1. 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

2. Roadmap Consumers, Producers, Market Failures 1) Consumers - Budget set - Preferences and Utility - Optimal Choice and Equilibrium - Applications (Labor Market, Finance, ) 2) Producers - Technology - Optimal Choice (Profit Maximization) 3) Market Failures - Monopoly and Oligopoly - Other (Externalities, Public Goods)

3. 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.

4. L01 Budget Set

5. 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

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

7. 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

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

9. Slope (Real Price) x1x1 p 1 =2 p 2 =1 m=6 x2x2 EI: Real price is a price of an apple in terms of

10. Budget Constraints: 3 goods u If n = 3 what do the budget constraint and the budget set look like?

11. 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

12. Income goes down x1x1 p 1 =2 p 2 =1 x2x2 What happens: m=6 m=4

13. Oranges more expensive x1x1 p 1 =2 M=6 x2x2 What happens: p 2 =1 p 2 =2

14. Inflation and Budget set u Inflation 100% x1x1 x2x2 p 1 =2 p 2 =1 m=6

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

16. 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=600 F=2 apples Black Market

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