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Economic principles - microeconomics
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Microeconomics and economic principles
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ECONOMIC PRINCIPLESUNIT 1 - INTRODUCTION
Different definitions of economy. Management of resources. Earnings. Expenditure.
Economy has different meanings:
- A science. Expenditure, consumptions of money, management of resources.
- A branch of knowledge dealing with a body of facts arranged systematically and
showing the operation of (general) law.
- Science of economy. Branch of knowledge dealing with management or … not
everybody accepts that economy is a science. To be a full science it needs to be able to
repeat the experiment having always the same result
In other science we know exact values we are going to have; the same things happen when
doing an experiment
This does not happen in economy, we have general laws, but they don’t happen all the time
It is properly a hard science but a social science the reason, the result is not always the same
Definition of economy, quoting the author (EXAM)
Economy divided in two fields: microeconomics and macroeconomics (Unit 2, page 29)
- Microeconomics: individuals or a group of individuals in relation of one given or
resource
- Macroeconomics: a group of people dealing with different goods or services. For
example; demand of transportation in the region of Madrid
UNIT 2 - MONETARY VERSUS REAL INCOME. PREFERENCES AND THEIR REPRESENTATION. THE
CHOICE OF THE CONSUMER (UNIT 21: the Theory of Consumer Choice)
Differentiation between real value and monetary value.
Monetary income is the exact amount of money a coin or a bill value. The real income is what
goods or services you can buy or get with that monetary income, with that money. After a
period, you link the monetary and the real income.
The most stable currencies are US dollar, Euro and Rubel. A confident currency is a save one,
you can change as much as you want without losing too much money. The conversion, the
closer to 1, the better. Currency needs to be convertible and not to have limits. You need to be
able to buy anything you want in that currency. Throughout the years, the prices do not change
too much.
Graphic in 441. Page 440 and 441 Explanation.
I= X · Px + Y · Py <- definition of a line. Intersection of line of pizza and Pepsi.
Space between the axis and the line is the Consumer’s Budget Constraint. The area between
the axis and the line, represents the amount of goods we can have considering the price of the
goods. It represents the real income.
If the price of the goods increase, our real income increase. If one of the increases, the line
differs.
,This represents the quantity of goods spent in goods of X and Y. It is a matter of decision to
spend our income in one or another. If I spend all my income in
X
Grey: the line changes if X maintains its price but Y is more expensive, keeping the same
income.
Blue: the same as grey but vice versa
Correlation. Two variables are correlated if one variable goes up and the other one goes up too
more or less the same. If one goes down and the other does too or if one goes up and the
other goes down in more or less the same quantity.
What would happen if the value of X is increased by 100%?
In this situation the monetary income remains the same because our amount of money to
spent is the same, but our real income decreases because we can
obtain less goods or services than before
An increase in prices by X and Y of a 100% but also the income in a 100%? It remains the same
because every variable states the same.
If the price of one of the variables decreases you can also increase the other variable, and the
real income changes because it increases
What happens if the price of X decreases 50% while the price of Y increases by 100%?
As X has decreased by 50% we can buy double of it, as the same time Y has increased by a
100% so it goes further in the X Axis but lower in the Y axis. We cannot
say that the real income has increased or decreased because we
cannot reach points we could before, but we can reach some different
that we can reach now.
, Initial situation, increase in the price of X by a 100%, decrease of Y by 10% and at the same
time an increase of monetary income of a 100%. IF X’s price has increased by double but also
our monetary income, of it, we can buy the same amount of X, so our real income has
increased because of X we can by the same but as Y has decreased its prices, we can buy more
of that. Real income increases.
X- 100Px Y- 100Py Income-1000 X-200Px Y-90Py Income-2000
The cost of opportunity is the value you give to anything you have to reject. When you have to
decide between A and B
This decisions among the two variables represent the preferences of the consumer. The
indifference curve shows the different combinations the consumer can choose. Any point on
the slope shows the rate in which the consumer is willing to substitute one good for another.
Each consumer has its own indifferent curves because their priorities are not the same.
The higher the slope is, the higher the utility is
The indifferent curve has 4 properties:
1. Higher ones are preferred than lower
2. They are downward sloping
3. They do not cross among each other. B is preferred than A because it provides more
goods than A. This means that the indifferent curve 1 is preferred than indifferent
curve 2. That also means that C is preferred to D, because it also provides more goods
so curve 1 is preferred than 2 at the same time. That is impossible to happen.
A-Yellow B-Blue C-Green D-Grey
1 2
B>A – 1>2 D>C – 2>1
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