Intermediate Microeconomics Econ 301 u Instructor: Marek Weretka u Course Description u Textbook u Grading u Attitude (no pain no gain, interactive) u.

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Presentation transcript:

Intermediate Microeconomics Econ 301 u Instructor: Marek Weretka u Course Description u Textbook u Grading u Attitude (no pain no gain, interactive) u Rules Please contact me after class u Mc Burney students u Not registered students

Class Quiz u REEF Polling: iclicker u Laptop/smartphone/iclicker

Roadmap Consumers, Producers, Market Failures 1) Consumers - Budget set and preferences - Optimal Choice 2) Applications - Labor Market, - Finance 3) Producers and Market Failures - Technology - Monopoly and Oligopoly - Other (Externalities, Public Goods)

Rationality in Economics u Behavioral Postulate: A decisionmaker chooses its most preferred alternative from the set of affordable alternatives. u Budget set = affordable alternatives u To model choice we must have decisionmaker’s preferences.

L01 Budget Set

Consumers: Commodity space u Commodity (apples, oranges, cars etc) u A Consumption Bundles u Math: Consumption bundle is a vector u Commodity Space - the set of all consumptions bundles u Budget set - set of all consumption bundles that are affordable given prices and income

Commodity Space: Geometry, 2 goods (Apples) x 2 (Oranges) x1x1

Budget Set =all affordable bundles u Affordable Bundle? u (1,1),(2,2),(3,3) u Budget constraint u Budget set: all affordable bundles p 1 =$2 p 2 =$1 m=$6

Budget Set and Real Income x1x1 p 1 =2 p 2 =1 m=6 x2x2 EI: Real income = income in terms of goods

Slope (Real Price) x1x1 p 1 =2 p 2 =1 m=6 x2x2 Real price: an apple price in terms of oranges

Budget Set u Budget set depends on prices and income u What happens to the budget set if –income changes? –one of the prices changes? u Effects of Inflation, taxes

Income goes down x1x1 p 1 =2 p 2 =1 x2x2 Budget line: parallel shift m=6 m=4

Oranges more expensive x1x1 p 1 =2 M=6 x2x2 Budget line pivots counterclockwise p 2 =1 p 2 =2

Inflation and Budget set u Inflation 100% x1x1 x2x2 p 1 =2 p 2 =1 m=6 p 1 =4 p 2 =2 m=12

Inflation and Budget set u CPI inflation 100% x1x1 x2x2 p 1 =2 p 2 =1 m=6 p 1 =4 p 2 =2 m=6 Quiz: BL Shift A. parallel B. clockwise C: counterclockwise D: none of the above

Ad Valorem Tax u Tax rate t=100% x1x1 x2x2 p 1 =2 p 2 =1 m=6 Effective prices

The Food Stamp Program u Food stamps are coupons that can be legally exchanged only for food. x1x1 x2x2 p 1 =2 p 2 =1 m=6 F=2 apples Black Market

Budget Set with u Minimal Purchase u Maximal Purchase (Rationing) u Quantity discount

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