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Microeconomics and BehaviourChapter 1
Scarce resources: time & money, limitations on things we need to pursue our goal
If B(x) > C(x) do x, otherwise do not
B = max. monetary amount you are willing to pay
C = value of all the resources you must give up to do x
Reservation price = the min. amount it would take for you to do sth (benefits = costs)
Opportunity costs = if doing activity x means not doing activity y, the value of doing y (it you
would have done it) is an opportunity cost of doing x (forgone opportunity)
Criticism: people do not make such explicit calculations, so not how accurate central
assumption is but how well it predicts behavior + behavior differs from the predictions of the
standard economic model
Pitfalls in decision making: ignoring implicit costs (so ignoring opportunity costs of forgone
earnings) + failing to ignore sunk costs (costs that are beyond recovery at the moment a
decision is made, so not focus on the total costs but on the costs to finish the job) +
measuring costs and benefits as proportions rather than absolute monetary amounts (so
costs and benefits in absolute euro terms, not comparing percentages) + failure to
understand the average-marginal distinction (comparing benefits and costs of an additional
unit of activity, marginal costs/benefits, NOT the AVERAGE costs and benefits)
MC(x) > MB(x) -> reduce the amount of activity
MC(x) < MB(x) -> increase the amount of activity
Homo economicus: stereotypical decision maker in the self-interest model, personal
material costs and benefits only care for them
Positive question: has a definitive answer
Normative question: does not have a definitive answer, value judgements about what ought
to be or should be
Chapter 2 Supply & Demand
A market consists of the buyers and sellers of a good or service
Demand curve: how much buyers want to purchase for each price -> vertical axis refers to
the real price of the good, negative slope
Horizontal interpretation: how much of a product consumers wish to purchase at various
prices
Vertical interpretation: start with quantity on horizontal axis and read the marginal buyer’s
reservation price on vertical axis -> inverse demand curve
Law of demand: when the price of a product falls, demand for the product will increase ->
when price rises, people switch to substitutes or can simply not afford it any more
Supply curve: the quantity that sellers are willing to supply at any possible price
Law of supply: the quantity supplies rises then the price also prices
Price: the marginal cost of supplying an extra unit
Equilibrium = pareto efficiency, no other combination can be found where not or the buyer
or the supplier gets worse, intersecting of demand and supply curve, maximizes total surplus
Excess supply & excess demand will not be possible, only if e.g., duties interfere
Price ceiling = price cannot rise further than certain price (plafond voor max. prijs) -> excess
demand
Price floors/support = keeps prices above their equilibrium level (floor) -> excess supply
, Price functions: rationing (scare supplies come to the users who place the highest value on
them, short time, consumer side CONSUMERS) + allocative (signals to direct productive
resources among different sectors of economy, long time, production side SUPPLIERS)
Factors that shift demand curve: incomes + tastes + price of substitutes and complements +
expectations + population size
Normal goods: quantity demanded at any prices rises with income
Inferior goods: quantity demanded at any prices falls with income (gehakt)
Complements: an increase in the price of one good decreases demand for the other good
(milk and coffee)
Substitutes: an increase in the price of one good will increase the demand for the other
(coca cola and pepsi)
Factors that shift supply curve: technology (cost-saving) + factor prices (productiefactoren) +
number of suppliers + expectations + weather
Change in quantity demanded = shift along the demand curve
Equilibrium Qs = Qd
Free market exchange helps the poor to get on in life and fairness is best achieved through
redistribution of wealth and resource within society
Change in quantity demanded = shift in supply!!
Chapter 4 Rational Consumer Choice
Bundle: combination of two or more goods
Budget constraint/budget line: the set of all bundles that exactly exhausts the consumer’s
income at given prices
Slope: vertical intercept (rise) / horizontal intercept (run) -> tells us something about relative
prices
Affordable set -> bundle triangle
Composite good: budgeting problem is a choice between not two but N different goods +
the units of the composite goods are defined so that its price is 1 euro per unit + in a choice
between a good X and numerous other goods, the composite good is the amount of money
spent on those other goods
Properties of preference orderings: completeness (consumer is able to rank all possible
combinations of goods and services) + transitivity (for any three bundles A, B and C, if he
prefers A to B and prefers B to C, then he prefers A to C) + more is better (other things qual,
more of a good is preferred) + continuity (small changes in the bundles should not lead to a
jump in preferences) + convexity (mixtures of goods are preferable to extremes)
Indifference curves: a set of bundles among which the consumer is indifferent
Indifference map: graphical summary of consumer’s preference ordering, you can see the
increasing satisfaction
Marginal rate of substitution: the rate at which the consumer is willing to exchange the
good measured along the vertical axis for the food measured along the horizontal axis ->
absolute value of the indifference curve
Consumer’s goal: to choose the best affordable bundle -> raakpunt tussen budget line and
hoogste punt indifference curve -> MRS = Ps / Pf
Corner solutions are exceptions, this is with substitutes, you will only consume one
Interior solution: solution in which consumers consume a positive amount of both goods
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