1. Microeconomics 3070 Prof. Barham
Lecture 1: Introduction
This is a 45 min. class. Need to add in an example of constrained optimization see add this slide

2. Syllabus and Website
Website:
All assignments and solution keys will be posted on the web site.
I will send you a notice when they are posted.
Syllabus

3. Outline Cover chapter 1 What is microeconomics
Economic models
Tools for microeconomics
Constrained optimization
Marginal analysis
Equilibrium analysis
Comparative statics
Next class are going over calculus, may start Chapter 2

4. What is mircoeconomics
Can you buy all the clothing, vacations, sport equipment, health care, food, beauty products, yoga classes, seasons tickets to sport event, donations to charity you want? No
Mircoeconomics models our decision making process on how much you decide to spent on what.

5. What is mircoeconomics
Official Definitions:
Microeconomics is the study of how individuals and firms make themselves as well off as possible in a world of scarcity and the consequences of those individual decisions on the markets and the entire economy.
Microeconomics is the study of the allocation of scarce resources.
Mircoeconomics is also often called price theory.
This is to emphasize the important role that price plays.
Price not only thing studied – think of health care market

6. What is mircoeconomics
Because we can’t have everything, we need to make trade-offs and microeconomics helps us make those tradeoffs.
A society faces 3 key tradeoffs:
Which goods and services to produce
How to produce them
How much labor and inputs should a firm use to produce a car
Who gets the good and services (allocation)

7. What is microeconomics
Workers need to choose how to allocate their time between labor and leisure.
Firms need to choose how to allocate their investment between human capital and machines.
Households need to choose how to allocate their incomes between savings and expenditure.

8. Micro versus Macroeconomics
What is the difference between micro and macro economics?
Microeconomics: behavior of individual economic units like consumers, producers, landowners, families, etc. How and why do they make the decisions they make?
Macroeconomics: analyzes how the entire national economy performs. It analyzes unemployment, inflation, price levels, interest rates (many things we take as given in microeconomics).

9. Economic Models How do economists allocate resources?
They develop theoretical model.
“Everything should be made a simple as possible but not simpler” Albert Einstein

10. Economic Models The models are abstractions of the real world
Too complicated to take into consideration all factors
Without simplifications we would not be able to make predictions.
Like a roadmap, does not give each house, but the bare essentials i.e. major streets, highways and sometime main attractions.
It may appear that the model makes heroic abstractions (assumptions) from the complexities of the real world.

11. Economic Models Example
Determinants of Poster Demand on Campus
You are advertising a big event for the freshman class how many posters will you need?
Factors in your model:
Price to make poster, size of freshman class
Factors not in your model:
Content of poster, placement of poster, relative size of poster
Are there any constraints to this model?
the amount of budget you have to spend on poster advertising.

12. Types of Variables in a Model
Exogenous Variable: one whose value is taken as given in a model.
Endogenous Variable: one whose value is determined within the model being studied
Which factor(s) would have you taken as given in the poster example?
Price, size of freshman class (exogenous)
Which factor(s) are determined by your model?
The quantity of posters needed (or demanded)

13. Tools of Microeconomic Analysis
Constrained Maximization
Equilibrium Analysis
Comparative Statics

14. Constrained Optimization
Constrained optimization: an analytical tool used when a decision maker seeks to make the best (optimal) choice, taking into consideration possible restrictions on the choice.

15. Constrained Optimization
This tool has two parts:
Objective function: is the relationship the decision maker seeks to optimize (maximize or minimize).
Constraint: limits or restrictions that are imposed on the decision maker

16. Constrained Optimization Examples
You want to maximize your happiness during your second year at CU.
Objective function:
Happiness=f(days skied per month, beers per week).
Constraints: s.t. (subject to)
Income, time for leisure

17. Marginal Analysis
Solution to a constrained optimization problem depends on the marginal impact of the decision variables on the value of the objective function.
But what is marginal?
The term marginal tells us how the value of the objective function changes as a result of adding one unit of a decision variable.

18. Marginal Analysis
How much do you spend on beer and skiing to Maximize your happiness if you have 100 budget?
Happiness
$ spent
From beer
From skiing 25 80 4 50 90 10 75 92 15
100 94 20
Marginal Happiness
From beer
From skiing 80 4 10 6 2 5

19. Marginal Analysis $100 on beer = 94 units of happiness
$75 beer plus $25 skiing = 96 units of happiness.
$50 on beer and $50 on skiing = 100 units of happiness.
Yes a day of skiing with a nice apres ski makes you very happy.

20. Marginal Analysis You just did a constrained optimization problem
Optimize happiness (beer and skiing) subject to you $100 weekly entertainment budget.
Max H(B, S) s.t. Ps*S + Pb*B=100
where B= quantity of beer; Pb=price beer
S=days of skiing; Ps=price skiing.

21. Equilibrium Analysis Price (P) Doctors visit Qd: demand Qs Supply P*50
Equilibrium: Qd=Qs Q1 . 10 Q2
Quantity (Q)
Number of appointments per day

22. Equilibrium Analysis
In a competitive market, equilibrium is achieved at a price at which the market clears – that is, at a price at which the quantity offered for sale just equals the quantity demanded by consumers.
Since Qd = Qs at P*, there is no upward or downward pressure on price. Hence, price could stay at P* indefinitely.

23. Equilibrium Analysis What if price is higher than P*?
Doctors visit
Qd: demand
Qs Supply
Excess Supply 70 50 8 13
Quantity (Q)
Number appointments per day

24. Equilibrium Analysis What is price is lower than P*
Doctors visit
Qd: demand
Qs Supply 70 50 30
Excess Demand 5 13
Q Quantity
Number of appointments per day per doctor

25. Comparative Statics
Examine how a change in an exogenous variable will affect the level of an endogenous variable.
First, look at the value of the endogenous variable at the initial level of the exogenous variable
Second, look at the value of the endogenous variable at the new level of the exogenous variable.

26. Comparative Statics Example
Price ($)
Doctors visit D S P* 50 . 10 Q
Number of appointments per day per doctor Q*

27. Comparative Statics Example
Suppose we are in China and there is an outburst of the Avian Flu. A few weeks later there are some new regulations put on doctors and they are unhappy about it. So they do a rotating strike.
How will these factors affect our Supply and Demand curve and the price?

28. Comparative Statics Example
Price ($)
Doctors visit
Outbreak of avian flu, D2 D1 S1
Moves demand to the right,
but supply curve does not change P2 60 P1 50 . 10 13 Q
Number of appointments per day per doctor Q1 Q2

29. Comparative Statics Example
The rotating strike will lead to P
Price ($)
Doctors visit D2 S2 D1
A reduction in supply S1
This is a shift to the left P3 65 11 Q
Number of appointments per day per doctor Q3