Microeconomics Corso E

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Presentation transcript:

Microeconomics Corso E John Hey

This week Tuesday: chapter 7 Wednesday: chapter 6 Thursday: chapter 8 We do them in this order because it seems to be easier to understand.

Chapters 7 and 6 In these two chapter we consider the demand (and the supply in chapter 6) of an individual with given preferences and endowment. Two goods – good 1 and good 2. In chapter 7 the endowment is in money. In chapter 6 the endowment is of the two goods. The demand (and the supply in chapter 6) depend on the preferences and the endowment.

Chapter 7 We consider an individual who starts with an endowment of money (chapter 6 with an endowment of the two goods). We find his demands for the two goods. We analyse how the demand varies when the prices and his income change. (These variables are exogenous for the individual). These are called comparative static exercises.

Chapters 6 and 7 We use two (graphical) spaces: The first: to show the preferences of the individual and the budget line: q1 on the horizontal axis and q2 on the vertical axis. The second: to show the effect of changes in an exogenous variable on the demand: q1 (and q2 ) on the horizontal axis and the exogenous variable on the vertical axis.

Chapter 7 We start with an individual with Cobb-Douglas preferences with parameter a = 0.5. The Maple/html file contains other examples: Cobb-Douglas with parameter a = 0.3; Stone-Geary; Perfect Substitutes; Perfect Complements. The shape of the demand curve depends upon the preferences.

Chapter 7 The indifference curves are given by the preferences. The budget constraint is given by the individual’s income and the prices of the two goods. Let us denote by m the income and by (q1, q2) the quantities chosen. The budget constraint is given by: p1q1 + p2 q2 = m ... This is a line with slope –p1/p2 which passes through the points (0,m/p2) and (m/p1,0). Notate bene: the indifference curves and the budget constraint are completely independent. Let us go the Maple file after the next two graphs…

q2 the budget line: p1 q1 +p2 q2 = m m/p2 has slope = -p1/p2 m/p1 q1

Chapter 7 Cobb-Douglas with parameter a q1 = am/p1 and q2 = (1-a)m/p2 Perfect Substitutes 1:a if p1/p2 < a then q1 = m/p1 q2 = 0 if p1/p2 = a then.... if p1/p2 >a then q1 = 0 q2 = m/p2 Perfect Complements 1 with a q1=m/(p1 + ap2) and q2 =am/(p1 + ap2) These formulas are in the promemoria.

Chapter 7 Goodbye!

Capitoli 6 e 7