Microeconomics 2 John Hey

Module Representatives Athena Fu Emma Wilson-Young Krishna Patel Liz Blum Michaela Lucas Kenny Yang

Office hours Mine are now decided: John Hey: Wednesdays 2.30 to 4.30 The TFs have still to decide theirs. Dan Howdon: James Lomas: Dominic Spengler:

Note Note that we are at present doing static (one-period) analysis without production: People are born, have given preferences and endowments, trade them in markets for a preferred bundle of goods, consume the preferred bundle and die. End of story. We also assume that preferences are given.

Chapters/Lectures 3 and 4 These lectures are very similar: Lecture 3 deals with a discrete good and Lecture 4 with a continuous good. In both we will be operating with two graphical spaces: 1.For indifference curves, with money on the vertical axis and the quantity of some good on the horizontal axis. 2.For demand and supply curves, with the price of the good on the vertical axis and the quantity of the good on the horizontal. Note the units of the variables on the axes (in 1: £ on the vertical and number of units on the horizontal; in 2: £/unit on the vertical and number of units on the horizontal).

Chapter 2 We introduced the following concepts: Reservation price. Surplus/profit. Competitive equilibrium (in which there is a price at which the demand equals the supply). We have shown (in a special case) that in a competitive equilibrium the total surplus is maximised.

Chapter 2: definitions and results The reservation price for a buyer......is the maximum price that he or she is willing to pay. The reservation price for a seller is the minimum price that he or she would accept. The surplus of a buyer is … … the area between the price paid and the demand curve. The surplus of a seller is … … the area between the price received and the supply curve.

Chapter 3 We prove these results in a particular context. We introduce the important concepts of indifference and an indifference curve. We work today with a discrete good, that is a good that can be bought or sold only in integral units. We work today with a particular kind of preferences – which are called quasi-linear preferences. Later we consider generalisations.

Assumptions about preferences The individual starts with 3 units of some good and 30 units of money (this is his or her endowment). His or her reservation price for the first unit bought is £5… …for the second unit bought is £3… …for the third unit bought is £2. His or her reservation price for the first unit sold is £10….for the second unit sold is £30. Would not sell a third unit (reservation price is infinite) and would not buy a fourth unit (reservation price is zero). Let us go the Maple/html file.

What we have done (discrete good) We have worked with quasi-linear preferences – where indifference curves are parallel in a vertical direction. We have proved that The surplus of a buyer is … … the area between the price paid and the demand curve. The surplus of a seller is … … the area between the price received and the supply curve.

Chapter 3 Goodbye!