NOTES FOR MICROECONOMICS
by
Prof. Nicholas Economides
Stern School of Business
Spring 2015
Copyright Nicholas Economides
, MICROECONOMICS is about
1. Buying decisions of the individual
2. Buying and selling decisions of the firm
3. The determination of prices and in markets
4. The quantity, quality and variety of products
5. Profits
6. Consumers’ satisfaction
There are two sides in a market for a good
DEMAND SUPPLY
Created by Consumers Created by firms
Each consumer maximizes Each firm maximizes its
satisfaction (“utility”) profits
------------------------------- ------------------------------
CONSUMPTION THEORY PRODUCTION THEORY
1
,We will first study consumption and later production. In the third part of the
course we will take the “demand” schedule from the consumption analysis and
the “supply” schedule from the production analysis and put them together in a
market. The price, and the quantity exchanged will be determined in the
market. We will also discuss the performance and efficiency of markets.
A. CONSUMPTION ANALYSIS UNDER CERTAINTY
1. Goods are products or services that consumers or businesses desire.
Examples: a book, a telephone call, insurance coverage. Goods may be
directly desired by consumers or may contribute to the production of other
goods that are desired by consumers. For example a machine used in the
production of cars is desirable because it is useful in the production of cars,
although it has no direct value to a consumer. Bads are products or services that
consumers desire less of. Examples: garbage, pollution, some telephone calls.
Clearly, a good for one consumer could be a bad for another.
2. If possible, each consumer would consume a very large (infinite) amount of
each good. But, each individual is constrained by his/her ability to pay for these
goods. The limitation of total funds available to an individual defines the
2
, budget constraint. Therefore a consumer has to maximize his/her satisfaction
while not spending more than he/she has, i.e., without violating the budget
constraint.
3. We are interested to find the best choice for a consumer that has a limited
amount of funds. We accomplish this in three steps. At the first step, we define
the available choices taking into account the limitation of funds. At the second
step, we discuss the desires/wants of the consumer. At the third step, we find
the optimal choice for the consumer by putting together the information we
gathered in the previous two steps.
STEP 1: We first analyze the available choices to a consumer that possesses
limited funds. Suppose there are only two goods, X and Y, and they are sold at
prices px and py per unit respectively. If a consumer buys x units of good X
and y units of good Y, she spends xpx on good X, and ypy on good Y. Total
expenditure is
E = xpx + ypy.
The pair (x, y) is called a (consumption) basket or (consumption) bundle.
If the consumer has a total amount of money I (income) her total expenditure
cannot exceed I, i.e.,
3
by
Prof. Nicholas Economides
Stern School of Business
Spring 2015
Copyright Nicholas Economides
, MICROECONOMICS is about
1. Buying decisions of the individual
2. Buying and selling decisions of the firm
3. The determination of prices and in markets
4. The quantity, quality and variety of products
5. Profits
6. Consumers’ satisfaction
There are two sides in a market for a good
DEMAND SUPPLY
Created by Consumers Created by firms
Each consumer maximizes Each firm maximizes its
satisfaction (“utility”) profits
------------------------------- ------------------------------
CONSUMPTION THEORY PRODUCTION THEORY
1
,We will first study consumption and later production. In the third part of the
course we will take the “demand” schedule from the consumption analysis and
the “supply” schedule from the production analysis and put them together in a
market. The price, and the quantity exchanged will be determined in the
market. We will also discuss the performance and efficiency of markets.
A. CONSUMPTION ANALYSIS UNDER CERTAINTY
1. Goods are products or services that consumers or businesses desire.
Examples: a book, a telephone call, insurance coverage. Goods may be
directly desired by consumers or may contribute to the production of other
goods that are desired by consumers. For example a machine used in the
production of cars is desirable because it is useful in the production of cars,
although it has no direct value to a consumer. Bads are products or services that
consumers desire less of. Examples: garbage, pollution, some telephone calls.
Clearly, a good for one consumer could be a bad for another.
2. If possible, each consumer would consume a very large (infinite) amount of
each good. But, each individual is constrained by his/her ability to pay for these
goods. The limitation of total funds available to an individual defines the
2
, budget constraint. Therefore a consumer has to maximize his/her satisfaction
while not spending more than he/she has, i.e., without violating the budget
constraint.
3. We are interested to find the best choice for a consumer that has a limited
amount of funds. We accomplish this in three steps. At the first step, we define
the available choices taking into account the limitation of funds. At the second
step, we discuss the desires/wants of the consumer. At the third step, we find
the optimal choice for the consumer by putting together the information we
gathered in the previous two steps.
STEP 1: We first analyze the available choices to a consumer that possesses
limited funds. Suppose there are only two goods, X and Y, and they are sold at
prices px and py per unit respectively. If a consumer buys x units of good X
and y units of good Y, she spends xpx on good X, and ypy on good Y. Total
expenditure is
E = xpx + ypy.
The pair (x, y) is called a (consumption) basket or (consumption) bundle.
If the consumer has a total amount of money I (income) her total expenditure
cannot exceed I, i.e.,
3
