ME for IMBA2010(1)

Chapter0Thesourceofalleconomicproblemsisscarcity.Problemoftrade-off,andchoice.Economics,asawayofthinking,asadismalscience.Problems-solutions-hiddenconsequences.Maindecision-makingagents:1individuals(household),2firms,and3governments.Objectsofeconomicchoicearecommodities,includinggoodsandservices.Maineconomicactivities:Consumption,Production,andExchange.Microeconomicsandmacroeconomics:toshowthemarketmechanism(theinvisiblehand),tosupplementit.Theproductmarketandthefactormarket.Themarketrelationismutualandvoluntary.Positiveissuesandnormativeissues.MarginalanalysisRelationsbetweenTotalmagnitudes,Averagemagnitudes,andMarginalmagnitudes.Chapter1EconomicsproceedsbydevelopingModelsofsocialphenomena.Byamodelwemeanasimplifiedrepresentationofreality.Exogenousvariables:takenasdeterminedbyfactorsnotdiscussedinamodel.Endogenousvariables:determinedbyforcesdescribedinthemodel.Theoptimizationprinciple:Peopletrytochoosewhat’sbestforthem.Theequilibriumprinciple:Pricesadjustuntildemandandsupplyareequal.Thedemandcurve:Acurvethatrelatesthequantitydemandedtoprice.Thereservationprice:One’smaximumwillingnesstopayforsomething.Frompeople'sreservationpricestothedemandcurve.Similarly,thesupplycurve.Fig.500490480ThedemandcurveReservationpriceNumberofapartmentFrompeoples’reservationpricestothemarketdemandcurve.supplyDemandPQEquilibriumP*Q*E(P*,Q*)supplyDemandpqEEquilibriumParetoefficiency:Aconcepttoevaluatedifferentwaysofallocatingresources.AParetoimprovementisachangetomakesomepeoplebetteroffwithouthurtinganybodyelse.AneconomicsituationisParetoefficientorParetooptimalifthereisalreadynowaytomakeanymoreParetoimprovement.ShortrunandlongrunEquilibriaintheshortrun(somefactorsareunchanged)andinthelongrun.Chapter2Twogoodsareoftenenoughtodiscuss.Thebudgetconstraint:p1x1+p2x2≤m.Thebudgetlineandthebudgetset(themarketopportunityset).Theslopeofthebudgetline:dx2/dx1=–p1/p2.Howthebudgetlinemoveswhentheincomechanges,orwhenapricechanges.x2x1BudgetsetBudgetlineSlope=-p1/p2m/p2m/p1Budgetlineandbudgetsetx2x1BudgetlineSlope=-p1/p2m’/p2m/p2m/p1m’/p1IncreasingincomeSlope=-p’1/p2m/p2BudgetlineSlope=-p1/p2m/p’1m/p1IncreasingpriceAsubsidyistheoppositeofaquantitytax.Taxes,quantitytaxes,valuetaxes(advaloremtaxes),andlump-sumtaxes.Rationing.Theireffectsonthebudgetset.x2x1BudgetlineBudgetsetRationingR*MarketopportunityChapter3Theindifferencesets,theindifferencecurves.Theycannotcrosseachother.Fig.indifferencecurvesx2x1Well-behavedpreferencesaremonotonic(meaningmoreisbetter)andconvex(meaningaveragearepreferredtoextremes).Figsx2x1Betterbundles(x1,x2)MonotonicityBetterbundlesThemarginalrateofsubstitution(MRS)measurestheslopeoftheindifferencecurve.MRS=dx2/dx1,themarginalwillingnesstopay(howmuchtogiveupofx2toacquireonemoreofx1).Usuallynegative.FigConvexindifferencecurvesexhibitadiminishingmarginalrateofsubstitution.Fig.x2x1ConvexityAveragedbundle(y1,y2)(x1,x2)Chapter4(asawaytodescribepreferences)UtilitiesEssentialordinalutilities,versusconvenientcardinalutilityfunctions.Theindifferencecurvesaretheprojectionsofcontoursofu=u(x1,x2).Fig.Utilityfunctionsareindifferentuptoanystrictlyincreasingtransformation.Examplesofutilityfunctionsu(x1,x2)=x1x2;u(x1,x2)=x12x22;u(x1,x2)=ax1+bx2(perfectsubstitutes);u(x1,x2)=min{ax1,bx2}(perfectcomplements).Quasilinearpreferences:Allindifferencecurvesarevertically(orhorizontally)shiftedcopiesofasingleone,forexampleu(x1,x2)=v(x1)+x2.Cobb-Douglaspreferences:u(x1,x2)=x1cx2d,oru(x1,x2)=x1ax21-a;andtheirlogequivalents:u(x1,x2)=clnx+dlnx2,oru(x1,x2)=alnx+(1–a)lnx2Cobb-DouglasMRSalonganindifferencecurve.DeriveMRS=–MU1/MU2bytakingtotaldifferentialalonganyindifferencecurve.MarginalutilitiesMU1andMU2.MRSIndifferencecurveSlope=dx2/dx1x2x1dx2dx1Chapter5ChoiceofconsumptionOptimalchoiceisatthepointinthebudgetlinewithhighestutility.Thetangencysolutionofanindifferentcurveandthebudgetline:MRS=–p1/p2.Fig.Basicequations:MU1/p1=MU2/p2andp1x1+p2x2=m.Figs.Threeapproachestothebasicequations:Graphically;As-one-variable;*Lagrangian.Theoptimalchoiceistheconsumer’sdemandedbundle.Thedemandfunction.Cobb-Douglasdemandfunctions.Chapter6DemandDemandfunctions:x1=x1(p1,p2,m),x2=x2(p1,p2,m).Normalandinferiorgoods(byincome);Fig.Luxuryandnecessarygoods(byincome).Fig.OrdinaryandGiffengoods(byprice).Fig.Theincomeexpansionpathortheincomeoffercurves,andtheEngelcurve.Figs.ThepriceoffercurveandtheDemandcurve.Figs.Chapter7SlutskyEquationHowtheoptimummoveswhenthepriceofagoodchanges?Decomposition:thetotaleffect=thesubstitutioneffect+theincomeeffect.p139Thepivotgivesthesubstitutioneffect,theshiftgivestheincomeeffect.Slutskyidentity,pivotingthebudgetlinearoundtheoriginalchoice.Fig.Hicksdecomposition,pivotingthebudgetlinearoundtheindifferencecurve.Fig.Chapter8UncertaintyUtilitiesandprobabilities.Expectedutilityfunctions,orvonNeumann-Morgensternutilityfunctions.Theyareindifferentuptoanypositiveaffinetransformation.(affinetransformation:y=a+bx).Riskaversionandriskloving.Concavevsconvexutility.Thesecondderivatives.$$UUChapt