The Economic Method and Demand & Supply
Constrained optimization problems.
As prices change, consumption also changes as consumers re-optimize their purchases.
Utility
a set of numerical values that reflect the relative rankings of various bundles of goods
properties of consumer preferences
completeness, transitivity, more is better.
Marginal Utility
the extra utility that a consumer gets from consuming an additional unit of a good.
Marginal rate of substitution (MRS)
the maximum amount of one good a consumer will sacrifice to obtain one more unit of another good.
What is dead weight loss?
the reduction in economic surplus resulting from a market not being in competitive equilibrium
Utility function
the relationship b/w utility values and every possible bundle of goods.
Indifference curve
the set of all bundles of goods that a consumer views as being equally desirable
Who gets what, how happy are they, is the equilibrium efficient?
welfare analysis
Properties of indifference maps: 1
1. Bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin.
Properties of indifference maps: 2
2. There is an indifference curve through every possible bundle.
Properties of indifference maps: 3
3. indifference curves slope downward. - unless one of the goods is a "bad"
Properties of indifference maps: 4
4. indifference curves cannot cross.
What is the equilibrium?
A price level where there is neither excess demand nor excess supply Inherently stable. Any point aside from equilibrium is unstable. Why?
What happens to the equilibrium in response to a shock?
Comparative Statics
Who are economic agents? What is their "objective function?"
Consumers and producers. C's Maximize utility P's profit
What are some key features of MRS Formula
How much of B you would be willing to give up to get one more of z. The negative of this is the (tangent) slope of the indifference curve.
What really matters to a utility function?
How the utility changes with respect to the goods that enter into it. NOT the level (value) of the utility function doesn't really matter. Utility functions are defined by these trade-offs.
Why can't indifference curves cross?
Indifference curves cannot cross given that by transitivity all points connected by a line should be give the same utility (indifference) but a higher point caused by the crossing of indifference point must be preferred above the below point since it has more of both goods. Thus, indifference can't cross bc of transitivity.
Where do demand curves come from?
Individual preferences and constraints (or limits on their choices). Consumers maximize their well-being or pleasure from consumption, subject to the constraint they face.
Who benefits from the price of a substitute product falling?
Intuitively consumers couldn't be worse off could they?
MRS(zb)=
MU(z)/MU(b)
What is the slope of the utility function?
Marginal utility as we hold the quantity of the other good constant.
What if the price of a substitute product rises?Falls?
Suddenly there is excess demand or excess supply, and either consumers or producers will change their behavior until there is no incentive for either group to change. That's what equilibrium is.
What is the difference between utility and indif. curves?
Utility is the value and indif. curves are where values are the same
indifference map
a complete set of indifference curves that summarize a consumer's tastes or preferences
Good and Bad
good- a commodity for which more is preferred to less, at least at some levels of consumption. Bad- something for which less is preferred to more, such as pollution.
What is diminishing marginal utility?
if marginal utility falls as we consume more.