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 %  Q D / %  P Calculations Relationship to Demand Curve Shape Relationship to Marginal Revenue

Other Elasticities Income Elasticity Cross Price Elasticity

Price Elasticity of Supply %  Q s / %  P Calculations Relationship to Supply Curve Shape

Using Elasticities Excise tax revisited The true tax burden is independent of who pays it!