Economics
the study of the allocation of scarce resources
opportunity cost
the value of the next best use
flow of causes in econ
scarcity -> OC -> trade-offs
Normative
how it should work
positive
how it does work
allocation of goods
authoratarian, market, mixed
nominal
quantities measured in currency
real
tangible things
demand
willingness to pay for marginal unit
why does d drop down
finite income: Income effect and Substitution effect
income effect
can't afford all previous consumption
substitution effect
other goods are relatively more attractive
demand in marginal terms
WTP for MUnit
shifts of d
population, income (normal v. inferior), prices of other goods, tastes
price reflects what?
benefit (WTP)
s slope up?
increasing MOC, diminishing MR
shift of s
price of inputs, tech., competitors
perfect equilibirum
many firms, homogenous goods, good info, well defined property rights
elasticity
%dQ/%dP
demand function
q as a function of p
elas > 1
elastic
marginal beneft
the change in benefit of a small change in x
how to derive d?
rational consumers, fixed income, prefereneces
optimal consumption
MRS = ratio of prices. Also equates the MU per dollar.
money metric utility
U = U(x) + M
M = Y - px
money metric utility proves
law of demand
conflicting substitution and complements
Sub effect: leisure is less expensive, substitue toward leisure
Income effect: if leisure is normal, less leisure and more work
MRS and substitution
big subst. effect from slow declining MRS, complements small subst. effect and both normal goods
Income effect particulars
size depends of fraction of budget spent on good. sign depends on normal or inferior
griffin good
demand increases with p
firms try to
make money! maximize profits
supply curve of firm
MC
production amount
MR = p = MC
production problem
produce at least cost
tech efficiency
don't waste imputs
econ efficiency
input use depends of input price
isoquant
K v. L, slope MPl/MPk
cost minimizing inputs
ration of MP equals ratio of input prices
problems with consumer surplus
weights preferences by income, "one dollar one vote", doesn't capture MC
MMUtility and surplus
MWTP is MUq and CS is total consumer utility
PS
revenue - VC
mmu and CS okay if
good is a small fraction of budget
pareto efficiency. why?
don't want to "add utils," want general equ.
pareto efficient
same resources could be re-allocated to make everyone better off
social surplus
TWTP - VC
cost of tax
DWL