Lecture 1 and 2 ___ 110914 120914

8/11/2019 Lecture 1 and 2 ___ 110914 120914

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12/09/2014

1

Crash Course

Introduction to ECONOMICS

Prof. Stefano Zambelli Dept. of Economics and Management - Trento

Lecture 1 - September, 11th 2014A. Introduction to Microeconomics: Consumer

Decisions, Production, Inputs and Costs

MAIN – MIM – MEC

Reading Material:

Baumol, W., and Blinder, A., 2006, Economics: Principles and Policy, Thomson – South-Western.ISBN 0-324-32343-3 (International Student Edition)

BB – Ch. 5, 6, 7 & 8 pp. 79 – 172

LiteratureBaumol, !, and Blinder, "!, 200#, Economics: Principles and Policy, $%omson & 'out%-estern! I'B( 0-)24-)2)4)-) *International 'tudent +dition

Meetin 1 +ntr. $est!

0/09/2014

Meetin 2 A. Introduction to Microeconomics: Consumer Decisions, Production, Inputs and Costs

11/09/2014 BB & C%! , #, pp! 9 & 12

!)0-10!)0

Meetin ) B. Introduction to Microeconomics: Consumer Decisions, Production, Inputs and Costs

12/09/2014 BB & C%! , #, pp! 9 & 12

10!)0-12!)0

Meetin 4 Mar3et orms: Per5ect Competition, Monopol. and 6liopol.

1/09/2014 BB & C%! 10, 11, 12 pp!19 & 2)

!)0-10!)0

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2

Meetin An Introduction to Macroeconomics and Economic Policy

1#/09/2014 BB & C%! 22 C%! 2) pp! 4#)-0

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Meetin # Accounting Principles – National Accounts Demand Side, Equilirium

1/09/201) BB - C%! 2 C%! 2# pp!29-)

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Meetin 7o8ernment +penditure, Mone. and t%e Ban3in '.stem and +conomic Polic.

1/09/201) BB & C%! 2 C%! 29 pp!9-#)4

10!)0-12!)0

Meetin +conomic Polic. -- International $rade and Comparati8e "d8antaes1/09/201) BB & C%! )0 C%!)1 pp! #)-#2

10!)0-12!)0 BB &C%! )4, ) )#pp! 11- #)

Meetin 9 +I$ $+'$!

10/09/201)

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%at is ;+conomics< a=out>

• "dam 'mit% -- ealt% o5 (ations

• "llocation and production o5 scarce resources

• Distri=ution

•?!

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)

orld @earl. Income

Distri=ution

• Auestion: ;it% t%e emerence o5capitalism %as distri=ution o5 ealt%=een more eual><

• 'ince t%e =einnin o5 t%e Industrial

e8olution %as t%e di55erence =eteenlo income indi8iduals and %i% incomeindi8iduals =een reduced or t%econtrar.>

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4

Individuals have basicNEEDS

NEEDTO

BREATH

NEEDTOEAT

NEEDTO

SLEEP

NEEDTO”BODYLY”

FUNCTIONS

NEEDTO

PROTECTION”Housing”

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'tandard "ssumptions in t%e ;Mainstream<ConsumerEs Decision $%eories:

Completeness

• "iom o5 Consumer $%eor.

• Complete: «Any two bundles can be compared.That is, given any x-bundle and any y-bundle it isassumed that

– X is preferred with respect to Y

– Y is preferred with respect to X

– X and Y are indifferent Varian, Intermediate Microeconomics, p. 35

'tandard "ssumptions in t%e ;Mainstream<

ConsumerEs Decision $%eories:

e5lei8it.


• e5lei8e: F Any bundle is at least as good as

itself!!!!” Varian, Intermediate Microeconomics, p. 35

• This is TRIVIAL or is it not?

• Time dimension and stability of preferences!

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#

'tandard "ssumptions in t%e ;Mainstream<ConsumerEs Decision $%eories:

$ransiti8it.


• $ransiti8e: «If the consumer thinks that X is at

least as good as Y and that Y is at least as

good as Z, than the consumer thinks that Y is

at least as good as Z” Varian, Intermediate Microeconomics, p. 35

'tandard "ssumptions in t%e;Mainstream< ConsumerEs Decision

$%eories

• Complete: «any two bundles can be compared.

That is, given any x-bundle and any y-bundle it

is assumed that

– X is preferred with respect to Y

– Y is preferred with respect to X

– X and Y are indifferent

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Pre5erences

Convex Indifference Curves

1 x

2 x

*

1 x

Indifference Curve

),( 21 x xU U =

*

2 x

Pre5erences

Indifference Curves Cannot Cross

1 x

2 x Indifference Curve

),( 21 x xU U =Y

Z

X

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Pre5erences

Perfect Substitutes

1 x

2 x

*

1 x

Indifference Curve

),( 21 x xU U =

*

2 x

Pre5erences

Perfect complements

1 x

2 x

*

1 x

Indifference Curve

),( 21 x xU U =

*2 x

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Pre5erences

X2 is a “BAD” good

1 x

2 x

*

1 x

Indifference Curve

),( 21 x xU U =

*

2 x

ell-Be%a8ed Pre5erences

Convex Indifference Curves

1 x


),( 21 x xU U =

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(on & ell - Be%a8ed Pre5erences Non - Convex Indifference Curves

1 x


),( 21 x xU U =

(on-ell-Be%a8ed Pre5erences

Concave Indifference Curves and preferences

1 x


),( 21 x xU U =

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'tandard +ample

Indi55erence Cur8es and Budet Lines

• $o oods

)

~

(

~~

),(

22112211

21

M x p x p x p x p

x xU

=+≤+

'tandard +ample - Indi55erence Cur8es and Budet Lines

The Agent’s Decision

1 x

2 x

1

2

1 x p

p−

2

2211

~~

p

x p x p +

*

1 x

*2 x

Budget Constraint

Indifference Curve

),( 21 x xU U =

1

2

1

21

2

1

2

~~ x p

p x x

p

p x −+=

1

2211~~

p

x p x p +

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Non Convex Preferences

1 x

2 x

1

2

1 x p

p−

2

2211 ~~

p

x p x p +

*

1 x

*

2 x

Budget Constraint

Indifference Curve

),( 21 x xU U =

1

2

1

21

2

1

2

~~ x p

p x x

p

p x −+=

1

2211~~

p

x p x p +**

1 x

**

2 x

• ealt% +55ect

• 'u=stitution +55ect

• Marinal ate o5 'u=stitution =eteen 7oods

• 7oods are de5ined as a continuum

• Compleit. o5 t%e decision increases %enoods increase

( )( )121

221

/ ),(

/ ),(

dx x xdU

dx x xdU MRS =

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1)

1 x

2 x

1

2

1

21

2

1

2

~~ x p

p x x

p

p x −+=


The Agent’s Decision

2 p′

2 p ′′′

2 p ′′

22 p p ′′>′ 222 p p p ′′′>′′>′

1 x

2 x

1

2

p

p 2 x

2 x

Individual Agent Demand Functions

2

1

p

p

2 x

1 x

Indifference Curve

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1 x

2 x

1

2

p

p 2 x

2 x


2

1

p

p

2 x

1 x

Indifference Curve

1 x

2 x

1

2

p

p 2 x

2 x


2

1

p

p

2 x

1 x

Indifference Curve

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• Revealed Preferences

• Cardinal Utility

• Ordinal Utility

rom indi8idual demand cur8es

to areate cur8es

• "reate demand 5unctions are t%e GsumE o5indi8idual demand 5unctions

• Pro=lems o5 composition: t%e result o5 t%eareation mi%t =e di55erent 5rom t%e

indi8idual atoms

• Partial 8ersus lo=al anal.sis: t%ere mi%t =e5eed =ac3 e55ects t%at ma. o in all directions

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1#

Collecti8e Htilit. unction>'ocial el5are unction>

• Does t%ere eist a Collecti8e Htilit. 5unction

%ic% %as t%e same properties as t%e

indi8idual utilit. 5unction>

So called

”Law of Diminishing Marginal Utility” *p! )

Utility

Quantity

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ell-Be%a8ed Pre5erencesConvex Indifference Curves

1 x


),( 21 x xU U =

(on ell-Be%a8ed Pre5erences Realistic case of Satiation

1 x


),(21

x xU U =

Satiation x1

Satiatio x2

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1


1 x


),( 21 x xU U =

Satiation x1

Satiatio x2


1 x


),(21

x xU U =

Satiation x1

Satiatio x2

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So called

”Law of Diminishing Marginal Utility” *p! )

Utility

Quantity

SATIATIONTHIS CASE IS EXCLUDEDWHY?

Agents have total information about

all the available goods,

they can establish a ranking, between all

the possible bundles of goods.The agents’ preferences are stable

And decisions are ’consistent’

Preferences are postulated to be

Complete

Reflexive

Transitive

Substantive Rationality Procedural Rationality

Agents take decisions with rules of

thumbs.

They do not have complete

information and their preferences do notfollow the postulates of the utility

Maximizers.

Decisions are taken following some sort

of heuristics and the

Decision procedures are subject to

Frequent updating.

AS IF AS IF AS IF AS IF - assumption

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• Consumer 'urplus

• In5erior oods etc?

• (ormal oods etc?

• %at is t%e e55ect o5 t%e indi8idual decisions onprices>

• Price ta3ers> Prices as parameters

Price +lasticit. o5 Demand

PP

QQ

∆

∆

=P

Qη

Documents

Lecture 1 and 2 ___ 110914 120914