Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 1
Economic Models
The Theory of Economics does not furnish a
body of settled conclusions immediately
applicable to policy. It is a method rather
than a doctrine, an apparatus of the mind, a
technique of thinking which helps its
possessor to draw c
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
TOPIC
Choice and Demand
Economic Rationality
The principal behavioral postulate is
that a decisionmaker chooses its
most preferred alternative from those
available to it.
The available choices constitute the
choice set.
How is the most preferred bundle
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
The Envelope Theorem
The envelope theorem concerns how the
optimal value for a particular function changes
when a parameter of the function changes
This is easiest to see by using an example
The Envelope Theorem
Suppose that y is a function of x
y = x
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Price Change: Income and
Substitution Effects
THE IMPACT OF A PRICE
CHANGE
Economists often separate the
impact of a price change into two
components:
the substitution effect; and
the income effect.
THE IMPACT OF A PRICE
CHANGE
The substitution effect i
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
INCOME AND SUBSTITUTION
EFFECTS
1
Demand Functions
The optimal levels of x1,x2,xn can be
expressed as functions of all prices and
income
These can be expressed as n demand
functions of the form:
x1* = d1(p1,p2,pn,I)
x2* = d2(p1,p2,pn,I)
xn* = dn(p1,p2,p
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Toipc
Revealed Preference
Revealed Preference Theory
1938
Paul Samuelson
Consumption Theory in Terms of Revealed
Preference, 1948
Advantage:
Consumer
Choices
are
observable where as preferences are not.
The economic study of consumer tastes as
determi
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
6/19/2014
Evernote shared notebook:
Modern Welfare Criteria
Tuesday, May 22 2012, 9:12 PM
General Equilibrium and Perfect Competition
General Equilibrium of Exchange and Consumption
1. We assume that there is no production and the economy is a pure exchan
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Franco Donzelli
Topics in the History of Equilibrium Analysis
Lesson 3
Marshall vs. Walras on
Equilibrium and Disequilibrium
Ph.D. Program in Economics
University of York
FebruaryMarch 2008
Introduction 1
The problem:
Do Walrass and Marshalls approaches
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
6/19/2014
Evernote shared notebook:
Theory of Distribution
Friday, April 6 2012, 12:38 AM
Q. State and explain the theory of distribution in which the exhaustion of the total product is taken care of
without leaving any residual claimant and also state cl
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
The Nature of Regression Analysis
Historical origin of the term Regression
The term REGRESSION was introduced by Francis
Galton
Tendency for tall parents to have tall children and for
short parents to have short children, but the average
height of child
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
THE PROBABILITY DISTRIBUTION OF DISTURBANCES UI
Adding the normality assumption for ui to the assumptions of the
classical linear regression model (CLRM), we obtain what is
known as the classical normal linear regression model (CNLRM).
The classical nor
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Two Variable Regression Analysis: Some Basic Ideas
Regressionpoints
1) The key idea behind regression analysis is the statistical
dependence of one variable on one or more other
variable(s)
2) The objective of regression analysis is to estimate and/or
pr
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Two Variable Regression Model: Estimation
THE METHOD OF ORDINARY LEAST SQUARES
Econometric methods such as regression help to overcome the problem
of complete uncertainty and provide guidelines on planning and decision
making
Under certain, the method o
Birla Institute of Technology & Science, Pilani  Hyderabad
MicroEconomics
ECON F242

Summer 2016
Chapter 15
Imperfect Competition
Chapter Overview
Monopolistic
competition
Market in which firms can enter freely, each
producing its own brand or version of a differentiated
product.
Oligopoly
Market in which only a few firms compete with one
another, an
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Topic
Preferences
Rationality in Economics
Behavioral Postulate:
A decisionmaker always chooses its
most preferred alternative from its
set of available alternatives.
So to model choice we must model
decisionmakers preferences.
Preference Relations
Compa
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
INCOME & SUBSTITUTION
EFFECTS
Income Effects
A good for which quantity demanded
rises with income is called normal.
Therefore a normal goods Engel
curve is positively sloped.
Income Effects
A good for which quantity demanded
falls as income increases is
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 6
Demand Relationship
among Goods
The TwoGood Case
The types of relationships that can
occur when there are only two goods
are limited.
But this case can be illustrated with
twodimensional graphs.
Gross Complements
When the price of y falls, t
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Competitive Markets:
Applications
Overview
1.Deadweight
1.Deadweight Loss
Loss
AA Perfectly
Perfectly Competitive
Competitive Market
Market Without
Without
Intervention
Intervention Maximizes
Maximizes Total
Total Surplus"
Surplus"
2.Government
2.Governm
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 3
Preferences and
Utility
Consumer Behavior
Theory of consumer behavior
Description of how consumers allocate incomes
among different goods and services to maximize their
wellbeing.
Consumer behavior is best understood in these
distinct steps:
1.
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 11
Profit Maximization
Chapter Overview
1.The
1.The Profit
Profit Maximization
Maximization Condition
Condition
2.Marginal
2.Marginal Revenue
Revenue and
and Elasticity
Elasticity
3.Short
3.Short Run
Run Equilibrium
Equilibrium
Short
Short Run
Ru
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 4
Utility Maximization
and Choice
Consumer Behavior
Theory
of consumer behavior
Description of how consumers allocate incomes
among different goods and services to maximize their
wellbeing.
Consumer behavior is best understood in these
distinct
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 10
Cost Functions
Various Cost Concept
1) Explicit Cost
2) Implicit cost
3) Opportunity Cost
4) Economic Cost
5) Accounting cost
Economic Cost
The economic cost of any input is the payment required
to keep that input in its present employment
th
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 12
The Partial Equilibrium
Competitive Model
Market Demand
Assume that there are only two goods (x and y)
An individuals demand for x is
Quantity of x demanded = x(px,py,I)
If we use i to reflect each individual in the market, then the
market d
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 5
Income and Substitution
Effects
Demand Functions
The optimal levels of x1,x2,xn can be expressed
as functions of all prices and income
These can be expressed as n demand functions
of the form:
x1* = d1(p1,p2,pn,I)
x2* = d2(p1,p2,pn,I)
xn* = dn
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 9
Production Functions
Chapter Overview
11.The
The Production
Production Function
Function
Marginal
Marginal and
and Average
Average Products
Products
Isoquants
Isoquants
The
The Marginal
Marginal Rate
Rate of
of Technical
Technical
Substitution
S
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Chapter 15
Imperfect Competition
Chapter Overview
Monopolistic
competition
Market in which firms can enter freely, each
producing its own brand or version of a differentiated
product.
Oligopoly
Market in which only a few firms compete with one
another, an
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
CHAPTER 14
MONOPOLY
Chapter Overview
1.The Monopolists Profit Maximization Problem
The Profit Maximization Condition
Equilibrium
The Inverse Pricing Elasticity Rule
Effects of Shift in demand and MC.
Effect of a excise tax
2. Multi  plant Monopoly
3
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Game Theory and
Strategic Behavior
Strategic Behavior
Decisions that take into account the predicted reactions of rival firms
Interdependence of outcomes
Game Theory
Players:
The decision makers ( i.e. the managers of oligopolistic firms)
whose behav
Birla Institute of Technology & Science, Pilani  Hyderabad
Econometrics
ECON F242

Spring 2016
Kinked Demand Curve
The Kinked Demand Curve
$
P*
D
Q*
quantity
MR Curve
for the top part of the Demand Curve
$
D
P*
MR
Q*
quantity
Drawing MR Curve
for the bottom part of the Demand Curve
$
P*
MR
D
Q*
quantity
MR Curve
for the bottom part of the Demand Cu