micro econ

firms optimization process

-minimizing cost -maximize profit from output perspective - maximize profit from input perspective

short run

-one resource is fixed capital fixed labor varies diminishing return to input

decomposing effect

-substitution effect - income effect

properties of preference

1. completeness 2. more > less 3.transitivity 4. continuity

inferior good income elasticity

<0

infeasible bundle

A bundle that the consumer cannot afford to purchase; lies to the right and above a consumer's budget constraint.

feasible bundle

A bundle that the consumer has the ability to purchase; lies on or below the consumer's budget constraint.

budget constraint

A curve that describes the entire set of consumption bundles a consumer can purchase when spending all income.

perfect complement

A good whose utility level depends on its being used in a fixed proportion with another good.

indifference curve

A mathematical representation of the combination of all the different consumption bundles that provide a consumer with the same utility.

consumption bundle

A set of goods or services a consumer considers purchasing.

corner solution

A utility-maximizing bundle located at the "corner" of the budget constraint where the consumer purchases only one of two goods.

interior solution

A utility-maximizing bundle that contains positive quantities of both goods.

Budget Constraint

I= P(x) + P(y)Y

Jack and Meg have the same amount of income, and they both spend their money on two goods, gum and apples, where gum is measured on the vertical axis. If Jack's optimal bundle contains 9 units of gum and 1 unit of apples and Meg's optimal bundle contains 1 unit of gum and 9 units of apples:

Jack's indifference curves are steeper than Meg's indifference curves.

welfare economics

The area of economics concerned with the economic well-being of society as a whole.

marginal rate of substitution of X for Y (MRSXY)

The rate at which a consumer is willing to trade off one good (the good on the horizontal axis X) for another (the good on the vertical axis Y) and still be left equally well off.

adding capital

adds output

continuity

analyze consumer behavior. if a goes well w b, then a goes well w things similar to b

suppliers

assume they want to maximize well-being. but their resources are limited

partial equilibrium analysis

assumes all other sectors of market are fixed. -analysis single market

law of supply

ceteris paribus, price and quantity are positively related. as price goes up, firms will supply more.

law of demand

ceterus parabus, the price and quantity demanded are inversely related

MP

change in quantity/change in labor

Evan and Lisa are consumers of apples and oranges. Evan's indifference curves are relatively straight, while Lisa's indifference curves are sharply curved. Apples and oranges are:

complements for Evan and substitutes for Lisa.

equilibrium

condition in which all acting influences are canceled by others, resulting in a stable, balanced, unchanging system -the systems is the market

more>less

consumer has unlimited wants

completeness

consumer is able to compare and evaluate all goods available

demand

customers want to satisfy their utility while working w unlimited wants and limited wants

engel curve

easier way to collect info from income expansion path negative slope- inferior good positive slope- normal good

law of diminishing marginal utility

effects willingness to buy, the more we have something the less we have a need or desire for it. (all you can eat buffet)

general equilibrium analysis

examines all markets at same time, very dynamic, taking in all account the interactions between markets

income

flow

marginal utility

flow-

supply

for each possible price and quantity of a particular product that a seller is willing and able to exchange

demand indicates

for every possible price the quantity of a product that the buyer is willing and able to buy

normal good

good x and good y increase as income increases >0, necesity <1 luxury >1

If the consumer's optimal bundle is a corner solution where all income is spent on good Y:

he indifference curve is steeper than the budget constraint at the optimal bundle.

factors influencing demand (4)

income and wealth prices of substitutes and complements tastes/ preferences # of buyers

giffen

income effect is negative and the income effect is greater than the substitution effect

transitivity

indifference curves cannot intersect. if a is better than b, and b is better than c- a is best preferred

output

intermediate: B2B. producer goods. tax legal services final: B2C consumer goods

firm decision making

iso quant:same quantity

input taxonomy

land (limitless) capital labour (human resource) entrepreneurship

flatter indifference curve

larger substitution effect

cobb douglas

power function level of technology increasing/decreasing level of productivity

primary focus for suppliers

price

marginal rate of substitution

rate in which consumer can give up one good and exchange for another, without changing utility

income effect

remaining change in demand due to income change move to the new budget constraint based on the new price ratio on diff indiff curve

costs to supplier

sellers transform inputs into outputs, and it costs them money.

substitution effect

smaller soda, bigger popcorn hold utility constant and find the optimal bundle that reflects new price ratio

steeper indifference curve

smaller substitution effect

wealth

stock

total utility

stock- amount you have accumulated

If an indifference curve has a positive slope at any point, this violates the assumption:

that consumer preferences are complete.

If indifference curves cross, this violates the assumption:

that more of a good is better.

If utility is maximized subject to the budget constraint at the consumer's current bundle A:

the marginal rate of substitution exceeds the ratio of prices at A.

If good X is measured on the horizontal axis and good Y is measured on the vertical axis; and if bundles A and B lie on the same indifference curve; and if bundle A contains less of good X than bundle B, then:

the marginal rate of substitution is lower at bundle A than at bundle B.

At the consumer's current bundle, the indifference curve is steeper than the budget constraint. At this bundle:

the marginal utility per dollar spent on good X equals the marginal utility per dollar spent on good Y.

If the price of good Y decreases:

the slope of the budget constraint becomes flatter and the y-intercept of the budget constraint slides in along the y-axis.

If the consumer's income increases:

the slope of the budget constraint becomes steeper and the x-intercept of the budget constraint slides in along the x-axis

If the price of good X increases:

the slope of the budget constraint becomes steeper and the x-intercept of the budget constraint slides in along the x-axis.

if market price is below equilibrium

there is a shortage

if market price if above equilibrium

there is a surplus

complements

things that go well together. based on preferences

income expansion path

traces out optimal consumer bundles as income changes

Randy likes baseball more than football, football more than basketball, and basketball more than baseball. Which assumption about consumer preferences does this violate?

transitivity

production

value added process transformation

An upward-sloping indifference curve:

violates the assumption of transitivity.???

utility

well being, satisfaction, benefit, someone gets by using something. can capture preference through utility

comparitive statics

when a market is "shocked" thrown out of equilibrium. -before and after look of equilibria -statics bc only looking at initial and final results, not process or dynamics