Microeconomics Course Overview: Part 1 - Economies Without Production, Part 2 - Economies with Production

1. MicroeconomicsCourse E John Hey

2. An overview • ...of the first two parts of the course... • ...of the most important points.

3. Economics – why? • “People Are Different”

4. Part 1: Economies without Production • 2: Gains from exchange • 3: Discrete goods: Reservation prices, Demand, Supply and Surpluses • 4: Perfectly divisible goods: Reservation prices, Demand, Supply and Surpluses • 5: Preferences • 6: Demand and supply with income in the form of an endowment • 7: Demand with income in money • 8: Exchange • 9: (welfare economics)

5. Chapter 2 Gains from trade • Important concepts: • Reservation price for a buyer. • Reservation price for a seller. • Buyer’s surplus. • Seller’s surplus.

6. Chapter 2 • In the competitive equilibrium the total surplus is maximised.

10. Chapter 3Discrete Goods • An indifference curve... ...the locus of points for which an individual is indifferent. • Quasi-Linear preferences... • ... parallel indifference curves for which we have an unambiguous measure of how much better off is the individual.

11. Chapter 3Discrete goods • The demand curve is a stair with a step at every reservation price. • The supply curve is a stair with a step at every reservation price.

12. Chapter 3Discrete goods • The surplus of a buyer is the area between the demand curve and the price paid. • The surplus of a seller is the area between the supply curve and the price paid.

16. Chapter 4Perfectly divisible goods • Quasi-linear preferences • The same concepts and the same results as in Chapter 3.

17. Chapter 5 Preferences • Quasi-linear. • Perfect substitutes 1 to a. • Perfect complements 1 with a. • Cobb-Douglas with parameter a. • Stone-Geary with levels of subsistence s1s2and parameter a.

22. Chapter 7Demand with money income • Demand depends on preferences. • If we know the preferences we can deduce the demands. • If we know the demands we can infer the preferences.

23. Chapter 7Demand with money income • Perfect substitutes 1:a if p1/p2 < a then q1 = m/p1 q2 = 0 if p1/p2 = a then.... ifp1/p2 >a then q1 = 0q2 = m/p2 • Perfect complements 1 with a q1=m/(p1 + ap2) and q2 =am/(p1 + ap2) • Cobb-Douglas with parameter a q1 = am/p1 and q2 = (1-a)m/p2 • Stone-Geary with parameters s1, s2and a q1 = s1 + a(m-p1s1-p2s2)/p1and q2 = s2 + (1-a)(m-p1s1-p2s2)/ /p2

24. Chapter 6Demand and supply with income in the form of endowments • The same kind of results as in Chapter 7.

25. Chapter 6 – results • Cobb-Douglas with parameter a q1=a(p1e1+p2e2)/p1 and q2=(1-a)(p1e1+p2e2)/ /p2 • Perfect substitutes 1:a if p1/p2 < a thenq1 = (p1e1+p2e2)/p1 q2 = 0 if p1/p2 = a then.... ifp1/p2 >a thenq1 = 0q2 = (p1e1+p2e2)/p2 • Perfect complements 1 with a q1= (p1e1+p2e2)/(p1 + ap2) and q2 =a(p1e1+p2e2)/(p1 + ap2)

26. Chapter 8Exchange • The most beautiful Chapter ... ... the most important in the course ... The Edgeworth Box. • To show exchange between two individuals. • We look for an efficient exchange and ask whether there is a just one.

32. Chapter 8Exchange • The contract curve is ... ... The locus of points efficient in the sense of Pareto. • A point off the contract curve is inefficient. • A point on the contract curve is efficient.

34. Chapter 9Welfare • … • … • …

35. Part 2 Economies with production • Chapter 10: Technology. • Chapter 11: Minimisation of costs and factor demands. • Chapter 12: Cost curves. • Chapter 13: Firm’s supply and profit/surplus. • Chapter 14: The production possibility frontier. • Chapter 15: Production and exchange. • (Chapter 16: Empirical analysis of demand, supply and surpluses)

36. Chapter 10Firms and technology • Isoquants • In the space of the inputs (q1,q2)teh locus of points for which output is constant • (note the parallel: an indifference curve is the locus of points for which the individual is indifferent.)

37. Individuals Buy goods and ‘produce’ utility… …depends on the preferences… …which we can represent with indifference curves.. …in the space (q1,q2) Firms Buy inputs and produce output… …depends on the technology… …which we can represent with isoquants .. …in the space (q1,q2) Chapter 5 Chapter 10

38. Two dimensions • The shape of the isoquants: depends on the substitution between the two inputs. • The way in which the output changes form one isoquant to another – depends on the returns to scale.

39. Perfect Substitutes 1:a • an isoquant: q1 + q2/a = constant • y = A(q1 + q2/a) constant returns to scale • y = A(q1 + q2/a)breturns to scale decreasing (b<1) increasing (b>1)

40. Perfect Complements 1 with a • an isoquant: min(q1,q2/a) = constant • y = A min(q1,q2/a) constant returns to scale • y = A[min(q1,q2/a)]breturns to scale decreasing (b<1) increasing (b>1)

41. Cobb-Douglas with parameters a and b • an isoquant: q1aq2b = constant • y = A q1aq2b • a+b<1 decreasing returns to scale • a+b=1 constant returns to scale • a+b>1 increasing returns to scale

42. Chapter 11Minimisation of costs and the demand for inputs • Demand depends on the technology. • If we know the technology we can deduce the demand. • If we know the demand we can infer the technology.

48. Chapter 12Cost curves • The total cost curve... • ... the form depends on the Returns to Scale: • Convex with decreasing RtS • Linear with constant RtS • Concave with increasing RtS.

49. Chapter 12Cost curves • The LONG run ... ... in which the firm can vary both inputs. • The SHORT run... ... in which the quantity of one of the two inputs is fixed.