Intermediate Microeconomic theory I
University of Alberta XiaoGang Che
Chapter One Overview
1. Defining Microeconomics and Macroeconomics 2. Microeconomic Modeling Tools • Constrained Optimization • Equilibrium Analysis • Comparative Statics 3. The Types of Microeconomic Analysis • Positive Analysis • Normative Analysis
Microeconomics is the study of how individual economic decision-makers such as consumers, workers, firms allocate scarce resources among alternate uses. This study involves both the behavior of these economic agents on their own and the way their behavior interacts to form larger units, such as markets.
Macroeconomics analyzes how an entire national economy performs, including aggregate levels of income and employment, the levels of interest rates and prices, the rate of inflation, and the nature of business cycles in a national economy. In this term, we focus on Microeconomics.
Key Societal Questions
Societies must answer these questions that relate to microeconomics: 1. What goods and services will be produced and in what quantities 2. Who will produces these services and how will they produce them 3. Who will receive these goods and services and how will they get them Summary: how can we (a consumer/a firm) allocate the limited resources optimally?
Models are used to analyze decision making problems for a consumer or a firm in a market.
Examples: Demand-Supply Model, Job Search Model, Bargaining Model, Auctions ….. Given assumptions in a model, we derive the equilibrium outcome and do comparative statics.
Exogenous & Endogenous Variables
Variables that have values taken as given in the analysis are exogenous variables. Variables that have values determined as a result of the model’s workings are endogenous variables. Now suppose you are the CEO for a car company. After observing the market prices, you decide what types of cars and how many cars your company will produce. In this case, market prices are exogenous variables. The quantities of different types of cars your company decides to produce are endogenous variables.
Defined: The Marginal Impact measures the incremental impact of the last unit of a variable on another variable.
The Objective Function
Dependent on How the Objective Function is Specified
The Objective Function specifies what the agent cares about.
•a consumer wants to maximize his/her utility •a firm wants to maximize its profits. •a social planner (government) wants to maximize total social welfare.
Constraints are whatever limits are placed on the resources available to the agent.
Time Budget Other Resources Technical Capabilities The Marketplace Rules, Regulations, and Laws Chapter One 10
The Constraint Optimization
Behavior can be modeled as optimizing the objective function, subject to various constraints.
Food (F), Clothing ( C ), Income (I), Price of food (pf), price of clothing (pc) Satisfaction/utility from purchases: S = (FC)/2 Max S(F,C) subject to: pfF + pcC < I Chapter One 11
Defined: Equilibrium is defined as the point where demand just equals supply in this market (i.e., the point where the demand and supply curves cross).
Equilibrium analysis is an analysis of a system in a state that will continue indefinitely as long as the exogenous variables (factors) remain unchanged. Example: equilibrium price and quantity, at which market clears.
Comparative Statics Analysis
A Comparative Statics Analysis compares the equilibrium state of a system before a change in the exogenous variables to the equilibrium state...