Intermediate Microeconomics Econ 301

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Intermediate Microeconomics Econ 301 Instructor: Marek Weretka Course Description Textbook Grading Teaching website Attitude (no pain no gain, interactive) Rules Please contact me after class Mc Burney Student Not registered students

REEF Polling: iclicker Laptop/smartphone/iclicker Class Quiz REEF Polling: iclicker Laptop/smartphone/iclicker Q: How much do you like economics I love it I cannot live without it I would die for it All of the above

Roadmap Consumers, Producers, Market Failures 1) Consumer Choice Budget set and preferences Optimal Choice Applications - Labor Market, - Finance - insurance markets Markets (Egegworth Box) 2) Producers and Market Failures - Technology - Monopoly and Oligopoly - Other (Externalities, Public Goods)

Rationality in Economics What does it mean ‘'rational?’’ Behavioral Postulate: A decisionmaker chooses its most preferred alternative from the set of affordable alternatives. Budget set = affordable alternatives To model choice we must have decisionmaker’s preferences.

L01 Budget Set

Consumers: Commodity space Commodity (apples, oranges, cars etc) A Consumption Bundles Math: Consumption bundle is a vector Commodity Space - the set of all consumptions bundles Budget set - set of all consumption bundles that are affordable given prices and income

Assumptions In our simple world 2 commodities Commodities perfectly divisible Selfish agents

Commodity Space: Geometry, 2 goods x2 (Oranges) x1 (Apples)

Budget Set =all affordable bundles (1,1),(2,2),(3,3) Budget constraint Budget set: all affordable bundles p1=$2 p2=$1 m=$6

Budget Set and Real Income x2 p1=2 p2=1 m=6 x1 EI: Real income = income in terms of goods

Slope (Real Price) x2 p1=2 p2=1 m=6 x1 Real price: an apple price in terms of oranges

Budget Set Budget set depends on prices and income What happens to the budget set if income changes? one of the prices changes? Effects of Inflation, taxes

Income goes down x2 p1=2 p2=1 m=6 m=4 x1 Budget line: parallel shift

Oranges more expensive Budget line pivots counterclockwise

Inflation and Budget set p1=2 p2=1 m=6 p1=4 p2=2 m=12 x2 x1

Inflation and Budget set CPI inflation 100% p1=2 p2=1 m=6 p1=4 p2=2 m=6 x2 Quiz: BL Shift A. parallel B. clockwise C: counterclockwise D: none of the above x1

Ad Valorem Tax Tax rate t=100% p1=2 p2=1 m=6 x2 After tax prices x1

The Food Stamp Program Food stamps are coupons that can be legally exchanged only for food. x2 p1=2 p2=1 m=6 F=2 apples Black Market x1

Budget Set with Minimal Purchase Maximal Purchase (Rationing) Quantity discount

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