Microeconomics 2

Microeconomics 2 John Hey

Module Representatives • Athena Fu • Emma Wilson-Young • Krishna Patel • Liz Blum • Michaela Lucas • Kenny Yang

Office hours • Mine are now decided: • John Hey: Wednesdays 2.30 to 4.30 • The TFs have still to decide theirs. • Dan Howdon: • James Lomas: • Dominic Spengler:

Note • Note that we are at present doing static (one-period) analysis without production: • People are born, have given preferences and endowments, trade them in markets for a preferred bundle of goods, consume the preferred bundle... • ... and die. End of story. • We also assume that preferences are given.

Chapters/Lectures 3 and 4 • These lectures are very similar: Lecture 3 deals with a discrete good and Lecture 4 with a continuous good. • In both we will be operating with two graphical spaces: • For indifference curves, with money on the vertical axis and the quantity of some good on the horizontal axis. • For demand and supply curves, with the price of the good on the vertical axis and the quantity of the good on the horizontal. • Note the units of the variables on the axes (in 1: £ on the vertical and number of units on the horizontal; in 2: £/unit on the vertical and number of units on the horizontal).

Chapter 2 • We introduced the following concepts: • Reservation price. • Surplus/profit. • Competitive equilibrium (in which there is a price at which the demand equals the supply). • We have shown (in a special case) that in a competitive equilibrium the total surplus is maximised.

Chapter 2: definitions and results • The reservation price for a buyer ... • ...is the maximum price that he or she is willing to pay. • The reservation price for a seller ... • ... is the minimum price that he or she would accept. • The surplus of a buyer is … • … the area between the price paid and the demand curve. • The surplus of a seller is … • … the area between the price received and the supply curve.

Chapter 3 • We prove these results in a particular context. • We introduce the important concepts of indifference and an indifference curve. • We work today with a discrete good, that is a good that can be bought or sold only in integral units. • We work today with a particular kind of preferences – which are called quasi-linear preferences. • Later we consider generalisations.

Assumptions about preferences • The individual starts with 3 units of some good and 30 units of money (this is his or her endowment). • His or her reservation price for the first unit bought is £5… • …for the second unit bought is £3… • …for the third unit bought is £2. • His or her reservation price for the first unit sold is £10… • .for the second unit sold is £30. • Would not sell a third unit (reservation price is infinite) and would not buy a fourth unit (reservation price is zero). • Let us go the Maple/html file.

What we have done (discrete good) • We have worked with quasi-linear preferences – where indifference curves are parallel in a vertical direction. • We have proved that • The surplus of a buyer is … • … the area between the price paid and the demand curve. • The surplus of a seller is … • … the area between the price received and the supply curve.

Chapter 3 • Goodbye!

Microeconomics 2