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

Roadmap Consumers, Producers, Market Failures 1) Consumers - Budget set - Preferences and Utility - Optimal Choice and Equilibrium - Applications (Labor Market, Finance, ) 2) Producers - Technology - Optimal Choice (Profit Maximization) 3) Market Failures - Monopoly and Oligopoly - Other (Externalities, Public Goods)

Rationality in Economics 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

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

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

Budget Constraints: 3 goods If n = 3 what do the budget constraint and the budget set look like?

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 What happens:

Oranges more expensive What happens:

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

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

The Food Stamp Program Food stamps are coupons that can be legally exchanged only for food. x2 p1=2 p2=1 m=600 F=2 apples Black Market x1

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