Comparative curves
Normal
Income , I2 > I1
Inferior
Income
Income consumption curve / income expansion path
I2/P2
I2/P2
X2
X1
I1/P1
Normal
Normal
Hungry
Joe,
Thirsty
Teresa
and
Extrathirsty Ed
all have the same budget constraint.
They have $20 to spend
Lectures Notes on Demand Theory
Comparative Statics refer to the effects of Income and Price Changes on the
optimal consumption of Goods
1. Income effects: Normal, Inferior and Luxury goods
Formally think about what happens to the optimal consumption of a
BC3035: Microeconomic Theory, Problem Set #5
1. Jack Sprat can eat no fat, his wife can eat no lean. Construct an
Edgeworth box diagram for this pair (assuming fixed quantities of fat
and lean) and indicate the contract curve.
2. Nothing in our anal
Practice Problems Ahead of Quiz #3
For #1-2: A machine sorts mushrooms into boxes labeled 12 ounces for sale at Trader Joes stores. Define X as a
variable measuring the actual weight of a box of mushrooms. The guide to the machine states that the standard
Lecture Notes: General Equilibrium
Chapter 28: Exchange (Varian, Intermediate Microeconomics)
Introduction
We have only studied the demand for a single good, and from the introduction course
we know that the interaction of the market demand curve fo
PROBLEM SET 2
(1) Joe Grad has just arrived at the big U. He has a fellowship that covers his tuition
and the rent on an apartment. In order to get by, Joe has become a grader in
intermediate price theory, earning $100 a month. Out of this $100 he must pa
The shut-down decision
If the price is less than SAVC, the firm will shut down (not produce anything.)
The firm ceases to operate if total revenues are less than total variable costs: Pq
SVC
This happens when the price is less than the average variable
Short-run competitive model
Taxes and subsidies (unless lump-sum) are inefficient
Lump sum/Poll/Head tax: a certain amount that must be paid regardless of a
taxpayer's behavior.
Eg. $100 per person. They are perceived as unfair b/c it would burdensome fo
Price elasticity & Total expenditure on x
P1 X Total expenditure = P1X1
Demand
P
Elastic
- < E
TE
Very responsive Q so much offset P, x
< -1
outweighs rise in P
Unit
E = -1
No
elastic
change
Inelastic
-1 < E <
TE
Unresponsive Q a little, P outweighs dec
Microeconomics deals with limitations.
Individuals decision making: people and firms
1. Tradeoffs (incentive)
2. Price Theory
3. Theories and models
Market = collection of buyer-seller interaction in setting market price & equilibrium
quantity
Market dem
Isoquants
Isoquant: a curve that shows combinations of inputs K (capital) & L (labor), yield
same level of output
Marginal rate of technical substitution (MRTS or RTS) is the negative of the slope
of an isoquant.
- measure how many K firm can give up if
Hicksian substitutes and complements
- change in price affect consumption of the "other" good v only substitution effect taken
into account
Hicksian substitutes: pairs of goods for which cross-substitution effects are
positive
if P1 increases, consumption
Cost Functions short run:
Short-run cost functions (STC): cost functions firms face, given that one or more inputs
are held fixed
- derived STC, K is fixed input, and L is variable input
STC =
vK + wL(Q,K)
A, B, and C are the cost minimizing bundles of K
Consumer Surplus
Gross surplus: the total amount a consumer would be willing to pay for a good that she
is consuming.
Marginal willingness to pay: max amount consumer spend for an additional unit of the
good.
It is the marginal value that the consumer pl
Compensated demand curves
- quantity demanded of a specific
good as its price changes, holding utility, rather than income fixed. - reflect only subs
effect of price change, rather than both subs & income effects of price change.
- show change consumptio
Comparative Statics
1. As price of good rises, both K & L increase b/c if P goes up, marginal revenue
product for K & L rises.
2. If w fall/rise, L increase/fall: demand for labor curve slopes down.
Substitution effect: In Theory of firm, subs of one inp
Math Review Notes
Instructor: Rajeev Cherukupalli
1
Introduction: About these notes
The objective of these notes is to help you build on and/or refresh your facility
for math, since mathematical tools are vital to economic analysis.
Mathematics is formal,