1、MICROECONOMICS Classroom Lecture Notes (3 credits, as of 2004),based on Hal R. Varians Intermediate Microeconomics, Sixth Edition, referring to Pindyck and Rubinfelds Microeconomics, Fourth Edition.,Chapter 0,Economics,The source of all economic problems is scarcity.,Problem of trade-off, and choice
2、. Economics, as a way of thinking, as a dismal science. Problems- solutions- hidden consequences.,Main decision-making agents:,1 individuals (household), 2 firms, and 3 governments.,Objects of economic choice are commodities, including goods and services.,Main economic activities:,Consumption, Produ
3、ction, and Exchange.,Microeconomics and macroeconomics:,to show the market mechanism (the invisible hand), to supplement it.,The circular flow of economic activities.,product market factor market,The product market and the factor market.,The market relation is mutual and voluntary. Positive issues a
4、nd normative issues.,Marginal analysis,Relations between Total magnitudes, Average magnitudes, and Marginal magnitudes.,1, MM is the slope of the TM curve; 2, AM is the slope of the ray from the origin to the point at the TM curve;,TM,MM(x*),AM(x*),x*,x,3, TM increasing (decreasing) if and only if M
5、M 0 ( MM 0 ); 4, If TM is at maximum or minimum, then MM = 0;,5, AM increasing (decreasing) if and only if MM AM ( MM AM );6, If AM is at maximum or minimum, then MM = AM,or MM cuts AM at the latters maximum or minimum.,Chapter 1,The Market,Economics proceeds by developing Models of social phenomena
6、. By a model we mean a simplified representation of reality.,Exogenous variables: taken as determined by factors not discussed in a model.,Endogenous variables: determined by forces described in the model.,The optimization principle:,People try to choose whats best for them.,The equilibrium principl
7、e:,Prices adjust until demand and supply are equal.,The demand curve:,A curve that relates the quantity demanded to price.,The reservation price:,Ones maximum willingness to pay for something.,From peoples reservation prices to the demand curve.,Similarly, the supply curve.,Fig.,Pareto efficiency:,A
8、 concept to evaluate different ways of allocating resources.,A Pareto improvement is a change to make some people better off without hurting anybody else.,An economic situation is Pareto efficient or Pareto optimal if there is already no way to make any more Pareto improvement.,Short run and long ru
9、n,Equilibria in the short run (some factors are unchanged) and in the long run.,Chapter 2,Budget Constraint,* Vector variables and vector functions. * The inner product of two vectors. * With the price vector p = ( p1, , pn ),the value of the commodity bundle x = ( x1, , xn ) is pTx = i pixi.,Howeve
10、r, two goods are often enough to discuss.,The budget constraint: p1 x1 + p2 x2 m.,The budget line and the budget set (the market opportunity set).,The slope of the budget line: d x2 /d x1 = p1 / p2 .,How the budget line moveswhen the income changes, orwhen a price changes.,x2,x1,Budget set,Budget li
11、ne Slope = -p1/p2,m/p2,m/p1,Budget line and budget set,x2,x1,Budget line,Slope = - p1/p2,m/p2,m/p2,m/p1,m/p1,Increasing income,Slope = - p1/p2,m/p2,Budget line,Slope = - p1/p2,m/p1,m/p1,Increasing price,A subsidy is the opposite of a quantity tax.,Taxes, quantity taxes, value taxes (ad valorem taxes
12、), and lump-sum taxes.,Rationing.,Their effects on the budget set.,Chapter 3,Preferences,* Prerequisite: A binary relation R on X is said to be Complete if xRy or yRx for any pair of x and y in X; Reflexive if xRx for any x in X; Transitive if xRy and yRz imply xRz.,Rational agents and stable prefer
13、ences,Bundle x is strictly preferred (s.p.), or weakly preferred (w.p.), or indifferent (ind.), to Bundle y. (If x is w.p. to y and y is w.p. to x, we say x is indifferent to y.),Assumptions about Preferences,Completeness: x is w.p. to y or y is w.p. to x for any pair of x and y.,Reflexivity: x is w
14、.p. to x for any bundle x.,Transitivity: If x is w.p. to y and y is w.p. to z, then x is w.p. to z.,The indifference sets, the indifference curves.,They cannot cross each other.,Fig.,indifference curves,x2,x1,Perfect substitutes and perfect complements.Goods, bads, and neutrals. Satiation. Figs,Blue
15、 pencils,Red pencils,Indifference curves,Perfect substitutes,Perfect complements,Indifference curves,Left shoes,Right shoes,Well-behaved preferences are monotonic (meaning more is better) and convex (meaning average are preferred to extremes). Figs,x2,x1,Better bundles,(x1, x2),Monotonicity,Better b
16、undles,The marginal rate of substitution (MRS) measures the slope of the indifference curve.MRS = d x2 / d x1, the marginal willingness to pay ( how much to give up of x2 to acquire one more of x1 ). Usually negative. Fig,Convex indifference curves exhibit a diminishing marginal rate of substitution
17、. Fig.,x2,x1,Convexity,Averaged bundle,(y1,y2),(x1,x2),Chapter 4,Utility,(as a way to describe preferences),Utilities,Essential ordinal utilities, versus convenient cardinal utility functions.,Cardinal utility functions:u ( x ) u ( y ) if and only if bundle x is w.p. to bundle y. The indifference cu
18、rves are the projections of contours of u = u ( x1, x2 ). Fig.,Utility functions are indifferent up to any strictly increasing transformation.Constructing a utility function in the two-commodity case of well-behaved preferences: Draw a diagonal line and label each indifference curve with how far it
19、is from the origin.,Examples of utility functions,u (x1, x2) = x1 x2 ; u (x1, x2) = x12 x22 ; u (x1, x2) = ax1 + bx2 (perfect substitutes); u (x1, x2) = minax1, bx2 (perfect complements).,Quasilinear preferences: All indifference curves are vertically (or horizontally) shifted copies of a single one
20、, for example u (x1, x2) = v (x1) + x2 .,Cobb-Douglas preferences: u (x1, x2) = x1c x2d , or u (x1, x2) = x1ax21-a ; and their log equivalents: u (x1, x2) = c ln x + d ln x2 , or u (x1, x2) = a ln x + (1 a) ln x2,Cobb-Douglas,MRS along an indifference curve. Derive MRS = MU1 / MU2 by taking total di
21、fferential along any indifference curve.,Marginal utilities MU1 and MU2.,Marginal analysis,MM is the slope of the TM curve,AM is the slope of the ray from the origin to the point at the TM curve.,500,490,480,The demand curve,Reservationprice,Number of apartment,From peoples reservation prices to the
22、 market demand curve.,supply,Demand,P,Q,Equilibrium,P*,Q*,E (P*,Q*),supply,Demand,p,q,E,Equilibrium,x2,x1,Budget line,Budget set,Rationing,R*,Market opportunity,MRS,Indifference curve,Slope = dx2/dx1,x2,x1,dx2,dx1,Chapter 5,Choice of consumption,Optimal choice is at the point in the budget line with
23、 highest utility. The tangency solution of an indifferent curve and the budget line: MRS = p1 / p2.Fig.,Basic equations: MU1 / p1 = MU2 / p2 and p1 x1 + p2 x2 = m.Figs.( How if negative solutions.),Interior solutions, and Boundary (Corner) solutions. Kinky tastes.Figs.,Three approaches to the basic
24、equations: Graphically; As-one-variable; *Lagrangian.,The optimal choice is the consumers demanded bundle.The demand function.,Examples: perfect substitutes, perfect complements, neutrals and bads, concave preferences.Figs.,Cobb-Douglas demand functions.* Choosing taxes.(By *Slutsky decomposition.)F
25、igs.,Chapter 6,Demand,Demand functions: x1 = x1 (p1, p2, m), x2 = x2 (p1, p2, m).,Normal and inferior goods (by income); Fig. Luxury and necessary goods (by income). Fig. Ordinary and Giffen goods (by price). Fig.,The income expansion path or the income offer curves, and the Engel curve. Figs.,The p
26、rice offer curve and the Demand curve. Figs.,Substitutes and complements. Cobb-Douglas preferences. Quasilinear preferences.,* Homothetic preferences:if (x1, x2) is preferred to (y1, y2),then (tx1, tx2) is preferred to (ty1, ty2) for any t 0. Thus both the income offer curves and the Engel curves ar
27、e all rays through the origin.,Example: Quasilinear preferenceslead to vertical (horizontal) income offer curves andvertical (horizontal) Engel curves.,Chapter 8,Slutsky Equation,How the optimum moves when the price of a good changes?,Decomposition: the total effect = the substitution effect + the i
28、ncome effect.p139,The pivot gives the substitution effect, the shift gives the income effect. P103andp137,Slutsky identity, pivoting the budget line around the original choice. Fig. Hicks decomposition, pivoting the budget line around the indifference curve. Fig.,Chapter 9,Buying and Sellingfor a co
29、nsumer with an endowment ,x1,x1,x2,p1,1,1,Net and gross demands, net supply. Offer curve and demand curve.p164,Labor supply p174,$,Leisure R,Labor,W,Leisure,E,Chapter 10,Intertemporal Choice,Suppose for example in a 3-period model,the consumption is ck and the interest rate is rk in period k, then t
30、he present value of the consumptions is c1 + c2 / (1+r1) + c3 / (1+r1) (1+r2). p190,Chapter 12,Uncertainty,Utilities and probabilities.,Expected utility functions, or von Neumann-Morgensternutility functions. They are indifferent up to any positive affine transformation. (affine transformation: y =
31、a + bx).,Risk aversion and risk loving.,Concave vs convex utility.,The second derivatives.,$,$,U,U,Chapter 14,Consumers surplus,1 2 3 4 5 6,p,r1,r2,r3,r4,r5,r6,Consumers Surplus p250,消费者得益,总收益,Producers surplus p259,Producers surplus,Supply curve,Q,P*,Q*,P,Q,Supply curve,Change in producers surplus,
32、R,T,Q,Q,P,P,P,The water-diamond paradox,PdPw,Q,Calculating gains and losses,Change in consumers surplus,B,T,Chapter 15 Market Demand,One can think of the market demand as the demand of some “representative consumer”.,Adding up demand curves: The horizontal summation principle.,+,=,Horizontal summati
33、on,PRICE,DEMAND CURVE,D(p),QUANTITY,It is the sum of the individual demand curve,The market demand curve,The price elasticity of demand: = (q / q ) / (p / p) = ( p / q ) / (p /q), or = ( d q / q ) / ( d p / p) = ( p / q ) / ( d p / d q) = slope of ray / slope of curve .,A good has an elastic ( inela
34、stic, unitary) demand if | 1 ( | 1 , | = 1 ).,Elasticity and revenue. R = pq, R = qp + pq , and then R/ p = q 1 +(p) where ( p ) = ( pq ) / (qp).,QUANTITY,PRICE,a /2,a / 2b,=, 1, =1, 1, =0,The elasticity of a linear demand curve,p = a b q,p267,Strikes and profits. The Laffer curve.,Similarly, MR = R
35、 / q = p (q) 1 + 1 /(q) where ( q ) = ( pq ) / (qp).,The income elasticity of demand. The arc elasticity and the point elasticity.,PRICE,QUANTITY,a,a/2,Slope=-2b,Slope=-b,a/2b,a/b,MR,Demand, AR,Marginal revenue p275,Marginal revenue for a linear demand curve.,MR = p(q)1-1/e,D, AR,QUANTITY,PRICE,Marg
36、inal revenue,MR for a constant elasticity demand curve,Chapter 16 Equilibrium,The market supply curve. The competitive equilibrium. Pareto efficiency.,Supply,Demand,QUANTITY,PRICE,Pd,Pd=Ps=P*,Ps,Willing to buy at this price,Willing to sell at this price,Q,Pareto efficiency p301,Q*,Market supply and
37、market shortage,P*,P,Q*,Qd,Qs,Market shortage,equilibrium,price,quantity,supply,demand,Shortage is not scarcity.,QUANTITY,PRICE,p*,q*,Demand curve,Supply curve,PRICE,QUANTITY,q*,p*,Supply curve,Demand curve,A,B,Special cases of equilibrium p291,Algebra of the equilibrium. Comparative statics. Shifti
38、ng both curves. p294,Taxes. Distinguish Pp , the price paid by consumers, Pr , the price received by producers, and Po , the original price.,Supply,Demand,QUANTITY,PRICE,A,C,Pp,Pr,Q*,Amount of tax revenue: A+C,The deadweight loss of a tax p301,The deadweight loss of the tax: B+D,B,D,Chapter 17 Techn
39、ology,Inputs and outputs. Factors of production: land, labor, capital, raw materials, and so on.,Y = f (X ) = production function,Y = Output,X = Input,Production set,A production set p307,Examples of technology (isoquants analysis):,Fixed proportions, Perfect substitutes,Cobb-Douglas. Figs. p308,Iso
40、quants,x1,x2,Fixed proportion,Isoquants,x1,x2,Perfect subsitutes,Assumptions of technology: monotonic (free disposal),and convex. p310,(a1/2 + b1/2 , a2/2 + b2/2),isoquant,x1,x2,a2,b2,a1,b1,The marginal product, MPi = d y / d x i . Y is output,The technical rate of substitution (TRS):,With d y = 0 a
41、long any isoquant, TRS (x1, x2 ) = d x2 / d x1= MP1 (x1, x2) / MP2 (x1, x2 ).,The long run (LR) and the short run (SR),Returns to scale: Increasing, decreasing, and constant: f ( t x ) t f ( x ) =,Chapter 18 Profit Maximization,The organization of firms:,Proprietorships, partnerships, corporations.,
42、SR profit maximization,= py - w1x1 - w2x2y = / p + w2x2 / p + w1x1 / p describes isoprofit lines, max x1 gives pMP1 = w1. Fig. p323,Isoprofit lines slope = w1/p,y = f (x1, x2) Production function,x1,x1*,Output,y*,/p+w2x2/p,Profit maximization,Optimum lies on the tangency of an isoprofit line and the
43、 production function.,P324 Comparative statics:,Increasing p increases x1 and then y.Increasing w1 reduces x1, and thus the factor demand curve follows. LR: both x1 and x2 are variable. Figs.,A,x1,f(x1),High w1,Low w1,B,x1,f(x1),Comparative statics,Low p,High p,要素价格,产品价格,Chapter 19,Cost Minimization
44、,Basic model:,min x1, x2 w1 x1 + w2 x2 subject to f (x1 , x2 ) = y,gives c ( w1 , w2 , y ),Isocost lines: p337,x2 = C/w2 w1x1/w2.,Tangency of an isocost line and an isoquant., MP1 (x1, x2) / MP2 (x1, x2 ) = TRS(x1, x2 ) = w 1 / w 2,Isocost lines slope= w 1 / w 2,Isoquant f (x1 , x2 ) = y,Optimal cho
45、ice,x2*,x2,x1*,x1,.,Minimizing costs for y = minax1 , bx2;完全互补 y = ax1 + bx2; 完全替代and y = x1a x2b. Cobb-,Fixed and variable costs. (FC and VC),Total, average, marginal, and average variable costs. (TC, AC, MC and AVC),MC () AC if and only if AC is increasing (decreasing),MC cuts AC (AVC) at ACs (AVC
46、s) extreme.,MC,AVC,AC,y,AC AVC MC,.,.,Chapter 20,Cost Curves,The area under MC gives VC:,MC = VC,MC,Variable costs,MC,y,Division of output among plants of a firm.,MC1,MC2,Typical cost curves.,c (y) = y 2 + 1.,Example:,AC MC AVC,y,MC,AVC,AC,The cost curves for c (y) = y 2 + 1,.,2,1,LR and SR cost cur
47、ves.,y,AC,SAC=C(y1, k* )/y,LAC=C(y)/y,.,y*,Short-run and long-run average costs,y,AC,Short-run average cost curves,Long-run average cost curves,y*,Short-run and long-run average costs,are costs that are not recoverable.A special kink of fixed costs.,Sunk costs,Chapter 21,Firm Supply,Pure competition.,Price Taker,The demand curve facing a competitive firm. p368,Q,P,P*,Marketprice,Demand curve facing firm,Market demand,The supply decision:,FOC: MC ( y* ) = p.,SOC: MC ( y* ) 0.,
