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MICROECONOMICSTERZO PERIODOISTRUTTORE: TRIOSSI ti voglio bene ❤CHAPTER 1: INTRODUCTION➔ microeconomics studies decision making by individuals and how theirdecisions determine the allocation of a society’s scarce resource ➔ Applications : individual decision making, analysis and evaluating of public ...

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MICROECONOMICS TERZO PERIODO ISTRUTTORE: TRIOSSI

ti voglio bene

CHAPTER 1: INTRODUCTION ➔ microeconomics studies decision making by individuals and how their decisions determine the allocation of a society’s scarce resource ➔ Applications : individual decision making, analysis and evaluating of public policy, mechanism design, marketing, management…. ➔ Main branches of economics: ◆ Microeconomics : individual decision making and its collective effect on the allocation of a society’s scarce resources ◆ Macroeconomics: aggregate phenomena ➔ Decentralization VS Centralization ◆ Capitalist economy (decentralized) ●

the means of production are mostly owned by private individuals

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the allocation of resources is governed by voluntary trading among businesses and consumers

◆ Communism economic (centralized) ●

the state owns and controls the means of production and distribution

◆ no economy is completely centralized or decentralized ➔ Markets: ◆ Markets are economic institutions that provide people with opportunities and procedures for assigning (buying, selling, exchanging…) goods and services ◆ A market is associated with a single group of closely related products that are assigned within particular geographic boundaries to agents with possibly conflicting goals ◆ A price is the rate at which someone can swap money for a good (an object for another) ◆ A property right is an enforceable claim on good or resources ◆ Trade can occur only if property rights are transferable

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➔ Market Economy: ◆ a Market economy allocates scarce resources primarily through markets ◆ In a Free Market System the government mostly allows markets to operate with little regulation of other intervention ➔ Economic Motives: microeconomist often assume that people are motivated by material self-interest ◆ consumers try to choose the mix of goods and services that provides the highest possible level of personal satisfaction ◆ Employees try to choose the mix of work and leisures provides the highest possible level of personal satisfaction ◆ Owners of firms try to choose the mix of inputs and outputs that provides the highest possible level of profit ◆ Microeconomics theory can accommodate other motivations ➔ Positive VS Normative Analysis ◆ Positive economic analysis addresses factual question: ●

Example: if the minimum wage were raised of 9$, how would that affect employment? Would businesses hire fewer workers?

◆ Normative economic analysis addresses question that involve value judgements ●

Example: is a society better off with free trade between countries or with trade barriers? or another example could be: What is the best way to control carbon emission?

◆ The principle of individual sovereignty holds that each person knows what’s best for him or her ➔ Tools of microeconomics: ◆ scientific method: ●

first step : initial observation

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second step : Theorizing

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third step: Identification of additional implications

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fourth step: Further observation and testing

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fifth step : Refinement of the theory

◆ Models and Mathematics: ●

a model is a simplified representation of a phenomenon

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the variable taken as given are said to be exogenous, and the variables determined by the model are said to be endogenous

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Responses of endogenous variables to changes in exogenous variables are called comparative statics

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◆ An equilibrium is a point of balance at which there is no tendency for a model’s endogenous variables to change given fixed values of the exogenous variables ◆ Simplifying Assumption: ●

Social phenomena are complex

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models are simplified representations, recurring many simplifying assumptions

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A simplifying assumption can be reasonable in one context bu unreasonable in another

◆ Data Analysis: ●

The scientific method requires us to test our theories by confronting them with Data ○

Records. E.g., financial information, personnel records, customer databases

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Surveys. E.g., consumer expenditure survey, business surveys

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Experiments. Lab experiments vs. natural experiments

Econometrics is the application of statistical methods to empirical questions in the field of economics

➔ why economist sometimes disagree: ◆ Positive matters: sometimes two economists look at the same evidence and come to different conclusions ◆ Normative matters: even when economists reach the same positive conclusions, they may disagree about the desirability of a particular public policy ➔ Themes of microeconomics - Decisions ◆ Trade-offs are unavoidable ◆ To choose well, focus on the margin ●

to determine whether a particular choice is best, we ask whether a small adjustments of the choice- a change- will lead to improved results

◆ People respond to incentives: a good decision maker carefully weights her benefits and costs ◆ Prices provide incentives: an increase in the price of a good reduces the incentive to buy and increases the incentive to sell ➔ Themes of microeconomics - Markets ◆ Trade can benefit everyone ◆ The competitive market price reflects both value to consumers and cost to producers ◆ Compared to other methods of resource allocation, markets have advantages ◆ Sometimes government policy can improve on free-market resource allocations

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➔ Review : ◆ Microeconomics studies decision making by individuals, and how their combined decisions determine the allocation of scarce resources ◆ Economist often assume that people are motivated by material self-interest ◆ Economist usually express their theories through mathematical models that are simplified representations of the real world, and contrast the results against real economic data ◆ Microeconomics plays a crucial role in individual decision making, and in the analysis and evaluation of public policy

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CHAPTER 2 : SUPPLY AND DEMAND Demand : we can represent demand in 2 ways : graphically (demand curve) or mathematically ( demand function) ➢ Demand curve: shows how much buyers of the product want to buy at each possible price, holding fixed all other factors that affect demand. The vertical axis shows the price of a bushel of corn. The horizontal axis shows the annual demand for corn. For example when the price of corn is $3 a bushel, buyers demand 9 billion bushel per years

in the picture A the demand curve is downward sloping: the higher the price, the less corn consumers and firms want to buy. Almost all curves slope downward. Some factors that can affect the demand for a product include : population growth, consumer tastes and incomes, the prices of other products, and in some cases, government taxes or regulations. -

substitutes: two products are substitutes if, all else equal, an increase in the price of one of the products causes buyers to demand more of the other product

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Complements: two products are complements if, all else equal, an increase in the price of one of the products causes consumers to demand less of the other product (scarpe) a change in one of these other factors (population growth…) will cause the entire demand

curve to shift. Figure B shows how the demand curve for corn shifts outward when the price of potatoes rises. At each price of corn, buyers demand more corn. -

Movements along vs Shifts of the demand curve: a change in the price of a product causes a movement along its demand curve, resulting in a change in the

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quantity (or amount) demanded. A change in some other factors ( such as consumer tastes or income, or the prices of other products) causes a shift of the entire demand curve, known as a change in demand. ➢ Demand Function: describes the amount of the product that is demanded for each possible combination of its price and other factors Quantity demanded = D (price, other factors) For example, if the demand for corn is affected by 3 factors other than its price (the price of potatoes, the price of butter and consumer’s income) : where Qdcorn is the amount of corn demanded per year in millions of bushels; Pcorn , Ppotatoes and Pbutter are the prices of each, M is the average income. According to this demand function, increases in the prices of corn and butter will decrease the amount that buyers demand, while increases in the price of potatoes and consumer income the amount that buyers demand.

Supply: it can be represented in 2 ways ➢ Supply curves: shows how much sellers of the product want to sell at each possible price, holding fixed all other factors that affect supply.

The vertical axis shows the price of a bushel of corn; the horizontal axis shows the annual supply of corn, measured in billions of bushels. ➢ Supply function : describes the amount of the product that is supplied for each possible combination of its price and other factors. ○

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Quantity Supplied = S (Price, Other Factors).

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for example, if the supply of corn is affected by only two factors other than its price (the price of diesel fuel and the price of soybeans) then that supply function for corn might take the form

According to this supply function, the amount of corn supplied will increase if the price of corn rises, and decreases if the prices of fuel and soybeans rise.

Market Equilibrium: is the price at which the amounts supplied and demanded are equal. Graphically, it’s the price at which the supply and demand curves intersect. Market prices tend to adjust so that the amount supplied equals the amount demanded. Suppose that the price of corn is $2 per bushel. According to the picture, there is excess demand; the amount demanded exceeds the amount supplied. In that case, some buyers won’t be able to purchase as much of the product as they would like at the prevailing price. They’ll have an incentive to offer a slightly higher price to acquire their desired amounts. These offers will push the market price upward, reducing buyers’ demands and increasing sellers’ supply until supply and demand are once more in balance. If instead the price of corn is $4 per bushel, there is excess supply: the amount supplied exceeds the amount demanded. In that case, some sellers won’t be able to sell as much as they would like at the prevailing price. They’ll have an incentive to lower their prices a little to boost sales. These price reductions will push the market price downward, increasing buyers’ demands and reducing sellers’ supply until supply and demand are once more in balance. When the price is such that the amounts supplied and demanded are equal, there is neither excess supply nor excess demand. Since everyone can buy or sell as much as they like at the prevailing price, there is no pressure for the market price to rise or fall.

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MARKET EQUILIBRIUM SUMMARY:

Excess supply sellers lower their prices Qs decreases and Qd increases lower excess supply, until it disappears

Excess of demand buyers increase their bids (offerte) Qs increases and Qd decreases lower excess demand, until it disappears

when some factors change we no longer have the market equilibrium. The four figures show the effects of various shifts in either demand or supply on price and the amount bought and sold.

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Sometimes, changes in market conditions involve shifts in both demand and supply. Because these effects work in opposite directions, we can’t be sure which way the price will change. In figure a demand increases a lot but supply increases only a little. These changes in the market equilibrium from point A to B involve a higher price. In figure b, demand increases a little but supply increases a lot. These changes move the market from point C to E which involves a lower price. In general, when separate shifts in demand and supply each individually move the price in the same direction, the equilibrium price will definitely move in the same direction. When separate shifts in supply and demand move the price in the opposite direction, the equilibrium price can move in either direction, depending on the relative sizes of changes. The size of changes in Market Equilibrium: What factors determine the size of the price change? The size of the change in demand or supply matters. The larger the shift in the demand or supply curve, the greater the effect on the price and amount bought and sold. Figure a shows that when the supply curve is perfectly horizontal, an increase in demand has no effect on the product’s price but increases the amount bought and sold. Figure b shows that when the supply curve is perfectly vertical, an increase in demand has no effect on the amount bought and sold but increases the product’s price

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steeper (più ripido) the supply curve: ➔ larger the increase in the product’s price ➔ smaller the increase in the amount bought and sold when demand increases

Factors affecting the response to a change in demand or supply: 1. When the demand or supply curve shifts, the resulting price change is larger the less responsive demand and supply are to price changes 2. When the demand curve or supply curve shifts, the amount bought and sold changes more the less responsive the shifting curve is and the more responsive the non shifting curve is to price changes 3. The responsiveness of a product’s demand or supply to its price and therefore the slopes of supply and demand curves, can depend on the time horizon. The steepness of supply and demand curves can depend on the time horizon, long-run changes in the equilibrium price and the amount bought and sold resulting from a shift in supply or demand can differ from short-run changes. Elasticity measures responsiveness Elasticity measures the percentage change in Y caused by a percentage change in X. Why use elasticity instead of slope? ●

Slopes depends on units

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Elasticities are unit-free measures

For both positive and negative elasticities, values that are further from zero indicate greater responsiveness (= to greater elasticity)

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Price elasticity of demand Measures how responsive the quantity demanded is to changes in prices

The elasticity of demand can differ at different points on the demand curve. For example, for high prices consumers may respond differently to a 1 percent price increase than they would at low prices. Elasticities for linear demand curves (for demand curves that are straight lines) When the elasticity of demand is less than -1, economists say that demand is elastic, which means that the percentage change in the amount demanded is larger (in absolute value) than the percentage change in the price. When the elasticity of demand is between -1 and 0, economists say that demand is inelastic, which means that the percentage change in the amount demanded is smaller (in absolute value) than the percentage in the price.

PERFECTLY ELASTIC: Ed = - ∞ PERFECTLY INELASTIC: Ed = 0

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CHAPTER 3 : BALANCING COSTS AND BENEFITS Maximising benefits less costs

From the first table we can notice that the more time the mechanic spends on our car, the more the car is worth. If we consider the costs in the second table, first we have to pay the mechanic time and the parts he uses and second, if we don’t have a car we won’t be able to work at the pizza shop while the car is being repaired. So if we were supposed to work 2 hour tonight, this is gonna cost us 30$ in wages. Our total cost is the sum of these 2 costs : cost of car + work cost These 2 costs are different because the mechanic cost is money out of pocket (you have to pay) the second one is the skipping the pizza delivery, you are not spending money but you are losing the opportunity to have others hand money to you (opportunity cost) ★ Opportunity cost: cost associated with forgoing the opportunity to employ a resource in its best alternative use (in these example you forgo the opportunity to use your car to deliver pizza)

To make the right decision, you need to find the number of repair hours that maximises your net benefit : the total benefit less the total cost you incur. So in this case the best option is when the repair time is 3 hr.

The figure shows the total benefit for each number of hours in blue and the total cost in red. At the best choice of 3 hr, the vertical distance between the blue total benefit point and red total cost is larger than at any number of hours.

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Maximising Net benefits with Finely divisible actions Many quantities can be divided into very tiny units (such as minutes, seconds…) When this is possible is more convenient the approximation.

If the repair time is finely divisible, we can use total benefit and total cost curves to find the best choice. To draw the first 2 curves we assume that the total benefit with H hours of repair work B(H) and the total cost is described by C(H): ● ●

B(H) = 654 H - 40 H^2 C(H) = 110 H + 40 H^2

Then we combine these two curves and we see that the bigger net benefit (longer distance) is at 3.4 hr. In this case the total benefit is $1,761,20, total cost is $836,40 and the net benefit is $924,80. Thinking on the margin Another way to approach the maximisation of net benefits involves thinking in terms of marginal effects. In an economic decision, economists focus on marginal benefits and marginal costs. Considering the car repair example, Marginal benefit and marginal cost measures how much your benefits and costs change due to a small Change in repair time (the smallest change that is possible). ★ Marginal Cost (MC): measures the additional cost you incur because of the last ΔH hours of repair time C(H) is the total cost of H hour of repair time. For example in the second table C(3) =$690. And C(H-ΔH) is the cost at some minutes before the C(H) for example after 2.5 hours. ★ Marginal benefits (MB): works in the same way as marginal cost.

Change on a pre-hour basis

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Best choices and marginal Analysis By comparing marginal benefits and marginal costs, we can determine whether an increase or a decrease in the level of an activity raises or lowers the net benefit.

Is one hour of repair work better than zero? According to the table, the marginal benefit of the first hour is $615, while the marginal cost is $150. Since 615 is larger (>) than 150, one hour of work is better than none. But then, if you need 5 hours of work, the marginal benefit is 295$, while the marginal cost is 470$, since 295 Marginal Cost → Convenient Marginal Benefit < Marginal Cost → Not Convenient Marginal benefit and marginal cost with finely divisible actions Now let’s see how to define MB and MC when actions are finely divisible Relationship between marginal benefit and the total benefit curve: When actions are finely divisible, the marginal benefit when choosing actions X equals the slope of the total benefit curve at X. Relationship between marginal cost and the total cost curve: when actions are finely divisible, the marginal cost when choosing action X equals the slope of the total cost curve at X. (DERIVATIVES)

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Marginal Benefit and marginal cost Curves: By computing the marginal benefit at many different levels of H, we can graph the marginal benefit curve.

Figure a reproduces the total benefit curve, adding tangents to the total benefit curve at three different numbers of hours. The slope of each tangent equals to the marginal benefit at each number of hours. Figure b shows the marginal benefit curve: note how the marginal benefit decreases with the number of hours. This marginal benefit curve is described by the function MB...