Microeconomics

Define microeconomics as a field of study.

Microeconomics is a Branch of economics that deals with the behaviour of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise.

Explain the difference between positive and normative analysis.

Positive - objective, fact-based, can be tested. Normative - subjective, value/opinion-based, cannot be tested.

Explain what the market is.

A collection of buyers and sellers that together through their actions (actual or potential) determine the prices of the goods.

Mrket mechanism

A tendency in a free market for a price to change until the market clears

Supply and demand curves equations

Q_d = a - bP (a - y-intercept, b - slope = dQ_d/dP) Q_s = c+dP

Price elasticity of demand/supply formula + analysis

E_QdP = dQ_d/dP * P/Q_d

• >1 → elastic

• =1 → unit-elastic

• <1 → inelastic

(considering absolute values)

Explain

a) Horizontal or Perfectly Elastic demand (E=infinity)

b) Vertical or Perfectly Inelastic demand (E=0)

Income elasticity of demand formula + analysis

E_QdI = dD/dI * I/D

• >0 → normal good

  • >0<1 → necessary good (1>E>0 )

  • >1 → luxury good

• <0 → inferior good

Cross - price elasticity of demand formula

E_QdxPy = dQ_dx/dP_y * P_y/Q_dx

Point vs Arc elasticity

Point - at a certain price point on the curve

Arc - over a range of prices

Short run vs Long run

Short run: L variable, K fixed (more than 1 production factor cannot be changed)

Long run: L variable, K variable

Durable goods

Goods for which income elasticity is larger in the short run than in the long run (for most goods the opposite, eg gasoline vs cars)

LTV vs Subjective theories

Value of the good is based on:

• LTV: socially necessary labour (L+K+Equipment etc)

• Subjective: individual consumer’s needs and attitudes towards the good

Marginal utility + formula

Additional utility (satisfaction) from consuming one additional unit of the good

MU_x = dTU/dX

What is the slope of the total utility curve?

Marginal utility

Theory of consumer behaviour definiton

How consumers allocate incomes among different goods and services to maximise resources and satisfaction

TCB Assumptions

1. Completeness - consumers can compare all the alternatives

2. Costs are ignored

3. Transitivity - if A>B and B>C the A>C

4. Goods are desirable - more is always better than less

Goods for which less in preferred

Bads / Undesirable goods (eg pollution)

Indifference curve

A curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction

IC Characteristics

1. Cannot intersect

2. U3>U2>U1

3. Negative slope → decrease Y to increase X

4. Convex curve

MRS

Marginal Rate of Substitution = maximum amount of a good that a consumer is willing to give up in oder to obtain one additional unit of another good (staying at the same level of utility)

MRS = MUx/MUy

What is the slope of the indifference curve?

MRS

Perfect substitutes

2 goods for which MRS of one for the other is a constant → straight line

Perfect compliments

2 goods for which MRS of one for the other is 0 (or infinite) → 90* angle bound lines

Utility

Numerical score that represents the satisfaction that a consumer gets from a certain market basket

Ordinal vs Cardinal utility

• Ordinal → general rankings from most to least preferred

• Cardinal → concrete numbers (by how much)

Budget constraints

Constraints that consumers face as a result of limited incomes

Budget line + equation formula

All combinations of goods for which the total amount of money spent equals income

I = Px*X + Py*Y

Slope of the budget line

Px/Py

Budget line intersect points with Y- and X-axis formula

• Y → I/Py

• x → I/Px

Consumer equilibrium equation formula

• MUx/Px = MUy/Py

• MUx/MUy = Px/Py

• MRS = Px/Py

• Slope of the indifference curve = Slope of the budget line

Marginal benefit

Benefit of consuming one additional unit of a good

To increase MUx..

We need to decrease X (amount of X) and vice versa

PCC

PCC = Price Consumption Curve = curve tracing the utility-maximising combinations of 2 goods that a consumer can buy at some price point (related to change in price of good X)

Demand curve can be drawn from..

PCC and MUx

Engel curve (ICC)

Curve relating the quantity of a good consumed to income

Isoelastic curve

Has the same elasticity at any point

Consumer surplus

The difference between the amount a consumer is willing to pay and the amount actually paid

CS formula

((Pmax - P*) * Q*) / 2