Microeconomic Tools

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Microeconomic Tools
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Supply and Demand

• In microeconomics, we typically have suppliers
  reacting positively to price, and demanders
  reacting negatively.
• The two of them combine to provide an
  equilibrium, that indicates the market quantity
  and the market price.

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Demand for Apples
Price
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
4
What affects demand?

• Price of the good
• Prices of other goods
• Consumer income
• Tastes

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Demand for Apples
Price
10.00
Demand with higher income
7.50
5.00
2.50
100
200
300
400
500
Apples
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Supply of Apples
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
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What affects supply?

• Technological change
• Input prices
• Prices of Production-Related Goods
• Size of the Industry
• Weather

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Supply of Apples
10.00
Poor weather
7.50
Improved technology
5.00
2.50
100
200
300
400
500
Apples
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Equilibrium of Demand and Supply
Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
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Equilibrium of Demand and Supply
Supply
Demand
10.00
7.50
Total Revenue, Total Expenditures
5.00
2.50
100
200
300
400
500
Apples
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Equilibrium of Demand and Supply
Shift in Demand
Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
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Equilibrium of Demand and Supply
Supply
Shift in Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
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Equilibrium of Demand and Supply
Shift in Demand
Supply
Shift in Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
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Utility Analysis?

• In principles courses we often measure utility --
  sometimes use utils ...
• which is dorky (most of the time).
• For several analyses in health economics, well
  want to use more modern analysis ,
• although for insurance, well go back to utils
• Ordinal utility

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Indifference Curves
100
75
Health Club Visits
50
25
20
40
60
80
100
Pounds of Spam
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Indifference Curves
100
Higher level of utility
75
Health Club Visits
50
25
20
40
60
80
100
Pounds of Spam
17
How much is bought?
In a month Visits 20/visit Spam
10/pound Income 1500
100
75
Health Club Visits
50
25
If price of Spam doubles?
20
40
60
80
100
Pounds of Spam
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Putting them together
In a month Prescriptions 20/visit Spam
10/pound Income 1500
100
75
Health Club Visits
50
25
20
40
60
80
100
Pounds of Spam
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Putting them together
In a month Visits 20/visit Spam
10/pound Income 1500
U1
100
U2
75
Health Club Visits
50
25
20
40
60
80
100
Pounds of Spam
20
Putting them together
In a month Visits 15/visit Spam
10/pound Income 1500
100
U increases
75
Health Club Visits
More visits
50
More Spam
Why?
25
20
40
60
80
100
Pounds of Spam
21
A close look at the tangency
In a month Visits 20/visit Spam
10/pound Income 1500
100
U2
75
Health Club Visits
-phDv
psDs
50
-DU/Dv - Mgl. utility of visits
DU/Ds Mgl. utility of Spam
25
20
40
60
80
100
Pounds of Spam
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A close look at the tangency
In a month Visits 20/visit Spam
10/pound Income 1500
-pvDv psDs 0
Dv/Ds ps/pv
100
Now, for utility
MUv/Mus (DU/Dv)/(DU/Ds)
U2
75
Ds/Dv
Health Club Visits
ps/pv Dv/Ds MUs/Muv
-phDv
or
psDs
50
Muv /pv MUs/ ps
-DU/Dv - Mgl. utility of visits
DU/Ds Mgl. utility of Spam
25
20
40
60
80
100
Pounds of Spam