Microeconomics appunti completi (microeconomia)

Introduction

Overview

Definitions

Microeconomics- There are two branches of economics:

• Microeconomics: Individual decision-making and its collective effect on the allocation of a society's scarce resources using specific methods and tools.
• Macroeconomic: Aggregate phenomena (e.g., booms and recessions, economic growth, unemployment).

Important applications and uses (crucial role):

• Individual decision-making for better economic decisions.
• Analysis and evaluation of public policy, measuring costs and benefits of policies.

Goods: Limited or scarce supplies found in nature or produced from natural resources.

Scarcity generates three critical issues society needs to address:

• Decide what to produce, how to produce it, and who gets what.

Economics examines the ways in which societies address these three issues concerning the allocation of scarce resources.

Institutions for allocating resources

Microeconomic analysis begins with understanding institutions:

• Laws and customs that define a society's procedures for allocating resources.
• Decentralisation vs. Centralisation.
• Capitalist economy (decentralised): The means of production are mostly owned by private individuals; resource allocation is governed by voluntary trading (commerce) among businesses and consumers.
• Communist economy (centralised): The state owns and controls the means of production and distribution.

No economy is completely centralised or decentralised.

Markets

Markets are economic institutions that provide people with opportunities and procedures for buying and selling goods and services, associated with a single group of closely related products offered for sale within particular geographic boundaries.

A price is the rate at which someone can swap (exchange) money for a good, governing trade.

In order to work, markets require institutions:

• A property right is an enforceable claim on a good or resource; trade can occur only if property rights are transferable.

A market economy allocates scarce resources primarily through markets, with governments playing either large or small roles. In a free-market system, the government mostly allows markets to operate with little regulation or other intervention.

One of the main objectives of microeconomics is to determine when each method of allocating scarce resources performs well and when poorly, helping us judge whether specific economic decisions should be centralised or decentralised.

Economic motives

Micro-economists assume that people are motivated by material self-interest:

• Consumers try to choose the mix of goods and services that provide the highest possible level of personal satisfaction.
• Employees try to choose the mix of work and leisure that provides the highest possible level of personal satisfaction.
• Owners of firms try to choose the mix of inputs and outputs that provides the highest possible level of profit.

Microeconomic theory can accommodate other motivations.

Analysis

Positive vs. Normative analysis examples:

• Positive: Economic analysis addresses factual questions. E.g., "If the minimum wage were raised to $9, how would that affect employment? Would businesses hire fewer workers?"
• Normative: Economic analysis addresses questions that involve value judgments. E.g., "Is society better off with free trade between countries or with trade barriers?"

The principle of individual sovereignty holds that each person knows what's best for him or her.

Why Economists Sometimes Disagree

Positive matters: sometimes two economists look at the same evidence and come to different conclusions.

Normative matters: even when economists reach the same positive conclusions, they may disagree about the desirability of a particular public policy.

Tools of Microeconomics

Scientific Method

Steps:

1. Initial observation.
2. Theorizing.
3. Identification of additional implications.
4. Further observation and testing.
5. Refinement of the theory.

Models and Mathematics

A model is a simplified representation of a phenomenon:

• Exogenous = variables taken as given.
• Endogenous = variables determined by the model.

Responses of endogenous variables to changes in exogenous variables are called comparative statics.

An equilibrium is a point of balance at which there is no tendency for a model's endogenous variables to change, given fixed values of the exogenous variables.

Simplifying Assumptions

Social phenomena are extremely complex. Models are simplified representations of the real world, requiring many simplifying assumptions.

A simplifying assumption can be reasonable in one context but unreasonable in another.

Data Analysis

The scientific method requires us to test our theories by confronting them with data:

• Records (financial information, personnel records, customer databases).
• Surveys (consumer expenditure survey, business surveys).
• Experiments (lab experiments vs. natural experiments).

Econometrics is the application of statistical methods to empirical questions in the field of economics.

Themes

Decisions

Trade-offs (compromises) are unavoidable:

• To choose well, focus on the margin. To determine whether a particular choice is best, we ask whether a small adjustment of the choice—a marginal change—will lead to improved results.
• People respond to incentives. A good decision-maker carefully weighs her benefits and costs.
• Prices provide incentives. An increase in the price of a good reduces the incentive to buy and increases the incentive to sell.

Markets

• Trade can benefit everyone.
• The competitive market price reflects both value to consumers and cost to producers.
• Compared to other methods of resource allocation, markets have advantages.
• Sometimes government policy can improve on free-market resource allocations.

Review

Supply and Demand

Objectives

• Explain what supply and demand curves for a good, and supply and demand functions, represent.
• Identify various market forces that shift supply and demand curves.
• Use the concept of market equilibrium to calculate the equilibrium price and the amount bought and sold.
• Evaluate how changes in demand or supply affect market equilibrium.
• Understand elasticity and the way economists use it to measure the responsiveness of demand or supply.

Concept of Demand

The demand curve shows how much buyers of a product want to purchase at each possible price, holding fixed all other factors that affect demand (e.g., population growth, consumer tastes and incomes, the prices of other products, and in some cases, government taxes or regulations).

Shifts in Demand

• Prices of related products:
  • Substitutes: shifts right. If, all else equal, an increase in the price of one of the products causes buyers to demand more of the other product.
  • Complements: shifts left. If, all else equal, an increase in the price of one of the products causes consumers to demand less of the other product.
• Income:
  • Normal good: M→D shifts right.
  • Inferior good: M→D shifts left.

Movement along: Change in price of the product results in movement along the curve [≠ change in other factors, shifts of the entire curve].

Function

Quantity Demanded = D(Price, Other factors).

Holding other factors constant at P = $0.50 per pound, P = $4 per pound, and income at $30,000.

Concept of Supply

The supply curve shows how much sellers of a product want to sell at each possible price, holding fixed all other factors that affect supply.

Shifts in Supply

• Prices of inputs, technology, taxes and regulations, and other factors: change in supply.

Movement along: Change in price of a product results in movement along the curve [≠ other factors, shifts the entire curve].

Function

Quantity Supplied = S(Price, Other factors).

Holding other factors constant at P = $2.50 per gallon, P = $8 per bushel (64 pints): fuel soybeans.

Equilibrium

Market equilibrium: price of a product tends to adjust to balance supply and demand (equilibrium price).

At the equilibrium price, the amounts supplied and demanded are equal [graphically: interception].

Excess supply:

• Sellers lower their prices.
• Q_s decreases and Q_d increases.
• Lower excess supply, until it disappears.

Excess demand:

• Buyers increase their prices.
• Q_s increases and Q_d decreases.
• Lower excess demand, until it disappears.

Market equilibrium: Q_d = Q_s.

Changes in Market Equilibrium

Example: demand shift.

Effect of increase on demand and supply.

Responsiveness of Equilibrium Price and Quantity to Changes in Price

Affects how changes in demand or supply alter the price and amount bought and sold:

• Demand: Steeper demand curve (the less responsive the quantity demanded is to price) results in a larger change in price and a smaller change in quantity (amount bought and sold).
• Supply: Steeper supply curve (the less responsive the quantity supplied is to price) results in a larger change in price and a smaller change in quantity (amount bought and sold).

Steepness of supply and demand curves depends on the time horizon: long-run changes in the equilibrium price and the amount bought and sold resulting from a shift in supply or demand can differ from short-run changes.

Elasticity Measures Responsiveness

Measures the percentage in Y caused by a percentage change in X.

Why use elasticity instead of slope?

• Slopes depend on units.
• Elasticities are unit-free measures.

Price Elasticity

• Demand: Measures how responsive the quantity demanded is to changes in prices (decreases when the price increases→ E_d: negative number).
  • Elastic: elasticity of demand < -1.
  • Inelastic: elasticity of demand between -1 and 0.
• Supply: Measures how responsive the quantity supplied is to changes in prices (increases when the price increases→ E_s: positive number).
  • Elastic at price P: elasticity of supply > 1.
  • Inelastic: elasticity of supply is between 0 and 1.

For linear curves (straight line), ΔQ = Q’ - Q and ΔP = P’ - P.

Total Expenditure and Elasticity

A small increase in price causes total expenditure to increase if demand is inelastic and decrease if demand is elastic.

Total expenditure is largest at a price for which the elasticity equals -1.

Income Elasticity of Demand

Equals the percentage change in the amount demanded for each 1 percent increase in income:

• Measures how responsive the demand is to changes in income.
• Normal good: demand for a product increases when income grows larger.
• Inferior good: if it instead decreases.

Cross-Price Elasticity of Demand

The percentage change in the quantity demanded of the product divided by the percentage change in the price of the other product, or equivalently, the percentage change in the quantity demanded for each 1 percent increase in the price of the other product:

• With products that are substitutes, the cross-price elasticity is positive.
• With complements, it is negative.

Review

• The demand curve shows how much of the product consumers want to buy at each possible price, holding fixed all other factors that affect demand.
• The supply curve shows how many units firms want to sell at each possible price, holding fixed all other factors that affect supply.
• Movement along a curve vs. shift of the entire curve. At market equilibrium, the amounts supplied and demanded are equal.
• Elasticity measures the responsiveness of one variable to changes in another variable.

Consumer Preferences

Introduction

Learning Objectives

• Explain the Ranking Principle and the Choice Principle.
• Illustrate consumers' preferences for consumption bundles graphically through indifference curves.
• Understand the properties and functions of indifference curves.
• Determine a consumer's willingness to trade one good for another by examining indifference curves.
• Explain the concept of utility and compare consumption bundles by calculating the numerical values of a given utility function.

Overview

• Rational consumers follow two basic decision-making principles:
  • Ranking principle.
  • Choice principle.
• Consumer preferences can be graphically represented through indifference curves.
• Preferences and indifference curves reveal a consumer's willingness to substitute one good for another.
• Economists use the utility function to describe consumer preferences.

Principles of Consumer Choice

Preferences

Tell us about a consumer's likes and dislikes:

• Ranking principle: A consumer can rank, in order of preference (though possibly with ties), all potentially available preferences.
• Choice principle: Among the available alternatives, the consumer selects the one that he ranks the highest.

Ranking Principle Implications

• Preferences are complete: between any pair of alternatives, a consumer either prefers one to the other or is indifferent between them.
• A consumer is indifferent between two alternatives if he likes (or dislikes) them equally.
• Preferences are transitive: if the consumer prefers one alternative to a second, and prefers the second alternative to a third, then he also prefers the first alternative to the third.

Consumption Bundles

A consumption bundle is the collection of goods that an individual consumes over a given period.

Consumer choices reflect how a consumer feels about various consumption bundles, rather than how the consumer feels about one good in isolation.

More-is-better principle: When one consumption bundle contains more of every good than a second bundle, a consumer prefers the first bundle to the second.

Ranking Consumption Bundles – Example

Indifference Curves

An indifference curve shows all consumption bundles that a consumer likes equally well.

Families of Indifference Curves

A family of indifference curves is a collection of indifference curves that represent one individual's preferences.

Properties

• Indifference curves are thin.
• Indifference curves do not slope upward.
• Indifference curves from the same family do not cross.
• The IC that runs through consumption bundle A separates bundles on better-than-A and worse-than-A.
• Consumer prefers IC furthest from the origin.

Plotting Indifference Curves from a Formula

Using the formula C(cheese) = U(constant)/F(yogurt), we can plot three indifference curves by replacing values of 10, 20, and 30 for the constant U.

Goods versus Bads

• A bad is an object, condition, or activity that makes a consumer worse off.
• We can think of a bad as the absence of a good. For example, we can think of a student choosing leisure time (a good) instead of study time (a bad).

Substitution Between Goods

Indifference Curves and Rates of Substitution

A consumer can substitute one good for another so that she is indifferent between the two bundles.

For example, in moving from bundle A to bundle B, Madeline loses 1 pint of yogurt and gains 2 ounces of pizza.

The rate at which Madeline is willing to substitute for yogurt with pizza is 2 ounces per pint.

The marginal rate of substitution for X with Y (MRS_XY) is the rate at which a consumer demand must adjust Y to maintain the same level of well-being when X changes by a tiny amount, from a given starting point.

Indifference Curves and the MRS (Marginal Rate of Substitution)

The marginal rate of substitution for frozen yogurt with pizza at bundle A equals the slope of the line drawn tangent to the indifference curve running through point A.

What Determines Rates of Substitution?

• Within the same indifference curve, as pizza becomes more scarce and yogurt becomes more plentiful, the MRS for yogurt with pizza falls.
• Angie likes yogurt relative to pizza more than Marcus. To keep Angie indifferent after sacrificing one pint of yogurt, she needs three additional ounces of pizza, compared with Marcus, who would need just 1/2 ounce of pizza to compensate for one less pint of yogurt. Angie's MRS for yogurt with pizza is higher than Marcus' MRS.

Why Are Rates of Substitution Important?

Mutually beneficial trade depends on the marginal rates of substitution of the individual potentially involved in a trading relationship.

Special Cases

• Perfect substitutes: Two products are perfect substitutes when their functions are identical, so that a consumer is willing to swap one for the other at a fixed rate.
• Perfect complements: Two products are perfect complements if they are valuable only when used together in fixed proportions.

Utility

• Utility is a numeric value indicating the consumer's relative well-being. Higher utility indicates greater satisfaction than lower utility.
• A utility function is a mathematical formula that assigns a utility value to consumption bundles.