Lecture 1
Microeconomics: how do individual firms (and consumers) make optimal choices
Macroeconomics: the economy as a whole
Equilibrium price: Qs=Qd
Equilibrium quantity: corresponding quantity
&∆𝑸𝑫
Price elasticity of demand: %∆𝑷
Chapter 1 - Microeconomics
Microeconomics: the branch of economics that studies the specific choices made by consumers and
producers.
Theories and models: explanations of how things work that help us understand and predict how and
why economic entities behave as they do.
Chapter 2 – Supply and Demand
Leading question: How do consumers and producers interact in the market for a good or service to
determine how much is sold and at what price?
Supply: the combined amount of a good that all producers in a market are willing to sell.
Demand: the combined amount of a good that all consumers are willing to buy.
A market is defined by the specific product being bought and sold, a particular location and a point in
time. Buyers and sellers need to be able to find each other.
Key assumptions supply and demand model:
- We restrict our focus to supply and demand in a single market.
- All goods bought and sold in the market are identical. commodities: goods that are traded in
markets where consumers view different varieties of the good as essentially interchangeable.
- All goods sold in the market sell for the same price, and everyone has the same information
about prices, the quality of the goods being sold, and so on.
, - There are many buyers and sellers in the market.
Factors that influence demand:
- Price
- The number of consumers
- Consumer income or wealth
- Consumer tastes
- Prices of other goods (substitutes, complements)
Demand curve: the relationship between quantity of a good that consumers demand and the good’s
price, holding all factors constant.
Changes in quantity demanded at every price:
- Changes in quantity demanded-> movement along a given demand curve.
- Changes in demand-> shift of a good’s entire demand curve.
Factors that influence supply:
- Price
- Supplier’s cost of production
- The number of sellers
- Sellers’ outside options
Supply curve: the relationship between the quantity of a goof and the goods’ price, holding all other
factors constant.
Supply choke price: the price at which no firm is willing to produce a good and quantity supplied is zero,
the vertical intercept of the inverse supply curve.
Changes in quantity supplied at every price:
- Changes in quantity supplied-> movement along a given supply curve.
- Changes in supply-> shift of a good’s entire supply curve.
Market equilibrium: the point where demand and supply curves cross -> has equilibrium price and
quantity. Qd=Qs
With prices lower or higher than equilibrium there is excess demand or excess supply.
Did the curve shift, or was it just a movement along the curve?
- Figure out what the shock is in any problem. changes in quantity and price in the market studied
cannot be the shock but are the result of the shock.
- Determine whether the shock shifts the demand or supply curve
Demand: inward (= decrease demand-> p decrease), outward (= increase demand-> p increase).
Supply: inward (= decrease supply-> p increase), outward (= increase supply-> p decrease).
price elasticity of demand: the percentage change in quantity demanded resulting from a given
percentage change in price.
Price elasticity of demand = % change in quantity demanded/ % change in price.
Price elasticity of supply = % change in quantity supplied/ % change in price.
, - Markets with large price elasticities of demand, where quantity demanded is sensitive to price
differences, are those where consumers have a lot of ability to substitute away from or toward
the good in question.
- Markets with large price elasticities of supply, where the quantity supplied is sensitive to price
differences, are those where it is easy for suppliers to vary their amount of production as prices
change.
Price elasticity of demand or supply = 1 -> unit elastic.
Price elasticity of demand or supply = 0-> perfectly inelastic.
Price elasticity of demand or supply = infinite in magnitude-> perfectly elastic
Price elasticity of demand or supply = >1 -> elastic.
Price elasticity of demand or supply = <1-> inelastic.
Income elasticity of demand: the ratio of the percentage change in quantity demanded to the
corresponding percentage change in consumer income.
𝑬𝑫
𝑰 = %change quantity demanded / %change income
Categorization goods income elasticity:
- Inferior goods: goods with negative income elasticities.
- Normal goods: goods with positive income elasticities.
- Luxury goods: normal goods with income elasticities above 1.
Cross-price elasticity of demand: the ratio of percentage change in one good’s quantity demanded to
the percentage change in the price of another good.
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅 𝑿
𝑬𝑫
𝑿𝒀 = % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒑𝒓𝒊𝒄𝒆 𝒀
Positive -> substitute, negative-> complement.
Lecture 2
Utility: measure of happiness
Utility function: the additional utility a consumer receives from an additional unit of a good or service
∆𝑈(𝑇, 𝐷)
𝑀𝑈: =
∆𝑇
Indifference curve: plots all consumption bundles that provide a consumer with the same level of utility
, Marginal rate of substitution: slope of indifference curve
∆𝑌
𝑀𝑅𝑆;< = −
∆𝑋
Relatively straight indifference curves -> goods are easily substituted
More convex indifference curves -> goods are more complementing
Budget constraint: describes all possible combination of goods that a consumer can purchase when
spending all income. It is generally plotted alongside indifference curves.
In the case of two goods (X and Y) we have:
Income = 𝑃= 𝑄= + 𝑃> 𝑄>
To find the slope of the budget constraint, solve for Qy:
𝐼𝑛𝑐𝑜𝑚𝑒 𝑃=
𝑄> = − ∗ 𝑄=
𝑃> 𝑃>
An income change shifts the budget constraint by changing the intercepts.
A change in the price of one good pivots the budget constraint by changing the slope.
The consumer’s problem: make consumption choices that maximize utility given the budget constraint
We call this a constrained optimization problem. The consumer does his “best” given his income and
prices for good.
Normal goods: higher income is associated with rising consumption.
Example: vacations and basketball tickets
Microeconomics: how do individual firms (and consumers) make optimal choices
Macroeconomics: the economy as a whole
Equilibrium price: Qs=Qd
Equilibrium quantity: corresponding quantity
&∆𝑸𝑫
Price elasticity of demand: %∆𝑷
Chapter 1 - Microeconomics
Microeconomics: the branch of economics that studies the specific choices made by consumers and
producers.
Theories and models: explanations of how things work that help us understand and predict how and
why economic entities behave as they do.
Chapter 2 – Supply and Demand
Leading question: How do consumers and producers interact in the market for a good or service to
determine how much is sold and at what price?
Supply: the combined amount of a good that all producers in a market are willing to sell.
Demand: the combined amount of a good that all consumers are willing to buy.
A market is defined by the specific product being bought and sold, a particular location and a point in
time. Buyers and sellers need to be able to find each other.
Key assumptions supply and demand model:
- We restrict our focus to supply and demand in a single market.
- All goods bought and sold in the market are identical. commodities: goods that are traded in
markets where consumers view different varieties of the good as essentially interchangeable.
- All goods sold in the market sell for the same price, and everyone has the same information
about prices, the quality of the goods being sold, and so on.
, - There are many buyers and sellers in the market.
Factors that influence demand:
- Price
- The number of consumers
- Consumer income or wealth
- Consumer tastes
- Prices of other goods (substitutes, complements)
Demand curve: the relationship between quantity of a good that consumers demand and the good’s
price, holding all factors constant.
Changes in quantity demanded at every price:
- Changes in quantity demanded-> movement along a given demand curve.
- Changes in demand-> shift of a good’s entire demand curve.
Factors that influence supply:
- Price
- Supplier’s cost of production
- The number of sellers
- Sellers’ outside options
Supply curve: the relationship between the quantity of a goof and the goods’ price, holding all other
factors constant.
Supply choke price: the price at which no firm is willing to produce a good and quantity supplied is zero,
the vertical intercept of the inverse supply curve.
Changes in quantity supplied at every price:
- Changes in quantity supplied-> movement along a given supply curve.
- Changes in supply-> shift of a good’s entire supply curve.
Market equilibrium: the point where demand and supply curves cross -> has equilibrium price and
quantity. Qd=Qs
With prices lower or higher than equilibrium there is excess demand or excess supply.
Did the curve shift, or was it just a movement along the curve?
- Figure out what the shock is in any problem. changes in quantity and price in the market studied
cannot be the shock but are the result of the shock.
- Determine whether the shock shifts the demand or supply curve
Demand: inward (= decrease demand-> p decrease), outward (= increase demand-> p increase).
Supply: inward (= decrease supply-> p increase), outward (= increase supply-> p decrease).
price elasticity of demand: the percentage change in quantity demanded resulting from a given
percentage change in price.
Price elasticity of demand = % change in quantity demanded/ % change in price.
Price elasticity of supply = % change in quantity supplied/ % change in price.
, - Markets with large price elasticities of demand, where quantity demanded is sensitive to price
differences, are those where consumers have a lot of ability to substitute away from or toward
the good in question.
- Markets with large price elasticities of supply, where the quantity supplied is sensitive to price
differences, are those where it is easy for suppliers to vary their amount of production as prices
change.
Price elasticity of demand or supply = 1 -> unit elastic.
Price elasticity of demand or supply = 0-> perfectly inelastic.
Price elasticity of demand or supply = infinite in magnitude-> perfectly elastic
Price elasticity of demand or supply = >1 -> elastic.
Price elasticity of demand or supply = <1-> inelastic.
Income elasticity of demand: the ratio of the percentage change in quantity demanded to the
corresponding percentage change in consumer income.
𝑬𝑫
𝑰 = %change quantity demanded / %change income
Categorization goods income elasticity:
- Inferior goods: goods with negative income elasticities.
- Normal goods: goods with positive income elasticities.
- Luxury goods: normal goods with income elasticities above 1.
Cross-price elasticity of demand: the ratio of percentage change in one good’s quantity demanded to
the percentage change in the price of another good.
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅 𝑿
𝑬𝑫
𝑿𝒀 = % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒑𝒓𝒊𝒄𝒆 𝒀
Positive -> substitute, negative-> complement.
Lecture 2
Utility: measure of happiness
Utility function: the additional utility a consumer receives from an additional unit of a good or service
∆𝑈(𝑇, 𝐷)
𝑀𝑈: =
∆𝑇
Indifference curve: plots all consumption bundles that provide a consumer with the same level of utility
, Marginal rate of substitution: slope of indifference curve
∆𝑌
𝑀𝑅𝑆;< = −
∆𝑋
Relatively straight indifference curves -> goods are easily substituted
More convex indifference curves -> goods are more complementing
Budget constraint: describes all possible combination of goods that a consumer can purchase when
spending all income. It is generally plotted alongside indifference curves.
In the case of two goods (X and Y) we have:
Income = 𝑃= 𝑄= + 𝑃> 𝑄>
To find the slope of the budget constraint, solve for Qy:
𝐼𝑛𝑐𝑜𝑚𝑒 𝑃=
𝑄> = − ∗ 𝑄=
𝑃> 𝑃>
An income change shifts the budget constraint by changing the intercepts.
A change in the price of one good pivots the budget constraint by changing the slope.
The consumer’s problem: make consumption choices that maximize utility given the budget constraint
We call this a constrained optimization problem. The consumer does his “best” given his income and
prices for good.
Normal goods: higher income is associated with rising consumption.
Example: vacations and basketball tickets
