Intro to Microeconomics

• Intermediate Microeconomic Theory I, Winter 2025, taught by Aisha Khan.

Definition of Microeconomics

• Microeconomics studies how individual economic decision-makers behave.
• Focus is on behavior of economic agents on their own and together.
• Microeconomics also deals with trade and trade models.
• Microeconomics studies how individual economic decision-makers such as consumers, workers, firms, or managers allocate scare resources.

Who Studies Microeconomics

• Policy makers
• Consumers
• Business owners
• Managers
• Union leaders
• Lenders

Topics of Interest

• Resource allocation occurs because wants are unlimited and individuals have constrained choices while making decisions.
• What goods and services will be produced and in what quantities?
• Who will produce these services and how will they produce them?
• Who will receive these goods and services and by what method will they get them?

Microeconomic Modeling

• Microeconomic issues are studied using models
• Models act like maps which use visual methods to simplify understanding of complex concepts.
• These models need to resemble reality, be understandable, be on an appropriate scale, and incorporate variables.

Variables

• There are generally 3 groups of variables used in microeconomic analysis.
• Exogenous variables have values taken as given in the analysis.
• For Example: "How would a manager hire the most possible workers on a budget of $100?”
• For Example: "How much food and clothing should the consumer purchase in order to maximize satisfaction on a budget of X?"
• Endogenous Variables values are determined as a result of the model's workings.
• For Example: "How would a manager minimize the cost of hiring three workers?"
• For Example: "What is the minimum level of expenditure that the consumer must receive in order to reach a subsistence level of satisfaction?”
• Exogenous variables are fixed and not in our control and are true.

Analytical Tools

• Three key analytical tools are commonly used for microeconomic analysis:
• Constrained optimization
• Equilibrium analysis
• Comparative statics

Constrained Optimization

• Constrained optimization is an analytical tool for making the optimal choice while taking into account any possible limitations or restrictions.
• Constrained optimization problems generally have two components.
• Objective function: specifies what the agent cares about to maximize or minimize. A manager/producer, for example, would aim to minimize costs or maximize profits. A consumer may want to maximize satisfaction from purchasing goods.
• Constraints: limits placed on available resources. These can include time, budget, other resources, technical capabilities, the marketplace, rules and regulations, and law.

Problem 1

• A farmer is planning to build a rectangular fence as a pen for their sheep and has F feet of fence and cannot afford to purchase more.
• The farmer can choose the dimensions of the pen which will have length L feet and width W feet. The goal is to choose L and W to maximize the area of the pen.
• The total amount of fencing (perimeter of the pen) cannot exceed F feet.

Objective Function

• The farmer is trying to maximize LW, which is the objective function.

Constraint

• The perimeter of the pen 2L + 2W must not exceed the amount of fence available, F. Therefore, the constraint can be written as 2L + 2W ≤ F.

Endogenous and Exogenous Variables

• Since the farmer is given only an amount F feet of fence to work with, the perimeter F is exogenous.
• The endogenous variables are L and W, since the farmer determines these values within the model.
• The statement of the constrained optimization problem is Max A(L,W) subject to: 2L +2W≤ F

Problem 2

• A consumer purchases only food and clothing, and needs to decide how many units of each to purchase each month.
• F = number of units of food, C = number of units of clothing Consumer wants to maximize their satisfaction with the two goods.
• Her satisfaction is measured by (FC)^1/2, but she can only purchase limited amounts of goods per month as she must live within I dollars/month.
• Food costs PF per unit and Clothing costs PC per unit.

Objective function

• Maximize F,C → S(F,C) = S=(FC)1/2

Constraint

• (PF)(F) + (Pc)(C) ≤ I

Endogenous and Exogenous Variables

• Exogenous variables are ones the consumer takes as given: I, PF, PC.
• Endogenous variables are the consumer's only choices- F and C.
• Max S(F,C)
• Subject to: (PF) (F) + (Pc) (C) ≤ I

Practice Question

• The price of X is $15 per unit, Y is $12 per unit, consumer's income is $100, and the consumer's level of satisfaction is measured by XY + Y.
• Consumer's constraint is 15X+12Y≤100

Further Constraint Practice

• A batch of cookies requires 3 cups of flour, a cake requires 4 cups of flour.
  • Constraint can be written as: the amount of cookies and cakes can be made with 24 cups of flour
• Box type 1 can hold 20 books and box type 2 can hold 12 books. A constraint for the number of boxes needed to box up 100 books can be written.
• If it takes 4 minutes to bike a mile, 9 minutes to run a mile, and 14 minutes to walk a mile, a constraint limiting how many miles of each type of exercise you can get in a 45-minute lunch break can be written.

Marginal Impact

• How a dependent variable changes as a result of adding one unit of an independent variable.
• Marginal impact is the incremental impact of the last unit of the exogenous variable on the endogenous variable
• Decisions are made at the margins to make the optimal choice with y=f(x)
• Marginal impact = dy/dx = Δy/Δx
• Suppose TC of production of 10 units is $100, and of 11 units is $105.
• The marginal cost of the 11th unit is $5.
• Suppose a consumer consumes x units and her utility is U=4x^1/2
• Her marginal utility of consuming 4 units of x is 4/sqrt(4)=2.

Equilibrium

• Supply equals demand.
• It is the point where the demand and supply curves cross.
• An analysis of a system in a state means a system will continue indefinitely as long as the exogenous factors remain unchanged.

Market Equilibrium for Coffee Beans

• At a price above equilibrium there is excess supply.
• At a price below equilibrium there is excess demand.
• Market equilibrium example: Market demand for the good slopes downward and market supply slopes upward. Equilibrium price is now $10 and 500,000 units of the good are traded at this price.
• If the cost to produce each unit of the good falls, there will likely be a fall in price

Comparative Statics Analysis

• Compares the equilibrium state of a system before a change in the exogenous variables to the equilibrium state after the change.

Positive and Normative Analysis

• Microeconomic analysis can be used to study both positive and normative questions.
• Positive analysis: explains how an economic system works and attempts to predict how it will change over time. It is a way of understanding the system.
• Normative analysis is an analysis of what should be done and considers policy recommendations.

Examples of Microeconomic Analysis

• Normative: "Should we increase income equality rather than focus on economic efficiency?"
• Normative: "Should we impose a progressive income tax or a sales tax to increase income equality?"
• Positive: "Will a progressive income tax reduce aggregate hours worked?"

Remaining tasks

• Read the textbook
• Read the Textbook slides and notes
• Practice Questions including: -"Learning by doing" within the chapters -Multiple choice questions in between sections -End of chapter questions 1.4, 1.5, 1.8, 1.9, 1.10, 1.12,

Exam questions

• Examples of problems that microeconomists might study include agricultural price support programs and housing policies such as rent control programs.
• A variable whose value is determined within the economic system being studied is endogenous
• Equilibrium is a condition where a system will continue indefinitely as long as all given factors are unchanged
• The demand for televisions are given by the equation Qd = 800 – P where the supply is given by the equation Qs = 200 +P, where P the market price. At a price of 300, the equilibrium quantity will be 500
• In a competitive market for sugar with a downward sloping demand curve and an upward sloping supply curve and an equilibrium price of $.60/pound, at a price of $ .50/pound the sugar market will experience a shortage
• Normative analysis is valuable because it can assist in the analysis of policy implementation