• Shocks to markets and regulations
• Efficiency consequences Consumer and Producer
  Surplus and Deadweight Losses
• General Equilibrium Edgeworth box
• Interconnected markets and agents
• Monopoly and Pricing strategies

3
Micro economics

• Doing the best with limited resources
• Maximizing what we want when we face scarcity
• wants
• ability or what we can
• Marginal benefit Marginal cost

4
Agents of economic analysis

• Consumers make choices over consumption options
• Producers make choices over factors of production
• Producers choose output levels
• Society chooses ethical distribution principles
• All agents make optimal choices
• MB MC
• MRS MRT

5
Markets - Interactions between agents

• Competitive markets
• Price takers
• Monopoly markets
• Price makers constrained by demand
• Oligopoly markets after test
• All markets tend to equilibrium
• Qd Qs

6
Behind DemandConsumer Choice Ch 4

• Preference axioms
• Utility functions and indifference curves
• MRS ? Qy / ? Qx MUx/MUy
• Substitutability
• Perfect substitutes
• Perfect complements
• Budget constraints
• Maximize utility subject to the budget constraint
• Minimize expenses subject to a utility constraint
• wants preferences, utility, indifference
  curves
• ability budget
• Optimum MRS Px/Py
• MUx/Px MUy/Py

7
Behind SupplyProducer Choice of Inputs Ch 6

• Production technology
• Production functions and isoquants
• MRTS ? QK / ? QL MPL/MPK
• Substitutability
• Perfect substitutes
• Perfect complements
• Isocosts
• Minimize costs subject to a production constraint
• Maximize output subject to a cost constraint
• wants production and ability costs
• Or wants low costs and ability technology
  constraint
• Optimum MRTS w / r
• MPL/MPK w / r

8
Social welfare ch 10

• Social Welfare principles
• Ethical principles about equity or equality
• Social Welfare function
• Level function iso-welfare lines
• Substituting utility for one person against
  utility for the other
• MRWS MW1 / MW2 (Marginal rate of welfare
  substitution)
• Constraint transforming resources into utility
  for one or the other person the utility
  possibility frontier
• MRUT MU1 / MU2 (Marginal rate of utility
  transformation)
• Maximize welfare subject to the utility
  possibility fronter (the utility transformation
  constraint)
• wants social welfare and ability utility
  transformation
• Optimum MRWS MRUT
• MW1 / MW2 MU1 / MU2

9
Functional forms

• Utility functions, Production functions, Social
  welfare functions
• The level functions are slices through the
  functions
• Indifference curves, isoquants, iso-welfare
  functions
• Choice items are perfect substitutes
• U X Y
• Choice items are perfect complements
• Umin X, Y
• Choice items substitutability between the
  extremes
• UXaYß Cobb-Douglas
• ?0.5 and ß0.5, square-root function

10
Changes

• Changes in prices or income affect budget
  constraint new optimum
• Changes in wages or capital returns affect
  isocost new optimum
• Changes in ethical principles affect iso-welfare
  curves

11
Markets Competitive and Monopoly

• Single market equilibrium analysis
• Multiple markets simultaneous analysis
• QdQs
• Efficiency of the market sum of Consumer
  Surplus, Producer Surplus, and any Government
  Revenues or Expenses

12
Single Competitive Market

• Demand curve derived from consumer choice problem
• Change Px and trace Price-Consumption curve along
  tangencies
• Pa-bQ
• Sum individual demand curves horizontally
• Supply curve derived from MC curves of firms
• QdQs

13
The firm on the competitive market

• PMC determines Qs for each firm
• Short-run above the shutdown point at min AVC
  cannot exit and get rid of fixed costs
• Long-run above the exit point at min AC

14
The firm and the market

• Long run equilibrium
• QdQs
• PMCAC
• Shock
• Shift in demand due to changes in
• Income
• Prices of other goods
• Taste changes
• Shift in costs due to
• Production taxes or subsidies
• Changes on factor markets
• New technologies
• Analyse the short-run change in the market
  (resulting in short-run price change)
• Analyse the firms response in the short run
• Analyse the longrun adjustment through entry and
  exit of firms (resulting in long-run price change
  and firms responding to that)

15
Efficiency analysis on single competitive market

• Pda-bQd
• CS (a-Peq)xQeq / 2
• PscgQs
• PS(Peq-c)xQeq / 2
• Q at PMC maximizes efficiency
• Taxes, Subsidies, Price Ceilings and Floors,
  Quantity Restrictions,
• Generate Deadweight Losses

16
Multiple competitive markets

• QdQs on market 1 and
• QdQs on market 2 simultaneously
• Graphically and algebraically show the how a
  change on one market affects the other market

17
Single monopoly market

• MRMC and PgtMR
• Solve for monopoly Q from MRMC
• For this Q identify the highest P
• Change in monopoly decision from a shift in
  demand (parallel) or a tax or subsidy affecting
  the demand curve or the cost curves
• Efficiency effects and deadweight losses

18
Price discrimination

• Perfect discrimination
• Multi market discrimination

19
General Equilibrium

• Edgeworth boxes
• Two strangers in the night bring stuff and
  exchange stuff
• Optimal choices for both at the same time
• The core
• The contract curve
• Pareto optimality
• Moving from the endowment point to the contract
  curve in the core
• Once on the contract curve no pareto improving
  move is possible
• Pareto optimality is less demanding way of making
  welfare statements than using Social Welfare
  Functions
• Pareto optimality does not require us to make any
  other ethical statements than Property Rights

20
Competitive Exchange Equilibrium

• Thousands of cloned strangers meeting in the
  night bringing stuff and exchanging stuff
• If group A want more of X than they have they
  will form the demand side of the market for X
• Thus group B will be supply side
• And then they will have more of Y than they want
  and form the supply side of the market for Y
• Thus group B will be demand side
• Both consumers must make optimal choices
• And QdQs for both goods X and Y (equilibria)

21
Add Production

• Two consumer groups own the goods produced by
  the firms
• They can exchange these goods between themselves
  Edgeworth box
• Price ratio of the goods tangent to indifference
  curves
• But the amounts of the goods are not
  pre-determined
• Production point on Production Possibility
  Frontier depends on price ratio of the goods