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INTRODUCTION 1
The Budget Constraint 69 Budget Constraint Algebra 70 A Numerical Example 71 Maximizing Utility 71 Using the Selected Model 73 Application 2.4: Ticket Scalping 74. Values of Price Elasticity of Demand 119 Price Elasticity and Effect of Substitution 119 Price Elasticity and Time Repayment.
UNCERTAINTY AND STRATEGY 137
The game in normal form 180 The game in extended form 180 Solution to the Nash equilibrium 181 Dominant strategies 182.
PRODUCTION, COSTS, AND SUPPLY 213
Demand Shift: Price as a Rationalizing Device 304 Applicability of the Very Short-Run Model 305 Short-Run Supply 305. Shape of the Long-Run Supply Curve 319 The Case of Increasing Cost 320 Long-Run Elasticity of Supply 321 .
TO THE INSTRUCTOR
Many other aspects of the crisis are mentioned in passing in the revised versions of our applications. We've also improved the other student resources in the text by updating and refocusing many of the micro-quizzes, review questions, and problems.
TO THE STUDENT
We have placed this chapter at the end because it represents a departure from the paradigm used in the rest of the book. Second, we have merged what was previously a separate chapter on applications of the competitive model into the final section of the chapter on perfect competition.
SUPPLEMENTS TO THE TEXT
ACKNOWLEDGMENTS
Kunkler, who managed to devise ways to incorporate the book's many elements into an attractive whole. Christopher Snyder is grateful to his wife, Maura, for putting in the long hours necessary for this revision and for providing financial insight from her teaching of the material.
INTRODUCTION
ECONOMIC MODELS
As the quote in the introduction to this section indicates, economics (especially microeconomics) is the study of “the ordinary affairs of life.” This means that economists consider things like airline tickets, house prices or restaurant menus to be interesting topics. , which are worthy of detailed study. The study of economics cuts through the clutter of television soundbites and the hot air of politicians who often obscure rather than illuminate these issues.
WHAT IS MICROECONOMICS?
If these are the kinds of questions that interest you, this is the place to be. Our goal here is to help you understand the market forces that affect all of our lives.
A FEW BASIC PRINCIPLES
If clothing production is expanded to 12 units per year (point B), the opportunity cost of clothing will rise from half a unit of food to 2 units of food. For example, suppose that the economy is operating at a point on its production possibility frontier where the opportunity cost of one unit of clothing is one unit of food.
USES OF MICROECONOMICS
For example, after a relatively large portion of prey has been caught in a certain area, a hawk will go elsewhere. Of course, many of the benefits of college (such as better appreciation of culture, friendships, etc.) have no monetary value.
THE BASIC SUPPLY-DEMAND MODEL
The relative price of a deer is high because of the extra labor costs involved in capturing one. The curve labeled ''Demand'' shows the amount of good people want to buy at each price.
HOW ECONOMISTS VERIFY THEORETICAL MODELS
This means that exports are given by the difference between the amount of this produced crop and the amount that is the domestic need. As in the physical sciences, they argue that the proper role of theory is to explain the real world as it is.
SUMMARY
REVIEW QUESTIONS
The increase in the minimum wage would represent an unjustified interference in the private relations between workers and their employers.''. Raising the minimum wage would benefit higher-wage workers and probably be supported by organized labor.''
PROBLEMS
Can you think of any reasons why you would prefer part a of the graph to part b? Use your graph to estimate the marginal tax rates for the income levels given in part a.
MATHEMATICS USED IN MICROECONOMICS
FUNCTIONS OF ONE VARIABLE
In Figure 1A.2, the X-intercept changes from 10 to 5 as the slope of the graph changes from 1 to 2. For example, the slope of the function shown in Figure 1A.4 at point B is the slope of the tangent line illustrated at that point.
FUNCTIONS OF TWO OR MORE VARIABLES
Another way to see the deviations in a multivariate function is to draw its contour lines. For the moment, the most important fact to note is that the slope of the contour lines is constantly changing - that is, the terms at which X and Z can be changed while.
SIMULTANEOUS EQUATIONS
Changing just one of the numbers in equation set 1A.20 produces a completely different solution set. The shift in the demand curve in Figure 1A.4 clearly resembles the change in the simultaneous equation in Figure 1A.6.
EMPIRICAL MICROECONOMICS AND ECONOMETRICS
In general, therefore, it appears that the increase in demand can explain a good part of the price increase in the summer of 2008. We then plug this into the model and proceed to solve for the values of the endogenous variables.
DEMAND
UTILITY AND CHOICE
UTILITY
These other things appear after the semicolon in equation 2.1 because we assume that they do not change while looking at the individual's choice between XandY. If one of the other things should change, the benefit from some particular amount of XandY may be very different from what it was before.
ASSUMPTIONS ABOUT PREFERENCES
One puzzle in the relationship between income and happiness is that a person's happiness does not seem to increase as he or she becomes richer over his or her lifetime. In Figure 2.1, all points in the dark shaded area are preferred to quantities X* of goodXandY*of goodY.
VOLUNTARY TRADES AND INDIFFERENCE CURVES
Remember Friedman's pool player analogy from Chapter 1—the laws of physics can explain his or her shots even if the player knows nothing about physics. In the first trade, two hamburgers are given up to get one more soft drink—the MRS is 2 (as we have already shown).
INDIFFERENCE CURVE MAPS
As we pointed out, there is no precise way to measure the level of utility associated with, say, U2. This card tells us everything you need to know about this person's preferences for these two goods.
ILLUSTRATING PARTICULAR PREFERENCES
For example, in Figure 2.5(c) we show an individual's indifference curve for Exxon and Chevron gasoline. The linear indifference curve in Figure 2.5(c) reflects perfect substitutability between these two goods.
UTILITY MAXIMIZATION: AN INITIAL SURVEY
Therefore, he or she is always willing to trade one gallon of Exxon for one gallon of Chevron—the MRS along any indifference curve is 1.0. This person (quite naturally) prefers to enjoy left shoes (on the horizontal axis) and right shoes (on the vertical axis) in a pair.
SHOWING UTILITY MAXIMIZATION ON A GRAPH
The downward slope of the budget line shows that each person can afford to buy more, only if purchases are cut back. The budget constraint can be used in conjunction with the individual's indifference curve map to show this process of utility maximization.
USING THE MODEL OF CHOICE
Chevron is the more expensive of the two brands, so this person decides to buy only Exxon. Finally, the utility-maximizing situation shown in Figure 2.9(d) indicates that this person will only buy the pair of shoes.
GENERALIZATIONS
The Open Golf Championships (in which players are ranked by the number of strokes they make); (f) results of. Would a doubling of the price of steak, the price of lettuce, the price of tomatoes, and this person's income change the budget constraint described in part c.
DEMAND CURVES
INDIVIDUAL DEMAND FUNCTIONS
The quantities of X and Y that the individual chooses when faced with the constraint in Equation 3.3 are exactly the same as when the individual is faced with the constraint in Equation 3.4. They will be on exactly the same indifference curve before and after inflation.
CHANGES IN INCOME
Of course, as Figure 3.1 shows, the demand for some "luxuries" (such as Y) may increase rapidly as income rises, but the demand for "necessities" (such as X) may increase less rapidly. How the demand for inferior goods responds to rising income is shown in Figure 3.2.
CHANGES IN A GOOD’S PRICE
When the price of X falls, the budget line shifts outward to the new budget constraint, as shown in the figure. This unusual result can be explained by looking at the size of the income effect of a change in the price of potatoes.
AN APPLICATION: THE LUMP-SUM PRINCIPLE
In general, the illustration of the lump sum principle in Figure 3.7 suggests that the loss of utility associated with the need to collect a certain amount of tax revenue can be kept to a minimum by taxing goods for which substitution effects are small. On the other hand, taxes on goods for which there are many substitutes will cause people to drastically change their consumption plans.
CHANGES IN THE PRICE OF ANOTHER GOOD
In this figure, the income effect from the fall in the price of good X is strong enough to reverse this result. Two goods are complements if an increase in the price of one causes a decrease in the quantity consumed of the other.
INDIVIDUAL DEMAND CURVES
The quantity of water demanded would probably not respond strongly to changes in its price; that is, the demand curve would be nearly vertical. Because food as a whole has no substitutes (although individual food products obviously do), an increase in the price of food will not produce significant substitution effects.
SHIFTS IN AN INDIVIDUAL’S DEMAND CURVE
This shift in the demand curve is shown in panel c – at P1, the quantity demanded of coffee falls from X1 to X2. In panel c, the demand curve shifts inward due to an increase in the price of Y; this means that XandYare is complementary.
TWO NUMERICAL EXAMPLES
The downward movement along a stationary demand curve in response to a fall in price is called an increase in quantity demanded. An increase in the price of a good causes a decrease in the quantity demanded (a shift along the demand curve), whereas a change in another factor can cause a decrease in demand (a shift of the entire curve to the left).
CONSUMER SURPLUS
Because the demand curve in Figure 3.10 is a straight line, the calculation of consumer surplus is particularly simple. When this person buys twenty T-shirts at $7, he or she actually spends $140, but also receives a consumer surplus of $80.
MARKET DEMAND CURVES
In some cases, the direction of a shift in the market demand curve is quite predictable. On the other hand, an increase in the price of Y will cause the market demand curve for X to shift inward if most people view the two goods as complementary.
ELASTICITY
For example, if a 5 percent decrease in the price of oranges typically results in a 10 percent increase in the quantity purchased (holding everything else constant), we could link these two facts and say that each percent decrease in the price of oranges leads to an increase in sales of around 2 per cent. That is, we would say that the ''elasticity'' of orange sales with respect to price changes is about 2 (actually, as we discuss in the next section, minus 2 because price and quantity move in opposite directions).
PRICE ELASTICITY OF DEMAND
In panel a of the figure, demand is very inelastic - the demand curve is almost vertical. How can he or she use this information to derive the exact value of the price elasticity of demand.
DEMAND CURVES AND PRICE ELASTICITY
For high prices, the demand curve in Figure 3.14 is elastic; a fall in price results in enough additional sales to increase aggregate consumption. This relationship is illustrated by considering how aggregate expenditure changes for different points on the demand curve.
INCOME ELASTICITY OF DEMAND
CROSS-PRICE ELASTICITY OF DEMAND
A fall in the price of tea would also lead to a fall in the demand for coffee as people would choose to drink tea instead of coffee. This would mean that every 1 percent increase in the price of donuts would cause the demand for coffee to fall by 1.5 percent.
SOME ELASTICITY ESTIMATES
If the two goods are complementary, an increase in the price of one will shift the demand curve of the other inward. If the goods are substitutes, an increase in the price of one good will shift the demand curve of the other outward.
UNCERTAINTY AND STRATEGY
Once such a balance is established, no player has an incentive to change what he or she is doing because it is best for him or her given the balancing behavior of others.
UNCERTAINTY
PROBABILITY AND EXPECTED VALUE
The game of blackjack (or twenty-one) provides an illustration of the expected-value concept and its relevance to people's behavior in uncertain situations. The expected value concept plays an important role in all the games of chance offered at casinos.
RISK AVERSION
Without insurance, this person's utility would be U1—the average of the utility from $35,000 and the utility from $20,000. Options We noticed that the 2-in-1 coat is better than any of the others in the presence of uncertain weather conditions because it offers more options.
PRICING OF RISK IN FINANCIAL ASSETS
Due to the uncertainty in energy prices, savings for the second and subsequent years are uncertain. He or she will choose a mix of investments that includes much of the risk-free option (pointL).
TWO-STATE MODEL
As can be seen in the formula for expected values, expected utility combines two elements: the utility of consumption in each state and the probability of each state occurring. In our analysis, we will hold the utility function and probabilities constant, so that we can determine the indifference curves as drawn.
