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Questions and Answers
What does the slope of the budget constraint represent?
What does the slope of the budget constraint represent?
Perfect substitutes have a Marginal Rate of Substitution (MRS) equal to zero.
Perfect substitutes have a Marginal Rate of Substitution (MRS) equal to zero.
False
What is an optimal bundle in consumption?
What is an optimal bundle in consumption?
The combination of goods that maximizes a consumer's utility within their budget.
The combination of bagels and croissants that can be purchased is represented by a ________ line on the budget constraint graph.
The combination of bagels and croissants that can be purchased is represented by a ________ line on the budget constraint graph.
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Match the following concepts with their definitions:
Match the following concepts with their definitions:
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What is the most important factor affecting the supply of coffee?
What is the most important factor affecting the supply of coffee?
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Demand comes from the supplier.
Demand comes from the supplier.
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What does the supply function represent in relation to price?
What does the supply function represent in relation to price?
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According to the Law of Supply, as price increases, the quantity __________.
According to the Law of Supply, as price increases, the quantity __________.
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Match the following aspects of supply and demand to their corresponding definitions:
Match the following aspects of supply and demand to their corresponding definitions:
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What does the variable 'a' in the supply function Q = a ± b * pc represent?
What does the variable 'a' in the supply function Q = a ± b * pc represent?
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An increase in the price of goods will lead to a decrease in quantity supplied.
An increase in the price of goods will lead to a decrease in quantity supplied.
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How do the goals of suppliers differ from those of consumers?
How do the goals of suppliers differ from those of consumers?
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What is the definition of excess demand?
What is the definition of excess demand?
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Excess supply occurs when the price is above the equilibrium price.
Excess supply occurs when the price is above the equilibrium price.
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What happens to the supply curve if the price of cocoa increases?
What happens to the supply curve if the price of cocoa increases?
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Excess demand occurs when p is below __________ price.
Excess demand occurs when p is below __________ price.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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If the equilibrium quantity is 100 units and the supply at price p* is 60 units, what does this indicate?
If the equilibrium quantity is 100 units and the supply at price p* is 60 units, what does this indicate?
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An increase in supply typically leads to a decrease in equilibrium price.
An increase in supply typically leads to a decrease in equilibrium price.
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What effect does the price of cocoa have on coffee production?
What effect does the price of cocoa have on coffee production?
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What type of good is characterized by a positive response in demand when income increases?
What type of good is characterized by a positive response in demand when income increases?
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An inferior good experiences an increase in demand when consumer income rises.
An inferior good experiences an increase in demand when consumer income rises.
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What does the cross-price elasticity of demand measure?
What does the cross-price elasticity of demand measure?
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The demand elasticity that describes the responsiveness of quantity demanded to changes in consumer income is called __________.
The demand elasticity that describes the responsiveness of quantity demanded to changes in consumer income is called __________.
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Match the type of goods to their demand response characteristics:
Match the type of goods to their demand response characteristics:
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What is the general formula for calculating income elasticity of demand?
What is the general formula for calculating income elasticity of demand?
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The demand curve for an inelastic good is represented by a horizontal line.
The demand curve for an inelastic good is represented by a horizontal line.
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When the price of a substitute good increases, the demand for the primary good tends to __________.
When the price of a substitute good increases, the demand for the primary good tends to __________.
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What does the equation I = PcC + PDB represent?
What does the equation I = PcC + PDB represent?
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The indirect utility function is represented as v(Pc, Pb, F).
The indirect utility function is represented as v(Pc, Pb, F).
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What type of utility function is demonstrated in the example?
What type of utility function is demonstrated in the example?
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The equation I = 2PoB implies that total income is __________ the price of B.
The equation I = 2PoB implies that total income is __________ the price of B.
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What does the function E B : Frp equal in relation to preferences?
What does the function E B : Frp equal in relation to preferences?
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An increase in income will always lead to an increase in demand for both goods.
An increase in income will always lead to an increase in demand for both goods.
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In the context of utility maximization, what must be achieved between the budget constraint and preferences?
In the context of utility maximization, what must be achieved between the budget constraint and preferences?
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What operation is represented by the symbol '+' in the content?
What operation is represented by the symbol '+' in the content?
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The symbol '-' is used for addition.
The symbol '-' is used for addition.
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What does the variable 'x' typically represent in mathematical expressions?
What does the variable 'x' typically represent in mathematical expressions?
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In the expression 'v/u(x)', the letter 'v' typically represents __________.
In the expression 'v/u(x)', the letter 'v' typically represents __________.
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Match the following mathematical operations with their symbols:
Match the following mathematical operations with their symbols:
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Which of the following operations does 'mult' refer to?
Which of the following operations does 'mult' refer to?
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The expression 'cross' indicates division in mathematics.
The expression 'cross' indicates division in mathematics.
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What does the term 'value' indicate in mathematical expressions?
What does the term 'value' indicate in mathematical expressions?
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Study Notes
Lessons to Cover
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 16
My Preferences
- Self-responsibility
- Likes constructive criticism
- Office hours are a great resource
- There's no free lunch
Our Program
- Three sections: Consumer, Firms, Markets
- Tests (3)
- Homework (6)
Who Puts Micro in Microeconomics?
- Subject of the semester's work
- Smallest economic agent
- Economic roles
People, People, People
- Consumers: Want, want, want... NOW!
- Firms: Money! Money! Money!
- Markets: More! Less! More! Less!
The Economic Problem
- Why is there a market for gold (unneeded) but not for air (needed)?
- Will there be a market for sand in the Sahara?
- What's missing (not missing)?
Fixing Scarcity
- Consider bread: How to make it plentiful (not scarce)?
- Make more than what's wanted
- Would you buy more bread than you want to eat?
- Would you bake bread, even if it would go to waste?
- How to coordinate production and consumption?
The Market's Signal
- How does the market coordinate consumers and firms?
- How do you know if you want one or two loaves of bread for breakfast?
- How do you know if you should increase or reduce your bread production?
Economics 101
- A baker can produce 10 loaves of bread per hour.
- Each loaf costs $3 to produce.
- Each loaf can sell for $8.
Economics is Simple
- People = rationality + more is better than less
- What about age, sex, profession, hobbies?
The Two Economics
- Positive Economics: Descriptive, agreement-based (elephants are gray)
- Normative Economics: What should be done, results in norms or laws, no agreement needed
Chapter 1
- Changes in rules and regulations
- Price changes consumer/firm taste, info/advertising, other goods' prices, incomes, and government
- Quantity demanded
Demand and Supply 101
- Demand:
- What's my demand for X?
- How much do I want?
- What's the demand for X?
- How much is wanted?
- Conditional on?
- What do we take for granted?
- What's my demand for X?
- Supply:
- What's my demand supply for X?
- How much do I want?
- What's the demand supply for X?
- How much is wanted?
- Conditional on?
- What do we take for granted?
- What's my demand supply for X?
Demand for Coffee
- What matters most when buying coffee:
- Attractive bartender?
- Weather in Brazil?
- Price?
- Neither?
- Other?
The Demand Function
- Qe = f(pc)
- 100 coffee cups if free
- Willing to pay $10 for a cup of coffee?
Fill in the Demand Function
- Relationship between quantity and price?
- Law of demand: ↑ price, ↓ quantity demanded.
- How to determine a?
- Maximum quantity demanded when the price is zero
- How to determine b?
- Price elasticity of demand
Determining the Demand Function
- Locate two points on a Cartesian plane and connect them with a straight line
- Find the value of the intercept (a)
- Find the slope (b) Example: The city of Austin could consume 30 tons of chocolate if it were free; no one would eat it at $5 million per ton.
Some Rules
- X and Y need meaningful labels (Q, P)
- Axes have direction
- Any point should be labeled
- Economists assume away complexity
Dynamics - Demand
- A change in quantity demanded means...
- We moved along the current demand curve.
- We moved the demand curve itself.
- What would cause a change in quantity demanded?
Displacing the Demand
- What may we call demand "determinants"?
- Why would we want to drink coffee, eat bread, or have a yacht?
- Preferences: trends, cultural influences, advertising, changing social norms.
- Environmental factors: recessions, growth, inflation, interest rates, employment, government expectations.
Preferences
- Tastes: Coffee over tea, soda over coffee.
- Information: Taylor Swift loves coffee. Coffee is good/bad for blood pressure.
- How to evaluate the effect on demand for coffee?
- How can we integrate these into the demand function?
Modifying the Demand Function
- How can we modify Q = 100 – 10pc so that Qe = f(pc, X)?
- Why isn't X in the demand function to begin with?
- What happens if we consider X to be a constant?
Environmental Factors
- Expand the coffee demand function to include the price of tea.
- Is their relationship positive or negative? Complements or substitutes?
- Suppose the price of tea goes down. What does the new demand function say? Use the ceteris paribus assumption
- Draw a new demand curve for coffee.
- Is it closer to or further from the origin?
- Is the demand higher or lower overall?
Other Factors (Environmental)
- Wealth: Types of goods
- State regulation: Taxes and subsidies
Demand Aggregation
- Combine the demand of different groups in the classroom.
- More people willing to buy coffee at $5?
- How much coffee at prices over $10?
Supply 101
- Supply:
- What's my supply for X?
- How much do I want to sell?
- What's the supply for X?
- How much is wanted to sell?
- Conditional on?
- What do we take for granted?
- What's my supply for X?
Defining Supply
- What is being supplied? (Goods and services)
- What's the most crucial information for determining supply? (Price)
- How do suppliers differ from consumers? (Different goals—profit maximization)
Supply for Coffee
- What matters most when selling coffee?
- Attractive bartenders?
- Weather in Brazil?
- Price?
- Personal preference in liking coffee?
- Other factors?
Why do we demand/supply X?
- We like X
- We think X is good for us
- X gives us profit
The Supply Function
- Qs = f(pc)
- Willing to sell 18 coffees at $1
- Willing to sell 74 cups at $8
Fill in the Supply Function
- Relationship between quantity and price?
- Law of supply: ↑ price, ↑ demanded quantity
- How to determine a?
- Minimum supply producers are willing to offer when the price is zero
- How to determine b?
- Price elasticity of supply
Determining the Supply Function
- Locate two points on a Cartesian plane, connect them with a straight line
- Find the value of the slope
- Find the value of the intercept
Dynamics - Supply
- A change in quantity supplied means...
- We moved along the current supply curve.
- We moved the supply curve itself.
- What would cause a change in quantity supplied?
Displacing the Supply
- What may we call supply "determinants"?
- Why would we want to sell more/less coffee at the same price?
- Input costs: raw materials, labor, production technology.
- Government policies and regulations (taxes).
- Supply chain issues, global trade.
Modifying the Supply Function
- How can we modify Qs = 10 + 8pc so that Qs = f(pc, X)?
- What could X be?
- Why isn't X initially in the supply function?
- What happens if X becomes a constant?
Environmental Factors
- Expand the supply for coffee to represent the cost of coffee beans.
- Is the relationship between them positive or negative? Why?
- Suppose the price of beans increases; what does the new supply function say? Use the ceteris paribus assumption.
- Draw the new supply curve for coffee.
- Is it closer to or further from the origin?
- Is the supply higher or lower overall?
Supply Aggregation
- Combine the supply from various sources (e.g., Japan's total rice supply including imports).
Regulation and Supply
- What happens to the supply if the government restricts rice imports?
Market Equilibrium 101
- Equilibrium between what?
- Consumers, firms, supply, demand, scarcity?
- What values are expected at equilibrium?
- Quantity demanded = quantity supplied
Moving to Market
- How do we integrate the parts?
The market for coffee
- Qd = 100 - 10pc, Qs = 10 + 8pc
- Find equilibrium price
- Find excess supply/demand at different prices
Comparative Statics - Shocks
- Coffee prices are affected by cocoa prices
- If cocoa prices increase, what happens to the supply curve for coffee?
Comparative Statics - Algebra
- How does an environmental change affecting the supply (e.g., factor a) impact the coffee market equilibrium?
- Supply for coffee is affected by changes in factor a; therefore, the price will equal f(a).
Shapes are Important
- Demand for coffee can vary.
- What is demand for coffee if there's no other water source? (Inelastic)
- What if tea is a perfect substitute for coffee? (Elastic)
- Elasticity measures the responsiveness of quantity demanded/supplied to price changes.
Demand Elasticity
- In the example Q = 100 - 10pc, how do we estimate price elasticity of demand?
Elasticity Along the Demand
- Demand elasticity varies along a linear demand curve.
- More elastic at higher prices (greater responsiveness to price changes)
- Unit elastic at midpoint
- More inelastic at lower prices (less responsiveness to price changes)
Different Demands
- A demand can have constant elasticity.
- What if demands disappear when prices rise? (Perfect substitutes)
- What if demands don't change when prices rise? (Inelastic demands, necessities)
Alternative Elasticities
- Income elasticity of demand: Responsiveness of quantity demanded to changes in consumer income.
- Normal good: Positive income elasticity
- Inferior good: Negative income elasticity
- Cross-price elasticity of demand: Responsiveness of quantity demanded of one good to changes in the price of another
- Substitutes: Positive cross-price elasticity
- Complements: Negative cross-price elasticity
Income Elasticity of Demand
- What is the “normal” response to rising income? (Quantity demanded increases—normal goods).
- Why does this matter? (Helps categorize goods and predict consumer behavior as income changes.)
Cross-Price Elasticity of Demand
- How do price changes in one good affect the quantity demanded of another good?
- Are they substitutes or complements?
Supply Elasticity
- How responsive is supply to changes in price?
Comparing "Terms" (Long/Short)
- How do consumer and producer responses differ based on the time horizon?
- What if electricity prices rise in September only?
- How does this compare to a persistent demand surge?
Effects of Taxes on Equilibrium
- Question 1: Who should be taxed on a good, consumers or producers?
- Question 2: Who pays the tax, ultimately? (Consumers and producers share the burden)
Other Government Interventions
- Subsidies: Opposite of taxes.
- Price ceilings: Cannot charge above X.
- Price floors: Minimum price of X.
The Individual
- In economics, individuals have preferences, seek to maximize utility possible, and face limitations.
Logical Lexicon
- Preferred: >
- Indifferent: ~
- Weakly preferred: ~>
Consumer Preferences
- Completeness: Consumers can rank all possible bundles.
- Transitivity: If a > b and b > c, then a > c.
- More is better: More of a good is always better.
- Reflexivity: Any bundle is as good or better than itself.
From "I Rather" to Inequality
- What should you know?
- Consumers can prefer one good over another (or vice versa)
- Can you assign more than one value to a single item?
- Sensible thinking.
Mapping Preferences
- Given the conditions, when can bundles be in the same indifference curve?
- Compare bundles (bagels and croissants): A (4,5), B (5,3), C (3,4), D (2,7), E (2,1)
Using Indifference in Preferences
- Equivalent bundle sets create indifference curves.
- "I'd be equally happy with 5 bagels and 5 croissants or 4 bagels and X croissants"
Barter
- How many croissants will you trade for your first, second, third, and fourth bagels?
- Is this information shown in the figure?
Marginal Rate of Substitution (MRS)
- How can we find the exact price?
- MRS is the slope of the indifference curve.
- MRS = - ∆Y / ∆X (the rate of exchange between goods)
Indifference Curves
- Marginal utility: The extra satisfaction gained from the next unit of consumption.
- Marginal Rate of Substitution (MRS): Rate at which one would trade one good for another while staying on the same level of utility.
- Perfect substitutes have constant MRS.
- Perfect complements are consumed in fixed proportions.
Limitations (Budget Constraint)
- Why not have an unlimited amount of everything?
- Why forced to make choices and tradeoffs?
- Budget constraints limit choices.
Budget Constraint
- How many goods can we purchase given our income?
- Maximum combinations of two goods.
- What information does the slope of the budget constraint reveal?
- Opportunity cost
Optimal Bundle
- What objective is sought when consuming?
- How can you find the optimal bundle on a graph?
- Maximize utility subject to a budget constraint.
Budget Constraint (Changes)
- How does an increase in income affect the budget constraint?
- How does a change in price affect the budget constraint?
- Show the relationship between the quantities and prices
Finding Optimal Bundle
- How to find the optimal bundle?
- Replacement
- Lagrangian
- Minimization
Lagrange
- What if we have three or more goods?
- What are perfect substitute goods?
- How to draw indifference curves and budget constraints.
Lagrange Maximisation
Constant Elasticity of Substitution
Utility Maximization Problem
Opposite but Equivalent
Indirect Utility
Schedule for This Week
- Derive demand curves from consumer preferences.
- Evaluate income changes and price changes.
How Can We Find the Demand?
- What changes and what doesn't?
- Income (Y)
- Prices of other goods (P1, P2)
- How to analyze when a determinant of demand is altered.
Income Changes
- How are demand curves affected by changes in income?
- Normal goods: increase in demand with increases in income.
- Inferior goods: decrease in demand with increases in income.
Price Changes
- How are demand curves affected by price changes?
- The substitution effect and the income effect.
Hicksian Demand
- Compensate for income changes.
- What formula maintains constant utility?
Sheperd's Lemma
- Minimizing an expenditure function leads to finding the Hicksian demand.
- Obtain the expenditure function, determine the maximized utility, and solve for each good's quantity demanded.
In Class Review
Cobb Douglas
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Description
Test your knowledge on fundamental microeconomic concepts such as budget constraints, supply and demand, and optimal consumption bundles. This quiz will challenge your understanding of key terms and definitions relevant to microeconomics.
