MOOCs: summarize notes of the lessons on POK polimi PDF

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MOOCs: summarize notes of the lessons on POK polimi. useful to start the course on the right foot. good luck...

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MOOCs Micro studies the consumer and the producer, so individual economic agents’ behavior. The problem of the consumer is to allocate scarce resources towards different ends. The job of the entrepreneur is to organize factors of the production in such proportion as to be able to generate any given level of output at the possible lower cost. So, the difference between what the entrepreneur spends to produce and the income he makes from selling the goods and services that are produced we call a profit. Macro studies the great aggregates of the economy: employment, inflation, international trade; the relationship between interest rates and investment. WEEK 1 Supply and demand graph. The demand curve in each point represent the price consumers are willing to pay for that quantity (downward sloping, since as the price goes up the consumers are willing to buy less). The supply curve represents how much they're going to charge for a given quantity of the good (upward sloping since as the price rises they are willing to supply more). And equilibrium is that point where supply equals demand. They're both happy because at a point such as e, the amount that consumers demand at that price is equal to the amount suppliers are willing to supply at that price. The demand curve is effected by the substitute goods. So here we have a situation where the substitute for pork has gotten more expensive. As a result, people want more pork. That is a shift out in the demand curve, or a shift up in the demand curve. A shift up or out, depending on it's out into space or up vertically in the demand curve. The price in one market can effect the price on another one (also the quantity – beef and pork). Now we talk about a change in the supply curve. More expensive to produce the original good (pigs). At that new price, initially, you would have excess demand. But quickly the price increases to shut off that excess demand. Different shifts has lead both to the same increase in the price, the quantity has changed. ou can't tell from a price increase what happened. If the price of pork goes up, you can't tell me whether that was a demand or supply shift. You need to know both the price and quantity to be able to tell me that. Both changes led to the same outcome in terms of prices. Elasticity of the demand determines the size of that shift from Q1 to Q2 and the increase from P1 to P2. Elasticity tells us how sensitive to price is the quantity demanded, which will determine the market responsiveness. Perfectly inelastic demand (no elasticity in the demand, so the demand for a good is unchanged regardless of the price), this happens when there are no substitute, nowhere else to go. So, when there is a change in the supply demand there no changes in the demand just in the prices.

Perfectly elastic demand. Consumers does not care about the quantity, but just about the price. (There are infinite good substitutes). So if there's a supply shock to a provider that's facing a perfectly elastic demand curve, they cannot raise their price, because people will just switch. Elasticity is the percentage change in quantity for the percentage change in price. WEEK 2 The consumer wants to maximize their utility, taken into considerations resources, budget constraints and what the consumer wants. 1. Preference assumption: are three: a. Completeness b. Transitivity c. Non-satiation (the more is better) 2. Indifference curves or preference maps which are the graphical representation of people’s preferences. (With no budget constraints). These curves show all combinations of consumption along which the individuals is indifferent. There are four key properties of indifference curves: consumers prefer high indifference curves (non-satiation); these curves are always downward sloping (non-satiation) if they were upward you will be indifferent to get more; indifference curves cannot cross (combination of non-satiation and transitivity); you cannot have more than one indifference curves through the same point. The utility function is the mathematical representation of the indifference curve, so their preferences. Marginal utility: how the utility changes with each additional unit of the good or the derivative of the utility function. Marginal utility is the derivative of your utility function with respect to one of the inputs. Diminishing marginal utility. (they are always decreasing; each additional thing gives you less utility) U= SQRT(P*M) Assume that our income equals our budget. The marginal rate of transformation is the marginal rate at which you can transform pizza into movies. If the one prices rises than the pool of alternatives drops.

that is the point that you can

of the farthest out indifference curve reach given your budget constraint.

Demand curves come from underlying utility maximization. WEEK 3 The goal of the producers is to maximize their profits, achieve through the efficiently production of goods.

To simplify we can consider that the company as two inputs: capital and labour. So little q (firm’s output) is some function of the amount of workers you have and the amount of capital you use. Variable inputs are inputs that are easily changed, like how many hours somebody works. The long run is the period over which all inputs are variable. The short run is a period over which some inputs are fixed. So let's start by considering the short run, and considering that period of time over which labor is variable but capital is fixed. How many workers should I hire to produce my good? And the key concept that's going to determine that is something we'll call the marginal product of labor, which is the change in total output resulting from the next unit of labor used. We typically assume diminishing marginal product because the capital is fixed. In the long run all inputs are variable. Same as the utility theory, you have two inputs K, and L and you have to trade them off within the budget constraints. Isoquants are the parallel to indifference curves. Isoquants are sets of inputs along which production is the same. So along a given isoquant, q is fixed. Each of those isoquants is a different level of q, but they show how you can vary K and L to get the same amount of q. The slope of isoquants is determined by the substitutability between labor and capital. You don't care if you have two capital, as long as you get a

labor and two capital, or three labor and one total of four.

given the amount of one input, it doesn't matter how much you have of the other. The slope of the isoquants it is called the marginal rate of technical substitution: the rate at which you can substitute one input for another in a production. This marginal rate is going to fall as you go down the isoquant, because of the diminishing marginal productivity. Returns to scale happens when there is a proportional increase/decrease of all inputs. Some processes can show a constant returns to scale; decreasing returns to scale and increasing returns to scale. The latter comes from specialization.

Fixed costs, different from the variable costs, cannot vary in the short run; while marginal cost is the change in cost with a change in output. So basically, when workers are very, very high marginal product, then it's going to be cheap to produce the next unit. When workers have a low marginal product, it's going to be expensive to produce the next unit, and that's going to depend on what you actually have to pay the worker. Input mix is used to maxime production efficiency, which euqates to minimizing costs. We consider the relative price of capital and labor; starting from the isocost lines, which represents the cost of different combinations of inputs. So each of these isocosts give you the combination of inputs that cost a certain amount.

So the economically efficient input combination for a given level of output is going to be determined by the tangency of the isoquant with the isocost.

WEEK 4 Market setting of perfet competition exits whne the firms are price takers on both input and output markets. They're price takers. They're not price makers. No action they take affects either the price at which they sell their good. No action the individual firm takes affects either the price at which they sell their goods or the price they pay for their inputs. There are four conditions under which the perfect competition exist: - Identical products in the perseption of the customers; - Cunsumers have to have full information on all prices; - Low transation or shopping costs - Free entry and exit of firms. Even if a given firm faces perfectly elastic demand, it doesn't necessarily mean that market demand is perfectly elastic. The residual demand is the difference between the market demand and what other firms supply. Well, if you differentiate this with respect to price, you'll see that dDr/dp equals dD/dp minus dS0/dp. This first one is the market demand curve. The firm's residual demand responds more to price than the market's demand does because the firm's residual demand is after all the supply of other firms. Well, what little q a firm chooses is dictated by maximizing the profit. Well, in a competitive market, we know what dR/dq is, because, remember, in a competitive market, dR/dq is given to the firm by the market. In a competitive market, dR/dq, or marginal revenue, equals the price. So the profit maximization is the quation where the price is equal to marginal cost. You will produce until the marginal cost of producing the next unit is equal to the price you can sell that unit for in the market. Short run profit maximization has two conditions. The first is to set price equal to marginal cost. The second condition is to check whether the firm wants to shut down, because they will losse money if they continue to produce. So unless you're actually losing more than your fixed costs, you will not shut down your firm. As long as its revenues are greater than or equal to its variable costs, it will stay in business. You've got to first solve for the optimal quantity that the firm is going to produce. But then you've got to make sure that the firm actually makes money on that quantity, or it won't produce at all. The supply curve is the marginal cost curve, above the point where price equals average variable cost. For entering in a market a company need a capital. As you add more firms the curve become flatter.

The third step is we intersect market supply with market demand to get the equilibrium price. Now, the key difference in the long run, is now we can't take the number of firms as given. Now we need to derive the number of firms. And the way we do that is by thinking about entry and exit. In a perfectly competitive long run equilibrium, all firms make zero profit. Because if there's any profit to be made, a new firm will enter and take it away. And if there's any unprofitable industry, a firm will exit until the profits go back to zero. In 11-5, we see that in the long run, firms always supply not on a single curve, but at a single point. In the long run, with a perfectly competitive market, for a given firm, there is no longer even meaningfully a supply curve to a firm. There's just literally a supply point. Every firm produces at exactly the point where marginal costs equal average costs. Remember, I said, what determines perfect competition? Two things: the demand curve to the firm was perfectly elastic, and the supply curve to the market is perfectly elastic. WEEK 5 Monopoly markets with only one firm, which are price makers. They do not face a perfectly elastic demand curve, but a downward-sloping one. In this case the residual demand equals the total demand. For monopolists there is a marginal revenue curve. There is a relationship between marginal revenue and elasticity of demad. What is the marginal revenue in a perfectly competitive firm? Well, as a perfectly competitive firm, what's the elasticity of demand facing a perfectly competitive firm? Infinity. Perfectly elastic. Profit is maximized when marginal revenue equals marginal cost. But then in setting the price, they still have to read off the demand curve. They can't change consumer tastes. There is also the shutdown rule, that says that even if profits are negative, you might not shut down. You shut down only when the price is less than the average variable cost. In this condition they have market power, so the ability to change price above the marginal cost. If there's close substitutes, the monopolist won't be able to charge a very high markup. We know that competitive firm maximizes welfare. So monopolists induce deadweight loss because units that people value above their marginal cost doesn't get sold. Most markets are describes as oligopolies, so markets where there is more than one player, where each firm is large enough to actually affect the price. So an oligopoly market is where there'll be a small number of firms in the market with substantial barriers to entry from additional firms. They have some market power, but in a context where they have to worry about competitors. And so in this context there are two different ways firms can behave. They can behave cooperatively or non-cooperatively. If they behave cooperatively we say that they form a cartel, which basically turn oligopolies into monopolies. In most oligopolistic markets firms are behaving non-cooperatively, so they compete with each other. The Cournot model. We talk about the prisoner dilemma, so at the Nash equilibrium. To solve it we look at the residual demand, then you develop a marginal revenue function.

WEEK 6 Macroeconomics tries to understand how the economic system as a whole works and tries to focus on the relationship between the different parts of the system. Macroeconomics considers aggregate variables, and how those interact in order to reach an equilibrium. Gross domestic product (GDP) used to measure the size of an economic system, to compare economics systems among themselves an to check if an economic systems is doing well and growing over time. The formal definition of gross domestic product is that it measures the market value of all final goods and services produced in a country in a given time span, normally a year but we can consider it also in shorter time spans. Intermediate goods are embodies in final goods. We need to take into account different price levels across countries when we want to compare GDP across countries. The fact that final goods are obtained through the transformation of intermediate inputs into final goods, using different production factors and intermediates, suggest that the value of final production, GDP, is also equal to the total value added generated in an economy. In fact the third definition of GDP corresponds exactly to the total value added, generated by transforming intermediate inputs, using factors of production into something different which has more value than the mayor sum of its components. If we take the monetary value of gross domestic product and we divide it by the population of a country, we obtain GDP per capita. And given that GDP measures also total income, GDP per capita is a proxy of the average individual income. The GDP per capita is also a proxy for the living standards and consumption levels. This doesn’t consider the distribution of income. In the longterm determinants of GDP are given by the number of factors of production that a country can use, the amount of physical capital, the labor force available, the amount of land, technology. Therefore, GDP growth in the long run is determined by the accumulation of factors and by technological progress. Both these phenomena rely on investment. The trend of GDP over time is upward and the maximum level of GDP that a country can produce at a given moment in time, given the technology and the factors of production available is called the potential GDP or full employment GDP. But the actual amount of GDP that we observe can change. We are not always in the shortrun producing at the maximum level and we therefore observe yearly fluctuations of GDP, even if the technology does not change and the amount of factors of production is stable. In the short run the GDP level is given by how much firms choose to produce, rather than can produce and this is not necessarily the maximum possible amount that can be produced using all factors of production and having full employment. To describe the short-run determinants of GDP we use the AD-AS model which comes from the Keynesian approach of macroeconomics, which highlights the role of aggregate demand in determining the equilibrium. Aggregate demand is represented by a downward sloping line intersecting aggregate supply. An equilibrium, that is the level of GDP that we actually observe, is given by the intersection of these two lines. By fiscal policies we mean the decisions of spending, taxing, and transferring money. A decision that the government takes in many countries we live in upon the elections from parliament. Spending. There are too ways of spending for the government: one way is to spend financing the expenditure through an increase in taxation. So, what they could do is to deficit spend they decide on some amount of spending on something they like to spend upon and they borrow. They don't tax the residence; they borrow on the market. Well, a transfer is money that the government transfers on Authority from some social group or some bunch of individuals, whatever you like, to another social group or other individuals. Fiscal austerity is a restrictive economic policy. Generally government's dislike these policies, also for political reasons because lowering demand and GDP increases unemployment in lowers income and makes the government unpopular by rising also social tensions.

A central bank is the monetary authority, they control the amount of money in circulation. One is the policy rate the interest rates that are maneuvered by the policy makers, the central bank, and the other one is called “open market operations”. We know that when the central bank lowers the discount rate or purchases obligations on the market, she is doing an expansionary monetary policy. On the other hand, when she does the opposite she does a contractionary monetary policy....