Microeconomics Concepts Quiz
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Questions and Answers

What does the slope of the budget constraint represent?

  • Indifference level
  • Marginal Rate of Substitution
  • Total utility
  • Opportunity cost (correct)

Perfect substitutes have a Marginal Rate of Substitution (MRS) equal to zero.

False (B)

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.

<p>straight</p> Signup and view all the answers

Match the following concepts with their definitions:

<p>Perfect Substitutes = Goods that can replace each other without loss of utility Perfect Complements = Goods that are consumed together in fixed proportions Marginal Rate of Substitution = Rate at which a consumer is willing to give up one good for another Budget Constraint = Limits on the combinations of goods that can be purchased given income</p> Signup and view all the answers

What is the most important factor affecting the supply of coffee?

<p>Price (D)</p> Signup and view all the answers

Demand comes from the supplier.

<p>False (B)</p> Signup and view all the answers

What does the supply function represent in relation to price?

<p>The supply function indicates how quantity supplied changes with changes in price.</p> Signup and view all the answers

According to the Law of Supply, as price increases, the quantity __________.

<p>supplied increases</p> Signup and view all the answers

Match the following aspects of supply and demand to their corresponding definitions:

<p>Demand = The desire and ability of consumers to purchase goods Supply = The total quantity of a good that producers are willing to sell at various prices Price = The amount of money required to purchase a good Profit = The financial gain obtained from selling goods or services</p> Signup and view all the answers

What does the variable 'a' in the supply function Q = a ± b * pc represent?

<p>Maximum supply at zero price (C)</p> Signup and view all the answers

An increase in the price of goods will lead to a decrease in quantity supplied.

<p>False (B)</p> Signup and view all the answers

How do the goals of suppliers differ from those of consumers?

<p>Suppliers aim to maximize profit while consumers aim to satisfy their wants or needs.</p> Signup and view all the answers

What is the definition of excess demand?

<p>When p is below equilibrium price (C)</p> Signup and view all the answers

Excess supply occurs when the price is above the equilibrium price.

<p>True (A)</p> Signup and view all the answers

What happens to the supply curve if the price of cocoa increases?

<p>It shifts to the left.</p> Signup and view all the answers

Excess demand occurs when p is below __________ price.

<p>equilibrium</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Excess Demand = When quantity demanded exceeds quantity supplied Excess Supply = When quantity supplied exceeds quantity demanded Equilibrium Price = The price at which quantity supplied equals quantity demanded Comparative Statics = Analysis of the change in economic outcomes due to external shocks</p> Signup and view all the answers

If the equilibrium quantity is 100 units and the supply at price p* is 60 units, what does this indicate?

<p>There is excess supply. (B)</p> Signup and view all the answers

An increase in supply typically leads to a decrease in equilibrium price.

<p>True (A)</p> Signup and view all the answers

What effect does the price of cocoa have on coffee production?

<p>It can increase or decrease production depending on the price change.</p> Signup and view all the answers

What type of good is characterized by a positive response in demand when income increases?

<p>Normal good (C)</p> Signup and view all the answers

An inferior good experiences an increase in demand when consumer income rises.

<p>False (B)</p> Signup and view all the answers

What does the cross-price elasticity of demand measure?

<p>Responsiveness of the quantity demanded for one good to a change in the price of another good.</p> Signup and view all the answers

The demand elasticity that describes the responsiveness of quantity demanded to changes in consumer income is called __________.

<p>income elasticity of demand</p> Signup and view all the answers

Match the type of goods to their demand response characteristics:

<p>Normal good = Demand increases with rising income Inferior good = Demand decreases with rising income Complementary good = Demand increases when the price of a related good falls Substitute good = Demand increases when the price of a related good rises</p> Signup and view all the answers

What is the general formula for calculating income elasticity of demand?

<p>%ΔQd / %ΔY (B)</p> Signup and view all the answers

The demand curve for an inelastic good is represented by a horizontal line.

<p>False (B)</p> Signup and view all the answers

When the price of a substitute good increases, the demand for the primary good tends to __________.

<p>increase</p> Signup and view all the answers

What does the equation I = PcC + PDB represent?

<p>Total income from both products (A)</p> Signup and view all the answers

The indirect utility function is represented as v(Pc, Pb, F).

<p>True (A)</p> Signup and view all the answers

What type of utility function is demonstrated in the example?

<p>Cobb-Douglas</p> Signup and view all the answers

The equation I = 2PoB implies that total income is __________ the price of B.

<p>twice</p> Signup and view all the answers

What does the function E B : Frp equal in relation to preferences?

<p>Demand function (A)</p> Signup and view all the answers

An increase in income will always lead to an increase in demand for both goods.

<p>False (B)</p> Signup and view all the answers

In the context of utility maximization, what must be achieved between the budget constraint and preferences?

<p>Equilibrium</p> Signup and view all the answers

What operation is represented by the symbol '+' in the content?

<p>Addition (B)</p> Signup and view all the answers

The symbol '-' is used for addition.

<p>False (B)</p> Signup and view all the answers

What does the variable 'x' typically represent in mathematical expressions?

<p>A variable or unknown value</p> Signup and view all the answers

In the expression 'v/u(x)', the letter 'v' typically represents __________.

<p>a variable or function</p> Signup and view all the answers

Match the following mathematical operations with their symbols:

<p>Addition = + Subtraction = - Multiplication = x Division = /</p> Signup and view all the answers

Which of the following operations does 'mult' refer to?

<p>Multiplication (A)</p> Signup and view all the answers

The expression 'cross' indicates division in mathematics.

<p>False (B)</p> Signup and view all the answers

What does the term 'value' indicate in mathematical expressions?

<p>A specific quantity or number</p> Signup and view all the answers

Flashcards

What is supply?

The quantity of goods or services that producers are willing and able to sell at a given price in a given time period.

What is the Law of Supply?

The relationship between the quantity supplied of a good or service and its price, holding all other factors constant. The law of supply states that as the price of a good or service increases, the quantity supplied will also increase, ceteris paribus.

What is the Supply Function?

A mathematical representation of the relationship between the quantity supplied of a good or service and its price. It can be expressed as an equation or a graph.

What is the Supply Intercept?

The minimum quantity of a good or service that a producer is willing to supply at a given price. It is the value of the intercept of the supply curve on the quantity axis.

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What is the Supply Slope?

The change in quantity supplied resulting from a change in price. It is the slope of the supply curve.

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Price Elasticity of Demand

The responsiveness of the quantity demanded of a good to changes in its own price, holding all other factors constant.

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Perfectly Inelastic Demand

A good or service that experiences no change in quantity demanded when its price changes.

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Income Elasticity of Demand

The responsiveness of the quantity demanded of a good to changes in consumer income, holding all other factors constant.

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Normal Good

A good for which demand increases as income increases.

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Inferior Good

A good for which demand decreases as income increases.

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Cross-Price Elasticity of Demand

The responsiveness of the quantity demanded of one good to changes in the price of another good, holding all other factors constant.

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Substitute Good

A good for which demand increases when the price of a related good increases.

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Complement Good

A good for which demand decreases when the price of a related good increases.

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Excess Demand

The quantity demanded exceeds the quantity supplied at a given price. This occurs when the price is below the equilibrium price.

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Excess Supply

The quantity supplied exceeds the quantity demanded at a given price. This occurs when the price is above the equilibrium price.

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Comparative Statics

A change in the equilibrium price and quantity caused by a shift in either the supply or demand curve.

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Shock

An event that changes the supply or demand curve. This can be a change in input costs, consumer preferences, or other factors.

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Comparative Statics Analysis

The process of analyzing how changes in the market affect equilibrium price and quantity. It helps us understand how the market adjusts to new conditions.

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Cross-Price Effect

A change in the price of a related good that affects the supply of another good. For example, an increase in the price of cocoa might make farmers switch to growing coffee, leading to a decrease in coffee supply.

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Equilibrium

The point where the supply and demand curves intersect. At this point, the quantity supplied and quantity demanded are equal, and there is no excess supply or demand.

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Quantity Demanded

The quantity of a good that buyers are willing and able to purchase at a given price.

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What is the marginal rate of substitution (MRS)?

The marginal rate of substitution (MRS) measures the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility. It is the slope of the indifference curve at a given point.

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What are perfect substitutes?

Perfect substitutes are goods for which the consumer is indifferent between consuming one good or the other. The MRS is constant, meaning the consumer is willing to trade one good for another at a fixed rate.

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What are perfect complements?

Perfect complements are goods that are consumed in fixed proportions. The MRS is undefined, meaning the consumer is unwilling to trade one good for another.

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What is a budget constraint?

The budget constraint represents all possible combinations of two goods that a consumer can purchase with their given income and the prices of the goods. It is a straight line with a negative slope.

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What is the optimal bundle?

The optimal bundle is the combination of goods that maximizes a consumer's utility given their budget constraint. It is found at the point where the indifference curve is tangent to the budget constraint.

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Total Indirect Utility

The total indirect utility is the maximum utility achievable given the price of consumption goods, the price of the bundle of goods, and the consumer's income.

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Total Indirect Utility Function

The total indirect utility function is a function of the prices of consumption goods, the price of the bundle of goods, and the consumer's income. It represents the maximum utility that the consumer can achieve with a given budget constraint.

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Indirect Utility Function

The indirect utility function for a bundle of goods is a function of the bundle's price.

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Maximizing Indirect Utility

The indirect utility function is maximized by the consumer in the presence of their budget constraint when choosing the optimal consumption bundle.

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Maximizing Indirect Utility: Tangency Condition

The consumer's indirect utility is maximized when their budget constraint is active and the slope of the indifference curve is equal to the slope of the budget constraint.

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Changes in Total Indirect Utility

The total indirect utility function is a function of the prices of consumption goods, the price of the bundle of goods, and the consumer's income. It represents the maximum utility that the consumer can achieve with a given budget constraint. Changes in the prices of consumption goods, the price of the bundle of goods, or the consumer's income can change the consumer's total indirect utility.

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Using Indirect Utility to Analyze Welfare

The indirect utility function can be used to analyze how changes in income, prices, or other factors affect a consumer's welfare. For example, an increase in the price of a good is likely to decrease the consumer's welfare, all else being equal.

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Indifference Curve in the Context of Indirect Utility

An indifference curve is a line that represents all possible consumption bundles that give a consumer the same level of utility. In the context of indirect utility, the indifference curve would be a line that is tangent to the budget constraint at the optimal consumption bundle.

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What is Price Elasticity of Demand?

The responsiveness of the quantity demanded of a good to changes in its own price, holding all other factors constant.

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What is Income Elasticity of Demand?

The responsiveness of the quantity demanded of a good to changes in consumer income, holding all other factors constant.

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What is a Normal Good?

A good for which demand increases as income increases.

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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?
  • 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?

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?

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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Unit 1 Review PDF

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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.

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