Riassunto esame Microeconomics, prof. Vannoni, libro consigliato Microeconomics, Pindyck

Microeconomics preliminaries

Nominal prices vs. real prices

Nominal Prices: The ones you see at the supermarkets.

Real Prices: The ones relative to an aggregate measure of prices.

CPI: Consumer price index, aggregate measure of price.

Real costs in year 2 is equal to (CPI year 1 on CPI year 2) x nominal price in year 2. What we mean when we talk about prices are the real ones.

The basis of supply and demand

Definitions

Demand: What the consumers are willing to buy.

Supply: What the producers offer.

Shifts along the curve

They are both functions of the price, but the demand curve is downward sloping because when price increases consumers buy less quantity of a good, the supply curve is upward sloping.

Shifts to the right or to the left

The curves shift right or left if other factors contribute to increasing or reducing the quantity bought or sold (e.g. increase in income makes the demand curve shifts to the right).

Market equilibrium

The market equilibrium is reached when demand equals supply.

Elasticity

By how much the demanded quantity changes is told by the elasticity of demand: (P on Q) x (deltaQ on deltaP). If this number is high, it means the demand is elastic, E>1, it changes a lot when price changes.

In a demand function like Q= a-bP, b is the angular coefficient and the slope of the curve, it is equal to deltaQ on deltaP. The slope decreases along the curve.

Infinitely elastic demand > horizontal curve.

Infinitely inelastic demand > vertical curve.

Consumer behaviour

1. Consumer preferences

Market baskets (completeness, transitivity, more is better than less) are a mix of goods, e.g. food and clothes. Each basket has a certain amount of food and clothes and gives a certain level of satisfaction. The baskets that give the same satisfaction, to which the consumer is indifferent in the choice, are on the same indifference curve. This curve’s slope is the MRS, marginal rate of substitution, that is how many units of clothes the consumer is willing to give up to have one more unit of food, -(deltaC on deltaF). This rate is decreasing because the more food I have, the less clothes I give up to add food.

2. Budget constraints

When buying, a consumer has to consider how much money he has got in his pocket. The budget line is about that and it moves on the graph as income or prices change. If income increases, it shifts to the right, if the price of a single good increases or decreases, it just rotates. Its slope is –(Pf on Pc).

3. Consumer choice

In the end, the consumer buys what, among its possible preferred baskets, is affordable within its budget. So, the optimal choice is the point where the indifference curve with the highest utility, level of satisfaction, intersects the budget line. In other words, it is where MRS= Pf/PC= MUf/MUc. Optimal choice for a consumer.

Marginal utility, MU, is the additional satisfaction obtained from consuming one additional unit of a good.

Individual and market demand

Demand function > prices vary > optimal choices vary > we have different optimal choices > the curve that joins the various optimal choices is the price consumption curve.

Demand function > income varies > optimal choices vary > we have different optimal choices > the curve that joins them is the income consumption curve, also known as the Engel curve. This curve is an upward line for normal goods, but a curve that is first upward and then downward in the case of inferior goods, those goods like hamburger that when income increases, lose market. In fact, as soon as income increases, I consume more of hamburger and steak, but then I prefer consuming more of steak that is more expensive and good and I reduce the consumption of hamburger.

For example, if the price of food decreases, then I consume more food and less clothes, this is the substitution effect.

• If the good is normal, the income effect is positive, but lower than substitution.
• If the good is inferior, the income effect is negative, but lower than substitution.
• If the good is a Giffen good, the income effect is negative and greater than the substitution one.

Production

In producing, a firm must consider how many inputs to use. A production function says it. These inputs are labor and capital. In the short run, at least one input must be fixed, in the long run, a firm can change both inputs.

• Production in the short run > one variable input > labor

Here, the firm has a fixed capital, so the only option it has to increase its output is increasing labor.

How many units of labor will a firm decide to use as an input? It depends if benefits of hiring more people are higher than costs. We can decide it by analyzing the situation on an incremental basis, how output increases when an additional unit of labor is added, or on an average one, how much output each worker produces.