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1、MICROECONOMICSClassroom Lecture Notes(3 credits,as of 2004),based on Hal R.Varians Intermediate Microeconomics,Sixth Edition,referring to Pindyck and Rubinfelds Microeconomics,Fourth Edition.,Chapter 0,Economics,The source of all economic problems is scarcity.,Problem of trade-off,and choice.Economi
2、cs,as a way of thinking,as a dismal science.Problems-solutions-hidden consequences.,Main decision-making agents:,1 individuals(household),2 firms,and 3 governments.,Objects of economic choice are commodities,including goods and services.,Main economic activities:,Consumption,Production,and Exchange.
3、,Microeconomics and macroeconomics:,to show the market mechanism(the invisible hand),to supplement it.,The circular flow of economic activities.,product market factor market,The product market and the factor market.,The market relation is mutual and voluntary.Positive issues and normative issues.,Ma
4、rginal analysis,Relations between Total magnitudes,Average magnitudes,and Marginal magnitudes.,1,MM is the slope of the TM curve;2,AM is the slope of the ray from the origin to the point at the TM curve;,TM,MM(x*),AM(x*),x*,x,3,TM increasing(decreasing)if and only if MM 0(MM 0);4,If TM is at maximum
5、 or minimum,then MM=0;,5,AM increasing(decreasing)if and only if MM AM(MM AM);6,If AM is at maximum or minimum,then MM=AM,or MM cuts AM at the latters maximum or minimum.,Chapter 1,The Market,Economics proceeds by developing Models of social phenomena.By a model we mean a simplified representation o
6、f reality.,Exogenous variables:taken as determined by factors not discussed in a model.,Endogenous variables:determined by forces described in the model.,The optimization principle:,People try to choose whats best for them.,The equilibrium principle:,Prices adjust until demand and supply are equal.,
7、The demand curve:,A curve that relates the quantity demanded to price.,The reservation price:,Ones maximum willingness to pay for something.,From peoples reservation prices to the demand curve.,Similarly,the supply curve.,Fig.,Pareto efficiency:,A concept to evaluate different ways of allocating res
8、ources.,A Pareto improvement is a change to make some people better off without hurting anybody else.,An economic situation is Pareto efficient or Pareto optimal if there is already no way to make any more Pareto improvement.,Short run and long run,Equilibria in the short run(some factors are unchan
9、ged)and in the long run.,Chapter 2,Budget Constraint,*Vector variables and vector functions.*The inner product of two vectors.*With the price vectorp=(p1,pn),the value of the commodity bundle x=(x1,xn)is pTx=i pixi.,However,two goods are often enough to discuss.,The budget constraint:p1 x1+p2 x2 m.,
10、The budget line and the budget set(the market opportunity set).,The slope of the budget line:d x2/d x1=p1/p2.,How the budget line moves when the income changes,or when a price changes.,x2,x1,Budget set,Budget lineSlope=-p1/p2,m/p2,m/p1,Budget line and budget set,x2,x1,Budget line,Slope=-p1/p2,m/p2,m
11、/p2,m/p1,m/p1,Increasing income,Slope=-p1/p2,m/p2,Budget line,Slope=-p1/p2,m/p1,m/p1,Increasing price,A subsidy is the opposite of a quantity tax.,Taxes,quantity taxes,value taxes(ad valorem taxes),and lump-sum taxes.,Rationing.,Their effects on the budget set.,Chapter 3,Preferences,*Prerequisite:A
12、binary relation R on X is said to beComplete if xRy or yRx for any pair of x and y in X;Reflexive if xRx for any x in X;Transitive if xRy and yRz imply xRz.,Rational agents and stable preferences,Bundle x is strictly preferred(s.p.),or weakly preferred(w.p.),or indifferent(ind.),to Bundle y.(If x is
13、 w.p.to y and y is w.p.to x,we say x is indifferent to y.),Assumptions about Preferences,Completeness:x is w.p.to y or y is w.p.to x for any pair of x and y.,Reflexivity:x is w.p.to x for any bundle x.,Transitivity:If x is w.p.to y and y is w.p.to z,then x is w.p.to z.,The indifference sets,the indi
14、fference curves.,They cannot cross each other.,Fig.,indifference curves,x2,x1,Perfect substitutes and perfect complements.Goods,bads,and neutrals.Satiation.Figs,Blue pencils,Red pencils,Indifference curves,Perfect substitutes,Perfect complements,Indifference curves,Left shoes,Right shoes,Well-behave
15、d preferences are monotonic(meaning more is better)and convex(meaning average are preferred to extremes).Figs,x2,x1,Betterbundles,(x1,x2),Monotonicity,Betterbundles,The marginal rate of substitution(MRS)measures the slope of the indifference curve.MRS=d x2/d x1,the marginal willingness to pay(how mu
16、ch to give up of x2 to acquire one more of x1).Usually negative.Fig,Convex indifference curves exhibit a diminishing marginal rate of substitution.Fig.,x2,x1,Convexity,Averagedbundle,(y1,y2),(x1,x2),Chapter 4,Utility,(as a way to describe preferences),Utilities,Essential ordinal utilities,versusconv
17、enient cardinal utility functions.,Cardinal utility functions:u(x)u(y)if and only if bundle x is w.p.to bundle y.The indifference curves are the projections of contours of u=u(x1,x2).Fig.,Utility functions are indifferent up to any strictly increasing transformation.Constructing a utility function i
18、n the two-commodity case of well-behaved preferences:Draw a diagonal line and label each indifference curve with how far it is from the origin.,Examples of utility functions,u(x1,x2)=x1 x2;u(x1,x2)=x12 x22;u(x1,x2)=ax1+bx2(perfect substitutes);u(x1,x2)=minax1,bx2(perfect complements).,Quasilinear pr
19、eferences:All indifference curves are vertically(or horizontally)shifted copies of a single one,for example u(x1,x2)=v(x1)+x2.,Cobb-Douglas preferences:u(x1,x2)=x1c x2d,or u(x1,x2)=x1ax21-a;and their log equivalents:u(x1,x2)=c ln x+d ln x2,or u(x1,x2)=a ln x+(1 a)ln x2,Cobb-Douglas,MRS along an indi
20、fference curve.Derive MRS=MU1/MU2 by taking total differential along any indifference curve.,Marginal utilities MU1 and MU2.,Marginal analysis,MM is the slope of the TM curve,AM is the slope of the ray from the origin to the point at the TM curve.,500,490,480,The demand curve,Reservation price,Numbe
21、r of apartment,From peoples reservation prices to the market demand curve.,supply,Demand,P,Q,Equilibrium,P*,Q*,E(P*,Q*),supply,Demand,p,q,E,Equilibrium,x2,x1,Budget line,Budget set,Rationing,R*,Marketopportunity,MRS,Indifferencecurve,Slope=dx2/dx1,x2,x1,dx2,dx1,Chapter 5,Choice of consumption,Optima
22、l choice is at the point in the budget line with highest utility.The tangency solution of an indifferent curve and the budget line:MRS=p1/p2.Fig.,Basic equations:MU1/p1=MU2/p2 and p1 x1+p2 x2=m.Figs.(How if negative solutions.),Interior solutions,and Boundary(Corner)solutions.Kinky tastes.Figs.,Thre
23、e approaches to the basic equations:Graphically;As-one-variable;*Lagrangian.,The optimal choice is the consumers demanded bundle.The demand function.,Examples:perfect substitutes,perfect complements,neutrals and bads,concave preferences.Figs.,Cobb-Douglas demand functions.*Choosing taxes.(By*Slutsky
24、 decomposition.)Figs.,Chapter 6,Demand,Demand functions:x1=x1(p1,p2,m),x2=x2(p1,p2,m).,Normal and inferior goods(by income);Fig.Luxury and necessary goods(by income).Fig.Ordinary and Giffen goods(by price).Fig.,The income expansion path or the income offer curves,and the Engel curve.Figs.,The price
25、offer curve and the Demand curve.Figs.,Substitutes and complements.Cobb-Douglas preferences.Quasilinear preferences.,*Homothetic preferences:if(x1,x2)is preferred to(y1,y2),then(tx1,tx2)is preferred to(ty1,ty2)for any t 0.Thus both the income offer curves and the Engel curves are all rays through th
26、e origin.,Example:Quasilinear preferences lead to vertical(horizontal)income offer curves andvertical(horizontal)Engel curves.,Chapter 8,Slutsky Equation,How the optimum moves when the price of a good changes?,Decomposition:the total effect=the substitution effect+the income effect.p139,The pivot gi
27、ves the substitution effect,the shift gives the income effect.P103andp137,Slutsky identity,pivoting the budget line around the original choice.Fig.Hicks decomposition,pivoting the budget line around the indifference curve.Fig.,Chapter 9,Buying and Selling for a consumer with an endowment,x1,x1,x2,p1
28、,1,1,Net and gross demands,net supply.Offer curve and demand curve.p164,Labor supply p174,$,Leisure R,Labor,W,Leisure,E,Chapter 10,Intertemporal Choice,Suppose for example in a 3-period model,the consumption is ck and the interest rate is rk in period k,then the present value of the consumptions is
29、c1+c2/(1+r1)+c3/(1+r1)(1+r2).p190,Chapter 12,Uncertainty,Utilities and probabilities.,Expected utility functions,or von Neumann-Morgenstern utility functions.They are indifferent up to any positive affine transformation.(affine transformation:y=a+bx).,Risk aversion and risk loving.,Concave vs convex
30、 utility.,The second derivatives.,$,$,U,U,Chapter 14,Consumers surplus,1 2 3 4 5 6,p,r1,r2,r3,r4,r5,r6,Consumers Surplus p250,消费者得益,总收益,Producers surplus p259,Producers surplus,Supply curve,Q,P*,Q*,P,Q,Supply curve,Change in producers surplus,R,T,Q,Q,P,P,P,The water-diamond paradox,PdPw,Q,Calculatin
31、g gains and losses,Change in consumers surplus,B,T,Chapter 15 Market Demand,One can think of the market demand as the demand of some“representative consumer”.,Adding up demand curves:The horizontal summation principle.,+,=,Horizontal summation,PRICE,DEMAND CURVE,D(p),QUANTITY,It is the sum of the in
32、dividual demand curve,The market demand curve,The price elasticity of demand:=(q/q)/(p/p)=(p/q)/(p/q),or=(d q/q)/(d p/p)=(p/q)/(d p/d q)=slope of ray/slope of curve.,A good has an elastic(inelastic,unitary)demand if|1(|1,|=1).,Elasticity and revenue.R=pq,R=qp+pq,and then R/p=q 1+(p)where(p)=(pq)/(qp
33、).,QUANTITY,PRICE,a/2,a/2b,=,1,=1,1,=0,The elasticity of a linear demand curve,p=a b q,p267,Strikes and profits.The Laffer curve.,Similarly,MR=R/q=p(q)1+1/(q)where(q)=(pq)/(qp).,The income elasticity of demand.The arc elasticityandthe point elasticity.,PRICE,QUANTITY,a,a/2,Slope=-2b,Slope=-b,a/2b,a/
34、b,MR,Demand,AR,Marginal revenue p275,Marginal revenue for a linear demand curve.,MR=p(q)1-1/e,D,AR,QUANTITY,PRICE,Marginal revenue,MR for a constant elasticity demand curve,Chapter 16Equilibrium,The market supply curve.The competitive equilibrium.Pareto efficiency.,Supply,Demand,QUANTITY,PRICE,Pd,Pd
35、=Ps=P*,Ps,Willing to buy at this price,Willing to sell at this price,Q,Pareto efficiency p301,Q*,Market supply and market shortage,P*,P,Q*,Qd,Qs,Market shortage,equilibrium,price,quantity,supply,demand,Shortage is not scarcity.,QUANTITY,PRICE,p*,q*,Demand curve,Supply curve,PRICE,QUANTITY,q*,p*,Supp
36、ly curve,Demand curve,A,B,Special cases of equilibrium p291,Algebra of the equilibrium.Comparative statics.Shifting both curves.p294,Taxes.DistinguishPp,the price paid by consumers,Pr,the price received by producers,andPo,the original price.,Supply,Demand,QUANTITY,PRICE,A,C,Pp,Pr,Q*,Amount of tax re
37、venue:A+C,The deadweight loss of a tax p301,The deadweight loss of the tax:B+D,B,D,Chapter 17Technology,Inputs and outputs.Factors of production:land,labor,capital,raw materials,and so on.,Y=f(X)=production function,Y=Output,X=Input,Production set,A production set p307,Examples of technology(isoquan
38、ts analysis):,Fixed proportions,Perfect substitutes,Cobb-Douglas.Figs.p308,Isoquants,x1,x2,Fixed proportion,Isoquants,x1,x2,Perfect subsitutes,Assumptions of technology:monotonic(free disposal),and convex.p310,(a1/2+b1/2,a2/2+b2/2),isoquant,x1,x2,a2,b2,a1,b1,The marginal product,MPi=d y/d x i.Y is o
39、utput,The technical rate of substitution(TRS):,With d y=0 along any isoquant,TRS(x1,x2)=d x2/d x1=MP1(x1,x2)/MP2(x1,x2).,The long run(LR)and the short run(SR),Returns to scale:Increasing,decreasing,and constant:f(t x)t f(x)=,Chapter 18Profit Maximization,The organization of firms:,Proprietorships,pa
40、rtnerships,corporations.,SR profit maximization,=py-w1x1-w2x2 y=/p+w2x2/p+w1x1/p describes isoprofit lines,max x1 gives pMP1=w1.Fig.p323,Isoprofit lines slope=w1/p,y=f(x1,x2)Production function,x1,x1*,Output,y*,/p+w2x2/p,Profit maximization,Optimum lies on the tangency of an isoprofit line and the p
41、roduction function.,P324 Comparative statics:,Increasing p increases x1 and then y.Increasing w1 reduces x1,and thus the factor demand curve follows.LR:both x1 and x2 are variable.Figs.,A,x1,f(x1),High w1,Low w1,B,x1,f(x1),Comparative statics,Low p,High p,要素价格,产品价格,Chapter 19,Cost Minimization,Basic
42、 model:,min x1,x2 w1 x1+w2 x2 subject to f(x1,x2)=y,gives c(w1,w2,y),Isocost lines:p337,x2=C/w2 w1x1/w2.,Tangency of an isocost line and an isoquant.,MP1(x1,x2)/MP2(x1,x2)=TRS(x1,x2)=w 1/w 2,Isocost lines slope=w 1/w 2,Isoquant f(x1,x2)=y,Optimal choice,x2*,x2,x1*,x1,.,Minimizing costs for y=minax1,
43、bx2;完全互补 y=ax1+bx2;完全替代 and y=x1a x2b.Cobb-,Fixed and variable costs.(FC and VC),Total,average,marginal,and average variable costs.(TC,AC,MC and AVC),MC()AC if and only if AC is increasing(decreasing),MC cuts AC(AVC)at ACs(AVCs)extreme.,MC,AVC,AC,y,ACAVCMC,.,.,Chapter 20,Cost Curves,The area under M
44、C gives VC:,MC=VC,MC,Variable costs,MC,y,Division of output among plants of a firm.,MC1,MC2,Typical cost curves.,c(y)=y 2+1.,Example:,AC MCAVC,y,MC,AVC,AC,The cost curves for c(y)=y 2+1,.,2,1,LR and SR cost curves.,y,AC,SAC=C(y1,k*)/y,LAC=C(y)/y,.,y*,Short-run and long-run average costs,y,AC,Short-r
45、un average cost curves,Long-run average cost curves,y*,Short-run and long-run average costs,are costs that are not recoverable.A special kink of fixed costs.,Sunk costs,Chapter 21,Firm Supply,Pure competition.,Price Taker.,The demand curve facing a competitive firm.p368,Q,P,P*,Market price,Demand cu
46、rve facing firm,Market demand,The supply decision:,FOC:MC(y*)=p.,SOC:MC(y*)0.,The firms supply curve is the upward-sloping part of MC that lies above the AVC curve.,The part of MC is also seen as the inverse supply function.,MC,AVC,AC,y,ACAVCMC,P,y2,y1,firms supply curve,Three equivalent ways to mea
47、sure the producers surplus(=R VC=+FC).p375,P377 Example:,c(y)=y 2+1.,LR:p=MC(y,k(y),vs,SR:p=MC(y,k),Chapter 22,Industry Supply,Horizontal summation gives,the industry supply.,Y,P,S1,S2,S1+S2,Entry and exit.,The“zero profit”theorem.,Free entry vs barriers to entry.,Economists versus lobbyists,Rent se
48、eking.,Chapter 23,Monopoly,The coincidence of the inverse demand curve D and the average revenue curve AR.Fig.,With MR=d R/d y=p(y)1+1/(y),p(y)=MC(y)/1 1/|(y)|.,Two equivalent ways to determine the equilibrium:MC=MR,or AR=MC/(1|).Figs.FOC:MC=MR.SOC:MC MR.,The impact of taxes on a monopoly.p411Ineffi
49、ciency of monopoly.Fig.p412 Deadweight loss of monopoly.Fig,Inefficiency of monopoly,Mc,MR,Demand,AR,Price,pm,pc,ym,yc,output,Deadweight lost,Deadweight loss of monopoly,A,B,C,PRICE,MonopolyPrice P*,Competitiveprice,MC,Demand,AR,MR,Y*,output,垄断收益,Natural monopoly.Figs.p417 What causes monopolies:by
50、nature or by permission.The minimum efficient scale factor.Regulation of monopoly:AC=AR.,Chapter 24,Monopoly Behavior,Price discriminations of first-degree(perfect),of second-degree(bulk discounts),andPrice discrimination of third-degree(market segmentation):Figs.,MC(y1+y2)=MR1(y1)=MR2(y2)gives p1 1
