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

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

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

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

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

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

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

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

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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

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
February-March 2008
Introduction 1
The problem:
Do Walrass and Marshalls approaches

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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

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

Demand Curves
N V M Rao
Effect of Income on Demand
Normal Goods
Inferior Goods
Effect of Price on Demand
Giffen Goods
Demand Curve
Effect of Price
Demand Curve - Examples
Demand Curve - Examples

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

Chapter 6
Demand Relationship
among Goods
The Two-Good Case
The types of relationships that can
occur when there are only two goods
are limited.
But this case can be illustrated with
two-dimensional graphs.
Gross Complements
When the price of y falls, t

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

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
well-being.
Consumer behavior is best understood in these
distinct steps:
1.

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

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
well-being.
Consumer behavior is best understood in these
distinct

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

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

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

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

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

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

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

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.
Effects of a Tax
2. Multi-plant Monopoly and Carte