Download - Mircroeconomics 3070-001
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Microeconomics 3070 Prof. Barham
Lecture 1: Introduction
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Syllabus and Website
Website: http://www.colorado.edu/ibs/hb/barham/courses/econ3070/
All assignments and solution keys will be posted on the web site.
I will send you a notice when they are posted. Syllabus
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Outline
Cover chapter 1 What is microeconomics
Economic models Tools for microeconomics
Constrained optimization Marginal analysis Equilibrium analysis Comparative statics
Next class reviews calculus, may start Chapter 2
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What is mircoeconomics
Can you buy all the clothing, vacations, sport equipment, health care, food, beauty products, yoga classes, seasons tickets to sport event, donations to charity you want?
NoMircoeconomics models our decision making process
on how much you decide to spent on what.
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What You Will Focus OnHow to make the market demand and supply curves starting from assumptions
Price (P) Doctors visit
Quantity (Q)Number of appointments per day
. 10
P*
Qd: demand Qs Supply
Equilibrium: Qd=Qs50
Q1 Q2
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What is mircoeconomics
Official Definitions: Microeconomics is the study of how individuals and
firms make themselves as well off as possible in a world of scarcity and the consequences of those individual decisions on the markets and the entire economy.
Microeconomics is the study of the allocation of scarce resources.
Mircoeconomics is also often called price theory. This is to emphasize the important role that price plays. Price not only thing studied – think of health care market
think about quantity
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What is mircoeconomics
Because we can’t have everything, we need to make trade-offs and microeconomics provides a way to think about tradeoffs.
A society faces 3 key tradeoffs:1. Which goods and services to produce2. How to produce of them
How much labor and inputs should a firm use to produce a car
3. Who gets the good and services (allocation) Based on price Based on need (flu vaccine when a shortage) Government
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What is microeconomics
Workers need to choose how to allocate their time between labor and leisure.
Firms need to choose how to allocate their investment between human capital and machines.
Households need to choose how to allocate their incomes between savings and expenditure, and which expenditures
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Micro versus MacroeconomicsWhat is the difference between micro and macro
economics?
Microeconomics: behavior of individual economic units like consumers, producers, landowners, families, etc. How and why do they make the decisions they make?
Macroeconomics: analyzes how the entire national economy performs. It analyzes unemployment, inflation, price levels, interest rates (many things we take as given in microeconomics).
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Economic Models
How do economists allocate resources?
They develop theoretical model.
“Everything should be made as simple as possible but not simpler” Albert Einstein
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Economic Models
The models are abstractions of the real world Too complicated to take into consideration all factors Without simplifications we would not be able to make
predictions. Like a roadmap, does not give each house, but the bare
essentials i.e. major streets, highways and sometime main attractions.
It may appear that the model makes heroic abstractions (assumptions) from the complexities of the real world.
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Economic Models Example
Determinants of Poster Demand on CampusYou are advertising a big event for the freshman class how
many posters will you need? Factors in your model:
Price to make poster, size of freshman class Factors not in your model:
Content of poster, placement of poster, relative size of poster Are there any constraints to this model?
the amount of budget you have to spend on poster advertising.
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Types of Variables in a Model
Exogenous Variable: one whose value is taken as given in a model.
Endogenous Variable: one whose value is determined within the model being studied
Which factor(s) would have you taken as given in the poster example? Price, size of freshman class (exogenous)
Which factor(s) are determined by your model? The quantity of posters needed (or demanded)
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Tools of Microeconomic Analysis
1. Constrained Maximization
2. Equilibrium Analysis
3. Comparative Statics
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Constrained Optimization
Constrained optimization: an analytical tool used when a decision maker seeks to make the best (optimal) choice, taking into consideration possible restrictions on the choice.
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Constrained Optimization
This tool has two parts:1. Objective function: is the relationship the
decision maker seeks to optimize (maximize or minimize).
2. Constraint: limits or restrictions that are imposed on the decision maker
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Constrained OptimizationExamplesYou want to maximize your happiness during your
second year at CU. Objective function Utility (happiness):
Utility=f(days skied per month (s), beers per week(b)).U=s*b
The thing you are maximizing or minimizing Constraints: s.t. (subject to)
Income (I)=S*Ps+B*Pb, where P is price Many max or min problems have some kind of a
constraint you have to work with
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Writing Out Statement of Constrained Optimization Problem
Objective Function
Endogenous Variables
Constraint
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Marginal Analysis Solution to a constrained optimization problem
depends on the marginal impact of the decision variables on the value of the objective function.
But what is marginal?
The term marginal tells us how the value of the objective function changes as a result of adding one unit of a decision variable.
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Marginal Analysis
Happiness
$ spent
From beer
From skiing
0 0 025 80 4
50 90 10
75 92 15
100 94 20
Marginal Happiness
From beer
From skiing
80 4
10 6
2 5
2 5
How much do you spend on beer and skiing to Maximize your happiness if you have 100 budget?
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Marginal Analysis
$100 on beer = 94 units of happiness $75 beer plus $25 skiing = 96 units of happiness. $50 on beer and $50 on skiing = 100 units of
happiness. Yes a day of skiing with a nice apres ski makes you
very happy.
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Marginal Analysis
You just did a constrained optimization problem Optimize happiness (beer and skiing) subject to $100
weekly entertainment budget. H(b, s)
s.t. Ps*s + Pb*b=100
where b= quantity of beer; Pb=price beer s=days of skiing; Ps=price skiing.
Objective Function
Constraint
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Equilibrium Analysis
Price (P) Doctors visit
Quantity (Q)Number of appointments per day
. 10
P*
Qd: demand Qs Supply
Equilibrium: Qd=Qs50
Q1 Q2
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Equilibrium Analysis
In a competitive market, equilibrium is achieved at a price at which the market clears – price at which the quantity offered for sale = the
quantity demanded by consumers. Since Qd = Qs at P*, there is no upward or
downward pressure on price. Hence, price could stay at P* indefinitely.
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Equilibrium AnalysisWhat if price is higher than P*? Excess Supply or Demand
50
8
Qd: demand Qs Supply
13
70
Excess Supply
Quantity (Q)Number appointments per day
PPrice ($) Doctors visit
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Equilibrium AnalysisWhat is price is lower than P*
50
5
Qd: demand Qs Supply
13
70
Excess Demand
30
PPrice ($) Doctors visit
Q Quantity Number of appointments per day per doctor
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Comparative Statics
Examine how a change in an exogenous variable will affect the level of an endogenous variable. First, look at the value of the endogenous variable at
the initial level of the exogenous variable Second, look at the value of the endogenous variable
at the new level of the exogenous variable.
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Comparative Statics Example
PPrice ($) Doctors visit
QNumber of appointments per day per doctor
. 10
P*
D S
50
Q*
Endogenous variable: movement along curve
Endogenous variable: movement along curve
How do the exogenous variables affect the graph?
Moves the curves
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Comparative Statics Example
Suppose we are in China and there is an outburst of the Avian Flu. A few weeks later there are some new regulations put on doctors and they are unhappy about it. So they do a rotating strike.
How will these factors affect our Supply and Demand curve and the price?
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Comparative Statics Example
PPrice ($) Doctors visit
QNumber of appointments per day per doctor
. 10
P1
D1 S1
50
D2
Outbreak of avian flu,
P2 60
13
Q1 Q2
Moves demand to the right,
but supply curve does not change
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Comparative Statics Example
PPrice ($) Doctors visit
QNumber of appointments per day per doctor
D1 S1
D2
The rotating strike will lead to
P3 65
11
S2A reduction in supply
This is a shift to the left
Q3
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See You Next Class