ME for IMBA20101

1、 Chapter 0 The source of all economic problems is scarcity . Problem of trade-off, and choice. Economics, as a way of thinking, as a dismal science. Problems - solutions - hidden consequences. Main decision-making agents: 1 individuals (household), 2 firms , and 3 governments. Objects of economic ch

2、oice are commodities, including goodsand services . Main economic activities: Consumption , Production , and Exchange . Micro economics and macro economics: to show the market mechanism (the invisible hand), to supplement it. The product marketand the factor market. The market relation is mutual and

3、 voluntary. Positive issues and normative issues . Marginal analysis ?Relations between ? Total magnitudes , ?Average magnitudes , and ? Marginal magnitudes. Chapter 1 Economics proceeds by developing Models of social phenomena. By a modelwe mean a simplified representation of reality. Exogenous var

4、iables : taken as determined by factors not discussed in a model. Endogenous variables : determined by forces described in the model. The optimization principle: People try to choose whats best for them. The equilibrium principle: Prices adjust until demand and supply are equal. The demand curve: A

5、curve that relates the quantity demanded to price. The reservation price: Ones maximum willingness to pay for something. From peoples reservation prices to the demand curve. Similarly, the supplycurve. Fig. 500 490 480The demand curve Reservation price Number of apartment From peoples reservation pr

6、ices to the market demand curve. supply Demand P Q Equilibrium P* Q* E (P*,Q*) supply Demand p q E Equilibrium Pareto efficiency: A concept to evaluate different ways of allocating resources. A Pareto improvementis a change to make some people better off without hurting anybody else. ?An economic si

7、tuation is ? Pareto efficient ?or ? Pareto optimal ?if there is already no way to make any more Pareto improvement. Short run and long run ?Equilibria in the shortrun (some factors are unchanged) and in thelongrun. Chapter 2 Two goods are often enough to discuss. ?The budget constraint: p1x1+ p2x2 m

8、. ?The budget line and the budget set (the market opportunity set ) . ?The slope of the budget line: d x2/d x1= p1/ p2. ?How the budget line moves when the income changes, or when a price changes. x2 x1 Budget set Budget line Slope = -p1/p2 m/p2 m/p1 Budget line and budget set x2 x1 Budget line Slop

9、e = -p1/p2 m/p2 m/p2 m/p1m/p1 Increasing income Slope = -p1/p2 m/p2 Budget line Slope = - p1/p2 m/p1m/p1 Increasing price Asubsidy is the opposite of a quantity tax. Taxes ,quantity taxes, value taxes (ad valorem taxes), and lump-sum taxes. Rationing . Their effects on the budget set. x2 x1 Budget l

10、ine Budget set Rationing R* Market opportunity Chapter 3 The indifference sets, the indifference curves . They cannot cross each other. Fig. indifference curves x2 x1 ?Well-behaved preferences are monotonic(meaning more is better) and ?convex (meaning average are preferred to extremes). ?Figs x2 x1

11、Better bundles(x1, x2) Monotonicity Better bundles ?The marginal rate of substitution (MRS) measures the slope of the indifference curve. ?MRS = d x 2 / d x 1, the marginal willingness to pay ( how much to give up of x 2 to acquire one more of x 1 ). ?Usually negative. ?Fig ?Convexindifferencecurves

12、 exhibit a diminishing marginal rate of substitution. ?Fig. x2 x1 Convexity Averaged bundle (y1,y2) (x1,x2) Chapter 4 (as a way to describe preferences) Utilities ?Essential ordinalutilities , versus ?convenient cardinal utility functions . ? ?The indifference curves are the projections of contours

13、of u = u ( x1, x2). Fig. ?Utility functions are indifferent uptoany strictly increasing transformation. Examples of utility functions ?u (x1, x2) = x1x2; ?u (x1, x2) = x12x22; ?u (x1, x2) = ax1+ bx2 (perfect substitutes); ?u (x1, x2) = minax1, bx2 (perfect complements). ?Quasilinear preferences : Al

14、l indifference curves are vertically (or horizontally) shifted copies of a single one, for example u (x1, x2) = v (x1) + x2. ? Cobb-Douglas preferences: u (x1, x2) = x1cx2d, or u (x1, x2) = x1ax21-a; and their log equivalents: u (x1, x2) = c ln x + d ln x2, or u (x1, x2) = a ln x + (1 a) ln x2 Cobb-

15、Douglas ? MRSalong an indifference curve. ?Derive MRS= MU 1 /MU 2 by taking total differential along any indifference curve. ? Marginal utilities MU 1 and MU 2 . MRS Indifference curve Slope = dx2/dx1 x2 x1 dx2 dx1 Chapter 5 Choice of consumption ? Optimal choice is at the point in the budget line w

16、ith highest utility. ?The tangency solution of an indifferent curve and the budget line: MRS = p 1 / p 2 . Fig. ?Basic equations: ? MU 1 / p 1 = MU 2 / p 2 and ? p 1 x 1 + p 2 x 2 = m . Figs. ?Three approaches to the basic equations: ?Graphically; ?As-one-variable; ?*Lagrangian. ?The optimal choice

17、is the consumers demanded bundle. ?The demand function. ? Cobb-Douglas demand functions . Chapter 6 Demand ?Demand functions: ?x1= x1(p1, p2, m), ?x2= x2(p1, p2, m). ? Normal and inferiorgoods (by income); Fig. ? Luxuryand necessary goods (by income). Fig. ? Ordinary and Giffengoods (by price). Fig.

18、 ?The income expansion path or the income offer curves, ?and the Engel curve. Figs. ?The price offer curve ?and the Demand curve. ? Figs. Chapter 7 Slutsky Equation ? How the optimummoves when the price of a good changes? ? Decomposition: ?the total effect = the substitution effect + the income effect. ?p139 ?The pivotgives the substitution effect, ?the shiftgives the income effect