THE BIG PICTURE
ECON 111: Microeconomics
The Big Picture with Perfect Competition
At the market level: Supply curve intersects Demand curve P *
At the firm level: P * = MC q*
q * = Q *
Market Demand curve
Market Supply curve
Individual Demand curves
COSTS IN THE LONG RUN
Pindyck, Rubinfeld & Koh 7.3, 7.4
The price of labour = wage rate w
The price of capital = rental rate r
Imagine that the capital is being rented from its owner.
Then the rent you would pay the owner
COSTS IN THE SHORT RUN
Pindyck & Rubinfeld
All Firms Think About Costs
Production requires inputs.
Inputs have to be hired/rented.
So they must be compensated.
Therefore, the firm incurs a cost in order to produce.
Firms want to produce
(WITH 2 VARIABLE INPUTS)
Pindyck & Rubinfeld 6.3, 6.4
Production with two variable inputs: Isoquants
TABLE 6.4 Production with Two Variable Inputs
Pindyck & Rubinfeld 4.3, 4.4
Individual demand: relationship between price & demanded by an individual
Market demand: the relationship between price & the total quantity demanded (by
all individuals togethe
INDIVIDUAL DEMAND &
Pindyck & Rubinfeld 4.1, 4.2
The Price Consumption Curve
Initial choice = A.
PC constant, I constant; PF
Budget line will rotate out.
New choice = B
Higher level of satisfaction.
Each time PF falls there i
3. BUDGETS & CHOICE
Rubinfeld & Pindyck 3.2, 3.3
The budget constraint is a straight line.
The points on the line, and below the line (in the positive
quadrant) are the budget set.
The equation of the budget constraint:
Ppp + Pee
2. CONSUMER PREFERENCES
Pindyck & Rubinfeld 3.1, 3.2, 3.3
The economists point of view
To analyse how a person decides how muc h to buy, we
need three fundamentals:
the persons preferences
the persons budget constraint
How much do they value each opti
Rubinfeld & Pindyck 2.2
The Market Mechanism
At the higher price P1, a
surplus develops, so price falls.
At the lower price P2, there is
a shortage, so price is bid up.
The market clears at price P0
and quantity Q0.