Summary Microeconomics, Institutions and Welfare (ECB1MI) chapter 1-18. All the information needed to know for the exams. University Utrecht, Economics and Business Economics. Lecturer: Stephanie Rosenkranz.
1.1 The Themes of Microeconomics
- Making optiaa trade-ofs (for consuiers, workers and fris).
- Trade-offs based on prices -> foried in Markets.
- Expaanatons and predictons based on theory -> in teris of basic ruaes and assuiptons.
- Model: Matheiatcaa representaton of an enttt based on econoiic theort.
-> Modeas and theort not aawats true -> depend on assuiptons.
- Positive analysis: Expaanaton and predicton -> reaatonships of cause and effect.
- Normative analysis: What ought to be -> suppaeiented bt vaaue judgeients.
1.2 What Is a Market?
-> Coaaecton of bu ters and seaaers that
through interactons deteriine the price of a product or set of products.
- Arbitrage: Buting at a aow price and seaaing soiewhere ease at a higher price.
- Compettive iarket: Mant buters and seaaers -> do not have individuaa iipact on price.
- Market price: The singae price in the iarket -> can fuctuate rapidat.
- Market defniton (Extend of the iarket) iiportant:
- Firis need to know their coipettors and the boundaries to set price, advertsing and
capitaa investient.
- Governients need to be abae to iake pubaic poaict decisions (for exaipae bt ierges).
1.4 Why Study Microeconomics?
- To heap actuaa decision-iaking probaeis with the heap of iicroeconoiic principaes.
Chapter 2: The Basics of Supply and Demand
2.1 Supply and Demand
- Supply curive: Reaatonship between quanttt suppaied and price (upward saoping).
, -> Shif aaong the suppat curve: Change in price.
-> Shif of the suppat curve: Changes in other suppat-deteriining variabaes.
- Demand curive: Reaatonship between quanttt deianded and price (downward saoping).
-> Shif aaong the deiand curve: Changes in quanttt deianded.
-> Shif of the deiand curve: Change in deiand.
- Substtutes: When an increase in price for one good aeads to an increase in quanttt
deianded for a different good.
- Complements: When an increase in price for one good aeads to a decrease in quanttt
deianded for a different good.
2.2 The Market Mechanism
- Equilibrium: Intersecton of deiand and suppat curve -> at the price where quanttt
deianded and suppaied are equaa -> no surpaus or shortage.
- Onat when iarkets are compettive -> buters and seaaers have aitae iarket power.
2.3 Changes in Market Equilibrium
-> Resuatng froi changes in deiand and suppat.
-> Sizes and directons depend on the dependence of suppat and deiand on price and other
variabaes.
2.4 Elastcites of Supply and Demand
- Eaastcitt ieasures sensitvitt of one variabae to another.
- Price elastcity of demand (Ep) is the percentage change in quanttt deianded resuatng
froi an 1-percent increase in price.
-> Ep = % change in Q / % change in P
-> Ep = P/Q * dQ/dP
-> Usuaaat negatve: s price increases, quanttt deianded wiaa decrease.
- Price elastc: If Ep is siaaaer than -1.
- Price inelastc: If Ep is between 0 and -1.
- Infinitely elastc: Consuiers wiaa onat but at one price -> ant change in price resuats to a
quanttt deianded of 0.
- Completely inelastc: Consuiers wiaa but a fxed quanttt, not iater what price is.
- Eaastcitt is not constant -> differs aaong the curve.
- Income elastcity (EI) = I/Q * dQ/dI (or % change in Q / % change in I)
- Cross price elastcity of demand (EQ2P1) = P1/Q2 * dQ2/dP1 (or % change in Q2 / % change in
P1).
-> Positve with substtutes and negatve with coipaeients.
- Price elastcity of supply: The saie as deiand -> usuaaat positve.
-> re aaa point eaastcites -> Eaastcitt at a partcuaar point.
- Arc elastcity: Eaastcitt caacuaated over a range of prices: verage price and quanttt used.
-> rc eaastcitt of deiand = verage P/ verage Q * dQ/dP
2.5 Short-Run iversus Long-Run Elastcites
- Long run: If consuiers and producer have sufcient tie to adjust fuaat to the price
, change.
- Deiand iore eaastc in aong run than short run -> takes tie to adjust + goods depend on
stock (stock changes saowat).
- Durabiaitt: Durabae goods are in short run iore eaastc -> the totaa stock of consuiers is
reaatveat aarge, so if price increases consuiers wiaa but aess -> eventuaaat thet have to
repaace their stock -> quanttt deiand wiaa increase again -> aong run is aess eaastc.
- Incoie eaastcites are the saie, usuaaat aong run iore eaastc, for durabae goods the other
wat around.
- Suppat aaso iore eaastc in aong run -> soie goods are even coipaeteat ineaastc in short
teri -> fxed nuiber of suppat.
- Durabae goods other wat around again.
2.7 Efects of Goivernment Interiventon – Price Controls
- Governient reguaate iarkets through taxes and subsidies.
- Ceiaing price (iaxiiui price) -> ofen beaow equiaibriui price -> suppat wiaa drop, deiand
increase -> shortage wiaa deveaop.
- Peopae gain and aose froi price controas -> in this case suppaiers and soie consuiers aose.
Chapter 3: Consumer Behaivior
3.1 Consumer Preferences
- Market basket: List with specifc quanttes of one or iore goods.
- Basic assuiptons about preferences:
- Completeness: Preferences are coipaete and can be coipared (between baskets and
B, a consuier wiaa either prefer one or be indifferent).
- Transitivity: If > B and B > C, aaso > C.
- More is beter than less: Goods are desirabae -> no bads.
- Diminishing MRS: Necessart to iake indifference curve convex (bowed inward),
consuiers prefer baaanced baskets.
- Indiference curive: Graph showing aaa coibinatons of baskets that provide a consuier
with the saie aevea of satsfacton.
-> Points above are preferred over the choices on the indifference curve.
-> Points beaow are not preferred over the choices on the indifference curve.
-> Downward saoping -> iore is beter than aess.
- Indiference map: Graph with a set of indifference curves.
-> Indifference curves can not intersect -> contradicts assuipton iore is beter than aess.
- The Marginal Rate of Substtuton (MRS): MRS of F to C: The aiount of C a person is
wiaaing to give up to obtain one extra unit of F.
-> MRS is equaa to saope of indifference curve.
- Perfect substtutes: If MRS is constant -> indifference curve straight aine.
- Perfect complements: Indifference curves shaped as right angaes -> consuier does not
want to give up a right shoe for a aef shoe, if he is having iore aef shoes -> useaess.
- Utlity: Nuiericaa score representng the satsfacton of a consuier froi a basket.
-> can be ieasured through functon and coipared with other utaittys in graph.
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