Equilibria
in the short run (some factors are unchanged) and in the long run.
Chapter 2
*
Vector variables and vector functions. * The inner product of two vectors. * With the price vector p = ( p1, …, pn ), the value of the commodity bundle x = ( x1, …, xn ) is pTx = Σi pixi.
w.p. to z, then x is w.p. to z.
The indifference sets, the indifference curves.
Fig.
They cannot cross each other.
indifference curves
x2
x1
Perfect
substitutes and perfect complements. Goods, bads, and neutrals. Satiation. Figs
Slope
= - p’1/p2
m/p’1
m/p1
Taxes, quantity taxes, value taxes A subsidy
is the opposite of a quantity tax.
(ad valorem taxes), and lump-sum taxes.
Rationing. Their effects on the budget set.
MRS
Usually

Fig
Convex
indifference curves exhibit a diminishing marginal rate of substitution. Fig.
x2
Convexity
(y1,y2)
Averaged bundle
(x1,x2)
x1
Chapter 4
The circular flow of economic activities.
product market
factor market
The product market and the factor market.
The market relation is mutual and voluntary.
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.
However, two goods are often enough to discuss.
The
budget constraint: p1 x1 + p2 x2 ≤ m.
The
budget line and the budget set (the market opportunity set).
Main economic activities: Consumption, Production, and Exchange.
Microeconomics and macroeconomics:
to show the market mechanism (the invisible hand), to supplement it.
TM

MM(x*)
AM(x*)
x*
x
3, TM increasing (decreasing) if and only if MM > 0 ( MM < 0 ); 4, If TM is at maximum or minimum, then MM = 0;
5, AM increasing (decreasing) if and only if MM > AM ( MM < AM ); 6, If AM is at maximum or minimum, then MM = AM, or MM cuts AM at the latter’s maximum or minimum.
MICROECONOMICS
Classroom Lecture Notes
(3 credits, as of 2004)
based on Hal R. Varian’s Intermediate Microeconomics, Sixth Edition, referring to Pindyck and Rubinfeld’s Microeconomics, Fourth Edition.
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 what’s best for them.

Figs
Monotonicity
x2 Better bundles
Better bundles x1
(x1, x2)
The
marginal rate of substitution (MRS) measures the slope of the indifference curve.
= d x2 / d x1, the marginal willingness to pay ( how much to give up of x2 to acquire one more of x1 ). negative.
Main decision-making agents:
1 individuals (household), 2 firms, and 3 governments.
Objects of economic choice are
commodities,
including
goods and services.
The equilibrium principle:
Prices adjust until demand and supply are equal.
The demand curve:
A curve that relates the quantity demanded to price.
The reservation price:
The indifference curves are the projections of contours of u = u ( x1, x2 ).
A concept to evaluate different ways of allocating resources.
A Pareto improvement is a change to make some people better off without hurting anybody else.
Rational agents and stable preferences
Bundle
x is strictly preferred (s.p.), or weakly preferred (w.p.), or indifferent (ind.), to Bundle y. (If x is w.p. to y and y is w.p. to x, we say x is indifferent to y.)
An
economic situation is
Pareto
or
efficient
Pareto optimal if there is already no way to make any more Pareto improvement.
Short run and long run
Perfect substitutes
Blue pencils Indifference curves
Red pencils
Perfect complements
Left shoes
Indifference curves Right shoes
Well-behaved
preferences are monotonic (meaning more is better) and convex (meaning average are preferred to extremes).
Assumptions about Preferences
Completeness: x is w.p. to y or y is
w.p. to x
bundle x.
for any pair of x and y.
Reflexivity: x is w.p. to x for any Transitivity: If x is w.p. to y and y is
The
slope of the budget line: d x2 /d x1 = – p1 / p2 . the budget line moves when the income changes, or when a price changes.
How
Budget line and budget set