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Microeconomics: Consumers & Firms - Midterm Summary - EBP819B05
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Samenvatting Microeconomics I hoorcolleges en boek Microeconomics van Austan Goolsbee, Steven Levitt en Chad Syverson (Nederlandse samenvatting)
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2.1-4 basic assumptions underpin the supply and demand model.-We restrict our focus to a single market, until chapter 15 we’ll ignore spillover effects.
-All goods are identical or homogeneous, as if they were commodities: Products traded in
markets in which consumers view different varieties of the good as essentially interchangeable.
-All goods are sold at the same price, everyone has the same information.
-There are many consumers and producers, no single one can have a noticeable impact on price.
2.2-A substitute can be used in place of another good, a complement is purchased and used in
combination with another good.
A demand curve graphs the relationship between the quantity of a good that consumers demand
and the good’s price, holding all other factors constant.
If Q = 1000 - 200p, 5 dollars is the demand choke price: The vertical intercept of the inverse
demand curve; a demand curve written in the form of price as a function of quantity demanded
(P = 5 - 0,005Q).
A change in quantity demanded is a movement along the demand curve after a price change. A
change in demand is a shift of the entire demand curve, caused by another change than price.
2.3-A supply curve graphs the relationship between the quantity supplied of a good and the
good’s price, holding all other factors constant. The supply choke price is the price at which no
firm produces and Q = 0: The vertical intercept of the inverse supply curve.
Like demand, a change in quantity supplied is a shift along the supply curve after a price change.
A change in supply is caused by another determinant than price.
2.4-Market equilibrium is the point at which demand exactly equals supply.
2.5-Elasticity is the ratio of percentage change in one value to the
percentage change in another. The price elasticity of demand is the
percentage change in quantity demanded resulting from a given
percentage change in price. E.g. a 10% fall in Q after a 4% rise in P,
means a Ed of - = -2,5. So a 1% price increase leads to a
2,5% demand decrease.
Elastic goods are with E greater than 1, inelastic between 0 and 1,
unit elastic equal 1.
Perfectly inelastic is 0, e.g. mandatory health insurance.
Perfectly elastic is equal to infinite: E.g. commodities, because any
change in price will lead to an infinite change in demand with commodities: Being 1 cent more
expensive than the market price will destroy all demand.
To calculate elasticity, take the slope of the demand curve by writing the equation as a function of
P. Q = 360 - 2P becomes P = 180 - 0,5Q, so the slope is -0,5. A rise of Q by one will thus offset a
fall of P of 0,5. No we make this 1/-0,5 ratio proportional to percentage points by multiplying it
with (P / Q at the price point we’re trying to find the elasticity of).
Income elasticity of demand is the percentage change in quantity
demanded associated with a 1% change in consumer income.
When this is below 0, income elasticity is negative, and it’s an
inferior good. If it’s above 0, they’re normal goods, and above 1
these are normal goods sometimes called luxury goods.
The cross-price elasticity of demand is the percentage
change in quantity demanded of one good associated with
a 1% change in the price of another good. If this is
positive, the consumers demand more Q of good X when
the price of good Y rises: They’re substitutes.
When the cross-price elasticity is negative, consumers
demand less of good X when good Y becomes more
expensive: They’re complements.
3.1-A consumer surplus is the difference between the price consumer are willing to pay and the
actual price.
,Producer surplus is the difference between the price producers receive for their goods and the
price they’re willing to sell them for.
A price ceiling sets the highest price that can be paid for a good, if it’s binding it will create excess
demand: The difference between quantity demanded and supplied. A nonbinding price ceiling is
set above equilibrium price; it has no impact.
A transfer is a surplus that moves from producer to consumer or vice versa, as a result of price
regulation. A binding price ceiling for example will transfer part of the producer surplus to
consumers.
The surpluses that aren’t transferred disappear: The deadweight loss, the reduction in total
surplus that occurs as a result of market inefficiency.
A price floor sets a legal minimum price, creating excess supply when binding.
3.3-A quota sets the quantity of a good, either a limit or a minimum.
3.4-Tax incidence is who actually pays a tax. If a 50 cent tax
increase the price from 8 to 8,30, consumers pay 60% and
producers 40%. These are the tax incidences.
3.5-A subsidy is a payment by the government to a buyer or
seller of a good.
4.1-4 basic assumptions about consumer preferences.
-Completeness and rankability. We assume consumers can compare all consumption bundles (set
of goods a consumer considers purchasing), and can decide which she prefers or is indifference
between.
-More is better
-Transitivity: If A is preferred to B, and B is preferred to C, A is preferred to C as well. Logic.
-Variety: The more a consumer has of a good, the less she is willing to give up of another good to
get even more of the first good.
Utility measures satisfaction. A utility function is a mathematical function
describing the relationship between what consumers consume and their level
of well-being.
Marginal utility is the additional utility a consumer receives from an additional
good.
4.2-Indifferent is a consumers state when she derives the same utility from each of two or more
consumption bundles.
Along an indifference curve, a mathematical representation of the combination of all different
consumption bundles that provide a consumer with the same utility, utility stays the same as the
bundles change.
Indifference curves have certain characteristics derived form the assumptions above:
-Because bundles are rankable, we can always draw indifference curves.
-Because more is better, we can figure out why the higher indifference curve give higher utility:
They have more of both goods when they lie above another indifference curve. This is why they
always slope downwards: If they’d slope up, they’d cross the same amount of goods Y twice with
different amounts of X on the same utility curves. A consumer will however never be indifferent
between 10x/5y and 15x/5y because more is better.
-Because of transitivity, indifference curves can never cross. Intersecting curves means the same
bundle gives 2 different utility levels, which is impossible.
-Because of variety, indifference curves are convex to the origin: The more they have of X, the
more X they’re willing to give up for more Y.
The marginal rate of substitution is the willingness of a consumer to
trade one good for another. It equals the negative of the slope of the
indifference curve, so it changes along the curve. If MRS BL = 2, you’re
willing to give up 2 burritos for 1 latte and the slope of the indifference
curve at this points is -2. If MRS BL = 0,5, you’d give up half a burrito
, for another latte, and the slope is -0,5. We see the MRS of
burritos for lattes is very high at A, where we have a lot of
burritos: The consumer wants variety.
The change in utility created by moving along the indifference curve is written above. The MU of
lattes is the extra utility from 1 more unit of lattes, multiplied with the change in the amount.
Because we’re moving along the indifference curve, the total change must be 0.
We can rearrange this into the
equation on the left.
So the MRS xy between 2 goods at
any point along the indifference
curve equals the inverse ratio of
these two goods marginal utilities.
When indifference curves are flat,
consumers are willing to give up a
lot of X for a little more Y. When steep, a lot of Y is given up for a little more X.
If the indifference curve is almost straight, the MRS doesn’t change much along the indifference
curve: Whether a consumer has a lot of X or a lot of Y, he’s still willing to trade about the same
amount of X for Y: They’re close substitutes.
When they’re very curved, the value of X or Y depends greatly on the amount of X or Y already
possessed, because they’re poor substitutes or maybe even complements.
Perfect substitutes are for example 2 half a litre packs of milk and 1 litre packs. It can be traded
for the other good and still received the same utility.
Perfect complements depend on being used in a fixed proportion to another, e.g. left and right
shoes.
4.3-Budget constraint is a curve that describes the entire set of consumption bundles a consumer
can purchase when spending all income. We assume they have a fixed income, can’t save or
borrow, and they can buy as much of it as they want without impacting the price. Everything
below and on the budget constraint is feasible.
The slope of the budget constraint is decided by the relative prices of 2 goods.
4.4-We can solve the constrained optimisation problem by finding the point where the ratio of the
goods marginal utilities is equal to the ratio of the prices. This is a point of tangency between the
budget constraint and the indifference curves. At tangency:
Slope of indifference curve = slope of budget constraint
A corner solution is a utility-maximising bundle located at
the corner of the budget constraint: Where the consumer
purchases only 1 of the 2 goods.
5.1-Income effect is the change in a consumer’s consumption choices that results from a change
in purchasing power. For a normal good the income effect is positive: quantity rises when income
does.
An inferior good has decreasing consumption when income rises, the income effect is negative.
Income elasticity is the percentage change in quantity consumed of a good
in response to a 1% change in income.
A necessity good is a normal good with an income elasticity between 0 and
1, a luxury good has an income elasticity greater than 1.
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