Appunti microeconomics Moro

MICROECONOMICS

CLASS I

When we talk about economics or political economy, we mainly refer to big branches, which are microeconomics and macroeconomics.

The difference between the two is that microeconomics is mainly devoted to the analysis of how individuals make choices, so microeconomics studies the individual, by which we mean the economic unit, while macroeconomics is more related with the general economics, so it deals with the relation between aggregates variables and values (employment and unemployment, interest rate, inflations...).

Of course, there is a relation between the two because what can be seen on the macro level is the result of what individuals are doing.

INTRODUCTION

Microeconomics is founded on the evolution of the thinking in classical economics:

• Mercantilism (16^th-beginning 18^th century)
• Physiocracy (Quesnay: 18^th century)
• Classical Economics (Smith, Ricardo, Malthus, Mill: end 18^th-half 19^th century)
• Marxism (Marx: 19^th century)
• Neo-classical Economics (Marshall, Jevons, Walras, Pareto: end 19^th century-20^th century)
• Keynesian Economics (Keynes: 20^th century)
• Monetarism (Chicago, Milton Friedman, 20^th century)

ADAM SMITH

The main elements that are interesting in microeconomics are:

1. Efficiency of choices: something is efficient if there is no way we can do that in a better way
• There are different ideas of efficiency:
• Economic Efficiency
• Productive Efficiency (production process)
• Allocative Efficiency
2. Social Optimality

The environment in which we are working, which is the market, because the reference of all microeconomics is the market, (from the 2 sides: demand and supply), what we're doing in the market and the way by which the market is working conducts to social optimality. So, market forces are working to produce the best possible outcome and if there are no particular situation the best result will be non-intervention (make the market work the way it likes).

HOW INDIVIDUALS MAKE CHOICES

An individual choice is the decision of a single decision unit (a consumer, a household, a firm, an agent ...) on what to do

There are some basic principles that are related to choices:

• Resources are scarce: as individual units we have to make decisions, but we are limited in our choices and limitation constraints come from different sources.
• The real cost of something is what we give up getting it: opportunity cost
• Every time that we do something there is a cost, and the opportunity cost is a different idea of the cost, it is the value of what we have to give up by doing something, so it relates the value of something to the value of something else and it's the real cost (not made by money, but by something concrete)
• “How much”: it is a decision at the margin (neo-classical)

The idea of marginality is very important within microeconomics, and when we talk about marginal it means that we are just concentrated on the last unit of interest

• People usually exploit opportunities to improve their conditions, they receive incentives or disincentives from the market/environment, and they respond to them

INTERACTIONS: HOW ECONOMY WORKS

Microeconomics studies individual units, studies how they make choices, but also the interactions between units (e.g., firms producing goods and consumers individually buying goods), so there is an exchange between units (demand and supply, which is what we consider an exchange between individuals)

There are also other principles, which are:

• Exchange produces benefits (advantages)
  • In a market economy individuals trade: they supply goods and services to others, and they receive other goods and services in exchange and there are benefits, in fact individuals may obtain “more things” through exchange than by being self-sufficient
• Markets tend to be in equilibrium, which means that there is a situation in which there is no incentive to move away (optimal status)
  • Economic systems reach the equilibrium because individuals exploit any opportunity/incentive to improve their conditions and every time there is a change the economy will move towards a new equilibrium
• Resources should be in the most efficient way
• Markets usually are efficient
• When markets are not efficient, public intervention may be beneficial

COURSE

CONSUMER’S PROBLEM

The consumer is the individual (economic) unit taking purchasing decision (is the individual who is taking consumption decisions).

There are 3 elements that are important for the consumption decision (important in analysing the choices of consumers), so we have to purchase goods and consume the goods that we purchased:

• Constraint, because in making the decisions of purchasing and consuming individuals have constraints, so choices are limited (as consumers we cannot do whatever we want, but we have to limit our choices)
• Consumption of goods gives “satisfaction”, so we talk about this by saying that we obtained pleasure from consumption, and in economic terms we’ll talk about “utility”, which is how we measure the level of satisfaction that we obtained from the consumption of goods (utility is a sort of economic synonym for pleasure/satisfaction)
• Individuals will follow the optimizing behaviour: individuals will decide what to buy because they will be rational and will behave in order to optimize their choices (we’ll set up an optimization rule by which we can see define the way by which we choose rules)

The consumption bundle is the objective of the choice, and it is defined as a “set” of goods.

Example

Considering a number of goods called “n goods”, so we have to choose among n goods (x1, x2, ... xn). A consumption bundle is a set in which we consider the combination of some quantity of all the n goods. So, we:

CLASS 2

The budget line from a mathematical point of view is an equation of a line, in which there are 2 elements that are useful to represent the characteristics of the line: the intercept and the slope.

• m / P2 intercept on x2 - axis
• -P1 / P2 slope

Suppose that we are in the point (0, m / P2), we want to increase the the quantity of x1 by one unit (1, ?)

How much money do we need to buy one unit of x1? P1 and to get these money we have to reduce the quantity of x2

Example

m = 50, P1 = 8, P2 = 10

∆x1 = 1

We need 8 (P1)

∆x2 = - 4/5 = ∆x2 --> - 0.80 = ∆x2

Under the PROVISION that we move on the budget line

COMPARATIVE STATICS

What is going to happen to the budget set:

• If there is a change in the budget (m)?
• There is an increase in m we can make more choices (there are more possibilities)

(the 2 budget lines have the same slope)

The part between the black and the red line highlights the set of the bundles that we can buy now that we could not buy before

The difference in the choice is

Example

m = 50, P1 = 8, P2 = 10

x2 = m / P2 - P1 / P2 . x1 = 50 / 10 - 8 / 10- x1

m' = 60

x2 = m' / P2 - P1 / P2 . x1 = 60 / 10 - 8 / 10 · x1

Bundle A, which was not affordable before, becomes affordable now (because the expenditure of bundle A is lower than the budget)

If we decrease the income, this is not good for the consumer because we decrease our choice set

• If prices change?

Supposed that we start with P1, P2, m, we increase P1, so now we have P1' and we keep the other prices the same as before