Recht und Ökonomie SS 2011Microeconomics Repetition Part 1 Recht und Ökonomie (Law and Economics)...

Recht und Ökonomie SS 2011 Microeconomics Repetition Part 1

Recht und Ökonomie (Law and Economics)

LVA-Nr.: 239.203

SS 2011

Microeconomics (Repetition Part 1)

1 of 35

Prof. Dr. Friedrich Schneider

Institut für Volkswirtschaftslehre

http://www.econ.jku.at/schneider

2 of 35

Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider

Outline of the section on Microeconomics – Part 1

1. Basic concepts and tools

2. Consumer theory

3. Theory of the firm

4. Interactions of households and firms

3 of 35


1.1 Basic concepts

Three important concepts

—Optimization

• Maximization or minimization

—Equilibrium

—Efficiency

4 of 35


1.2 Basic concepts

Maximize

— Sales

— Profits

— Market shares

— Utility

Minimize

— Cost

5 of 35


1.3 Basic concepts

Equilibrium

— Plans of all parties involved are realized

or

— Ex post equals ex ante

not to be confused with equality

—e. g. quantities sold must – by definition – always be

equal to quantities bought

6 of 35


1.4 Equilibrium in the market

Quantity (per time period)

D

S

P0

Q0

If the price lies above the equilibrium price then:

i) there will be a surplus,ii) quantity supplied will

exceed quantity demanded,

iii) price will start falling.

P1

Surplus

Price(€ per unit)

7 of 35


1.5 Basic concepts

Efficiency in production

— will be reached when

one cannot produce the same level of

output at lower cost, i. e. using the minimal

resources, valued at their (factor) prices;

OR

one cannot produce more output using the

same set of inputs.

8 of 35


1.6 Basic concepts

Pareto efficiency or

allocative efficiency

— will be reached when

no individual can be made better off without

making another person worse off.

9 of 35


1.7 Basic tools

Functions:

— A dependent variable (y) is a function of an

independent variable (x)

y = f(x) or y = y(x) or y = g(x, z)

y = bx or y = a – bx or y = 10 – .5x

y = a – bx + cz

10 of 35


1.8 Basic tools Graphs: linear (y = a – bx)

x (quantity)

y (price)4

8

2

4

Linear demand curve

11 of 35


U1

Indifference curve

1.9 Basic tools Graphs: non-linear (y = a/x)

x (food)

10

20

30

40

10 20 30 40

y (clothing)

50

12 of 35


2 Consumer theory

Preferences

Utility functions

Indifference curves

Consumer optimum

Marginal benefit and marginal cost

13 of 35


2.1 Preference orderings When comparing bundles of goods, consumer

preferences are supposed to fulfil the following

axioms:

Preferences of individuals (or households) are— complete (vollständig, d.h. alle Warenkörbe sind

vergleichbar und bewertbar)

— transitive (Warenkörbe: wenn A>B und B>C, dann ist auch

A>C)

— non-satisfactory (“mehr ist besser als weniger”)

— (reflexive: “jeder Warenkorb ist so gut wie er selbst”)

14 of 35


2.2 Utility functions

Preferences can be represented by

— utility functions which are functions that

assign higher numbers to bundles of goods

which are preferred over others.

— Utility functions are ordinal representations of

preferences.

15 of 35


2.3 Indifference curves

Another representation of preferences are

indifference curves:—Each bundle of goods on a specific indifference curve

yields the same level of utility (for a specific

consumer/household).

Indifference curves—have a negative slope;

—are (usually) convex towards the origin;

—cannot intersect;

— represent greater utility if farther away from the origin.

16 of 35


U1

2.4 Indifference curve (graph)

x (food)

10

20

30

40

10 20 30 40

y (clothing)

50

17 of 35


U2

U3

2.5 Indifference map

x (food)

y (clothing)

U1

AB

D

Bundle A Is preferred to bundle B; B is preferred to D.

18 of 35


2.6 Budget constraint (1)

x (food)

y (clothing)

80 120 16040

20

40

60

80

0

An increase in income shifts the budget constraint parallel

outwards (to the right).

(I = €160)L2

(I = €80)

L1

L3

(I =€40)

A decrease in income shifts the budget constraint parallel inwards (to the left).

19 of 35


2.7 Budget constraint (2)

x (food)

y (clothing)

80 120 16040

40

(Px = €1)

L1

An increase in the price of food pivots

the budget constraint clockwise.

L3

(Px= €2)(Px = €0.5)

L2

A decrease in the price of food pivots

the budget constraint counterclockwise.

20 of 35


2.8 Consumer optimum

The consumers’/households’ objective is

to maximize utility,

i.e. to allocate her scarce budget such that

(graphically) she reaches the highest (farthest to

the right) indifference curve.

21 of 35


U

2.9 Consumer optimum (graph)Py = €2 Px= €1 I = €80

budget constraint

A

At bundle A the budget constraint and the indifference curve are tangent

to each other, no higher level of utility can be reached at given prices and income

in A:MRS =PxPy = 0,5

x (food)

y (clothing)

40 8020

20

30

40

0

22 of 35


Price-consumption-curve

2.10 Demand curve (1)

x (food)

y (clothing)

4

5

6

U2

U3

A

BDU1

4 12 20

The price-consumption-curveconsists of all utility-maximizing bundles for different food prices.

23 of 35


2.11 Demand curve (2)

Demand curve

The demand curve relates the quantity demanded by the consumer to its price.

x (food)

Price of food

H

E

G

€2,00

4 12 20

€1,00

€0,50

24 of 35


2.12 Price elasticity of demand

The price elasticity of demand (EP) is equal to:

(P … price; Q … quantity; ∆ … change in)

P)Q)/(%(% EP

25 of 35


2.13 Price elasticity of demand (graph)

Q

P

Q = 8 - 2P

Ep = -1

Ep = 0

- EP The lower part of the demand curveIs less elastic than the upper part.4

8

2

4

Linear demand curveQ = a - bPQ = 8 - 2P

26 of 35


2.14 Elastic and inelastic demand

When

— EP > 1 … elastic demand

— EP = 1 … unitary elastic demand

— EP < 1 … inelastic demand

27 of 35


2.15 Marginal benefit and cost

Any constrained optimum can be viewed as a situation

where marginal cost equals marginal benefit

i. e.

MC = MB

28 of 35


Marginal cost

Marginal benefit

MC=MB

2.16 Cost and benefit of pollution reduction

Reduction in pollution

€

29 of 35


3 Theory of the firm

The firms’ objective is profit maximization.

Profit maximization implies cost minimization.

Firms are constrained by the technology at any given

point in time.

The main task of a firm is the optimal combination of

inputs.

We assume the firms to face competitive markets both for

their inputs and their output.

30 of 35


3.1 Profit maximization

Profit (π) is defined as the difference between total

revenue and total cost.

A firm will maximize its profits by producing at an output

level where marginal cost (MC) is equal to marginal

revenue (MR).

For a firm operating in a perfectly competitive market MR

will be equal to P.

Thus the above condition becomes MC = P.

31 of 35


q0

Profit lost atq1 < q*

Profit lost atq2 > q*

q1 q2

3.2 Profit maximization (graph)

10

20

30

40

Price

0 1 2 3 4 5 6 7 8 9 10 11

50

60MC

AVC

ATCAR=MR=P

Outputq*

At q*: MR = MCand P > ATC

D A

BC

q1 : MR > MC andq2: MC > MR andq0: MC = MR but

MC falls

32 of 35


Price

MC

Output

AVC

ATC

P = AVC

P1

P2

q1 q2

S = MC above AVC

3.3 Short-run supply of a competitive firm

Shut down

33 of 35


3.4 Market demand and supply

Market demand is the (horizontal) sum of the

individual households’ demand curves (derived

from utility maximization).

Market supply is the (horizontal) sum of the

individual firms’ supply curves (derived from profit

maximization, a section of the firms’ MC-curve).

34 of 35


3.5 Market equilibrium (graph)

D

S

Q1 Q2

P2

shortage

Output

Price

Suppose the price to be P2: 1) QD = Q2 > Qs = Q1

2) There is a shortage equal to Q2 – Q1.3) Producers raise the price.4) Quantity supplied increases, quantity demanded decreases.5) Equilibrium will be reached at P3, Q3.

Q3

P3

35 of 35


3.6 Perfectly competitive markets

Perfect competition

— implies that no individual actor can influence the

market price;

— firms may have positive or negative profits in the short

run;

— leads to zero profits for each firm in the long run;

— will result in a Pareto optimal allocation of resources in

the long run.

Recht und Ökonomie SS 2011Microeconomics Repetition Part 1 Recht und Ökonomie (Law and Economics)...

Documents

Transcript of Recht und Ökonomie SS 2011Microeconomics Repetition Part 1 Recht und Ökonomie (Law and Economics)...