ME for IMBA2010.ppt

Chapter0,Economics,Thesourceofalleconomicproblemsisscarcity.,Problemoftrade-off,andchoice.Economics,asawayofthinking,asadismalscience.Problems-solutions-hiddenconsequences.,Maindecision-makingagents:,1individuals(household),2firms,and3governments.,Objectsofeconomicchoicearecommodities,includinggoodsandservices.,Maineconomicactivities:,Consumption,Production,andExchange.,Microeconomicsandmacroeconomics:,toshowthemarketmechanism(theinvisiblehand),tosupplementit.,Theproductmarketandthefactormarket.,Themarketrelationismutualandvoluntary.Positiveissuesandnormativeissues.,Marginalanalysis,RelationsbetweenTotalmagnitudes,Averagemagnitudes,andMarginalmagnitudes.,Chapter1,TheMarket,EconomicsproceedsbydevelopingModelsofsocialphenomena.Byamodelwemeanasimplifiedrepresentationofreality.,Exogenousvariables:takenasdeterminedbyfactorsnotdiscussedinamodel.,Endogenousvariables:determinedbyforcesdescribedinthemodel.,Theoptimizationprinciple:,Peopletrytochoosewhatsbestforthem.,Theequilibriumprinciple:,Pricesadjustuntildemandandsupplyareequal.,Thedemandcurve:,Acurvethatrelatesthequantitydemandedtoprice.,Thereservationprice:,Onesmaximumwillingnesstopayforsomething.,Frompeoplesreservationpricestothedemandcurve.,Similarly,thesupplycurve.,Fig.,500,490,480,Thedemandcurve,Reservationprice,Numberofapartment,Frompeoplesreservationpricestothemarketdemandcurve.,supply,Demand,P,Q,Equilibrium,P*,Q*,E(P*,Q*),supply,Demand,p,q,E,Equilibrium,Paretoefficiency:,Aconcepttoevaluatedifferentwaysofallocatingresources.,AParetoimprovementisachangetomakesomepeoplebetteroffwithouthurtinganybodyelse.,AneconomicsituationisParetoefficientorParetooptimalifthereisalreadynowaytomakeanymoreParetoimprovement.,Shortrunandlongrun,Equilibriaintheshortrun(somefactorsareunchanged)andinthelongrun.,Chapter2,BudgetConstraint,Twogoodsareoftenenoughtodiscuss.,Thebudgetconstraint:p1x1+p2x2m.,Thebudgetlineandthebudgetset(themarketopportunityset).,Theslopeofthebudgetline:dx2/dx1=p1/p2.,Howthebudgetlinemoveswhentheincomechanges,orwhenapricechanges.,x2,x1,Budgetset,BudgetlineSlope=-p1/p2,m/p2,m/p1,Budgetlineandbudgetset,x2,x1,Budgetline,Slope=-p1/p2,m/p2,m/p2,m/p1,m/p1,Increasingincome,Slope=-p1/p2,m/p2,Budgetline,Slope=-p1/p2,m/p1,m/p1,Increasingprice,Asubsidyistheoppositeofaquantitytax.,Taxes,quantitytaxes,valuetaxes(advaloremtaxes),andlump-sumtaxes.,Rationing.,Theireffectsonthebudgetset.,x2,x1,Budgetline,Budgetset,Rationing,R*,Marketopportunity,Chapter3,Preferences,Theindifferencesets,theindifferencecurves.,Theycannotcrosseachother.,Fig.,indifferencecurves,x2,x1,Well-behavedpreferencesaremonotonic(meaningmoreisbetter)andconvex(meaningaveragearepreferredtoextremes).Figs,x2,x1,Betterbundles,(x1,x2),Monotonicity,Betterbundles,Themarginalrateofsubstitution(MRS)measurestheslopeoftheindifferencecurve.MRS=dx2/dx1,themarginalwillingnesstopay(howmuchtogiveupofx2toacquireonemoreofx1).Usuallynegative.Fig,Convexindifferencecurvesexhibitadiminishingmarginalrateofsubstitution.Fig.,x2,x1,Convexity,Averagedbundle,(y1,y2),(x1,x2),Chapter4,Utility,(asawaytodescribepreferences),Utilities,Essentialordinalutilities,versusconvenientcardinalutilityfunctions.,Theindifferencecurvesaretheprojectionsofcontoursofu=u(x1,x2).Fig.,Utilityfunctionsareindifferentuptoanystrictlyincreasingtransformation.,Examplesofutilityfunctions,u(x1,x2)=x1x2;u(x1,x2)=x12x22;u(x1,x2)=ax1+bx2(perfectsubstitutes);u(x1,x2)=minax1,bx2(perfectcomplements).,Quasilinearpreferences:Allindifferencecurvesarevertically(orhorizontally)shiftedcopiesofasingleone,forexampleu(x1,x2)=v(x1)+x2.,Cobb-Douglaspreferences:u(x1,x2)=x1cx2d,oru(x1,x2)=x1ax21-a;andtheirlogequivalents:u(x1,x2)=clnx+dlnx2,oru(x1,x2)=alnx+(1a)lnx2,Cobb-Douglas,MRSalonganindifferencecurve.DeriveMRS=MU1/MU2bytakingtotaldifferentialalonganyindifferencecurve.,MarginalutilitiesMU1andMU2.,MRS,Indifferencecurve,Slope=dx2/dx1,x2,x1,dx2,dx1,Chapter5,Choiceofconsumption,Optimalchoiceisatthepointinthebudgetlinewithhighestutility.Thetangencysolutionofanindifferentcurveandthebudgetline:MRS=p1/p2.Fig.,Basicequations:MU1/p1=MU2/p2andp1x1+p2x2=m.Figs.,Threeapproachestothebasicequations:Graphically;As-one-variable;*Lagrangian.,Theoptimalchoiceistheconsumersdemandedbundle.Thedemandfunction.,Cobb-Douglasdemandfunctions.,Chapter6,Demand,Demandfunctions:x1=x1(p1,p2,m),x2=x2(p1,p2,m).,Normalandinferiorgoods(byincome);Fig.Luxuryandnecessarygoods(byincome).Fig.OrdinaryandGiffengoods(byprice).Fig.,Theincomeexpansionpathortheincomeoffercurves,andtheEngelcurve.Figs.,ThepriceoffercurveandtheDemandcurve.Figs.,Chapter7,SlutskyEquation,Howtheoptimummoveswhenthepriceofagoodchanges?,Decomposition:thetotaleffect=thesubstitutioneffect+theincomeeffect.p139,Thepivotgivesthesubstitutioneffect,theshiftgivestheincomeeffect.,Slutskyidentity,pivotingthebudgetlinearoundtheoriginalchoice.Fig.Hicksdecomposition,pivotingthebudgetlinearoundtheindifferencecurve.Fig.,Chapter8,Uncertainty,Utilitiesandprobabilities.,Expectedutilityfunctions,orvonNeumann-Morgensternutilityfunctions.Theyareindiffer