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Transcript of Recht und Ökonomie SS 2011Microeconomics Repetition Part 1 Recht und Ökonomie (Law and Economics)...
Recht und Ökonomie SS 2011 Microeconomics Repetition Part 1
Recht und Ökonomie (Law and Economics)
LVA-Nr.: 239.203
SS 2011
Microeconomics (Repetition Part 1)
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Prof. Dr. Friedrich Schneider
Institut für Volkswirtschaftslehre
http://www.econ.jku.at/schneider
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
Outline of the section on Microeconomics – Part 1
1. Basic concepts and tools
2. Consumer theory
3. Theory of the firm
4. Interactions of households and firms
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.1 Basic concepts
Three important concepts
—Optimization
• Maximization or minimization
—Equilibrium
—Efficiency
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.2 Basic concepts
Maximize
— Sales
— Profits
— Market shares
— Utility
Minimize
— Cost
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.3 Basic concepts
Equilibrium
— Plans of all parties involved are realized
or
— Ex post equals ex ante
not to be confused with equality
—e. g. quantities sold must – by definition – always be
equal to quantities bought
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.4 Equilibrium in the market
Quantity (per time period)
D
S
P0
Q0
If the price lies above the equilibrium price then:
i) there will be a surplus,ii) quantity supplied will
exceed quantity demanded,
iii) price will start falling.
P1
Surplus
Price(€ per unit)
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.5 Basic concepts
Efficiency in production
— will be reached when
one cannot produce the same level of
output at lower cost, i. e. using the minimal
resources, valued at their (factor) prices;
OR
one cannot produce more output using the
same set of inputs.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.6 Basic concepts
Pareto efficiency or
allocative efficiency
— will be reached when
no individual can be made better off without
making another person worse off.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.7 Basic tools
Functions:
— A dependent variable (y) is a function of an
independent variable (x)
y = f(x) or y = y(x) or y = g(x, z)
y = bx or y = a – bx or y = 10 – .5x
y = a – bx + cz
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
1.8 Basic tools Graphs: linear (y = a – bx)
x (quantity)
y (price)4
8
2
4
Linear demand curve
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
U1
Indifference curve
1.9 Basic tools Graphs: non-linear (y = a/x)
x (food)
10
20
30
40
10 20 30 40
y (clothing)
50
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2 Consumer theory
Preferences
Utility functions
Indifference curves
Consumer optimum
Marginal benefit and marginal cost
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.1 Preference orderings When comparing bundles of goods, consumer
preferences are supposed to fulfil the following
axioms:
Preferences of individuals (or households) are— complete (vollständig, d.h. alle Warenkörbe sind
vergleichbar und bewertbar)
— transitive (Warenkörbe: wenn A>B und B>C, dann ist auch
A>C)
— non-satisfactory (“mehr ist besser als weniger”)
— (reflexive: “jeder Warenkorb ist so gut wie er selbst”)
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.2 Utility functions
Preferences can be represented by
— utility functions which are functions that
assign higher numbers to bundles of goods
which are preferred over others.
— Utility functions are ordinal representations of
preferences.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.3 Indifference curves
Another representation of preferences are
indifference curves:—Each bundle of goods on a specific indifference curve
yields the same level of utility (for a specific
consumer/household).
Indifference curves—have a negative slope;
—are (usually) convex towards the origin;
—cannot intersect;
— represent greater utility if farther away from the origin.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
U1
2.4 Indifference curve (graph)
x (food)
10
20
30
40
10 20 30 40
y (clothing)
50
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
U2
U3
2.5 Indifference map
x (food)
y (clothing)
U1
AB
D
Bundle A Is preferred to bundle B; B is preferred to D.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.6 Budget constraint (1)
x (food)
y (clothing)
80 120 16040
20
40
60
80
0
An increase in income shifts the budget constraint parallel
outwards (to the right).
(I = €160)L2
(I = €80)
L1
L3
(I =€40)
A decrease in income shifts the budget constraint parallel inwards (to the left).
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.7 Budget constraint (2)
x (food)
y (clothing)
80 120 16040
40
(Px = €1)
L1
An increase in the price of food pivots
the budget constraint clockwise.
L3
(Px= €2)(Px = €0.5)
L2
A decrease in the price of food pivots
the budget constraint counterclockwise.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.8 Consumer optimum
The consumers’/households’ objective is
to maximize utility,
i.e. to allocate her scarce budget such that
(graphically) she reaches the highest (farthest to
the right) indifference curve.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
U
2.9 Consumer optimum (graph)Py = €2 Px= €1 I = €80
budget constraint
A
At bundle A the budget constraint and the indifference curve are tangent
to each other, no higher level of utility can be reached at given prices and income
in A:MRS =PxPy = 0,5
x (food)
y (clothing)
40 8020
20
30
40
0
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
Price-consumption-curve
2.10 Demand curve (1)
x (food)
y (clothing)
4
5
6
U2
U3
A
BDU1
4 12 20
The price-consumption-curveconsists of all utility-maximizing bundles for different food prices.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.11 Demand curve (2)
Demand curve
The demand curve relates the quantity demanded by the consumer to its price.
x (food)
Price of food
H
E
G
€2,00
4 12 20
€1,00
€0,50
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.12 Price elasticity of demand
The price elasticity of demand (EP) is equal to:
(P … price; Q … quantity; ∆ … change in)
P)Q)/(%(% EP
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.13 Price elasticity of demand (graph)
Q
P
Q = 8 - 2P
Ep = -1
Ep = 0
- EP The lower part of the demand curveIs less elastic than the upper part.4
8
2
4
Linear demand curveQ = a - bPQ = 8 - 2P
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.14 Elastic and inelastic demand
When
— EP > 1 … elastic demand
— EP = 1 … unitary elastic demand
— EP < 1 … inelastic demand
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
2.15 Marginal benefit and cost
Any constrained optimum can be viewed as a situation
where marginal cost equals marginal benefit
i. e.
MC = MB
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
Marginal cost
Marginal benefit
MC=MB
2.16 Cost and benefit of pollution reduction
Reduction in pollution
€
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
3 Theory of the firm
The firms’ objective is profit maximization.
Profit maximization implies cost minimization.
Firms are constrained by the technology at any given
point in time.
The main task of a firm is the optimal combination of
inputs.
We assume the firms to face competitive markets both for
their inputs and their output.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
3.1 Profit maximization
Profit (π) is defined as the difference between total
revenue and total cost.
A firm will maximize its profits by producing at an output
level where marginal cost (MC) is equal to marginal
revenue (MR).
For a firm operating in a perfectly competitive market MR
will be equal to P.
Thus the above condition becomes MC = P.
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
q0
Profit lost atq1 < q*
Profit lost atq2 > q*
q1 q2
3.2 Profit maximization (graph)
10
20
30
40
Price
0 1 2 3 4 5 6 7 8 9 10 11
50
60MC
AVC
ATCAR=MR=P
Outputq*
At q*: MR = MCand P > ATC
D A
BC
q1 : MR > MC andq2: MC > MR andq0: MC = MR but
MC falls
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
Price
MC
Output
AVC
ATC
P = AVC
P1
P2
q1 q2
S = MC above AVC
3.3 Short-run supply of a competitive firm
Shut down
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
3.4 Market demand and supply
Market demand is the (horizontal) sum of the
individual households’ demand curves (derived
from utility maximization).
Market supply is the (horizontal) sum of the
individual firms’ supply curves (derived from profit
maximization, a section of the firms’ MC-curve).
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
3.5 Market equilibrium (graph)
D
S
Q1 Q2
P2
shortage
Output
Price
Suppose the price to be P2: 1) QD = Q2 > Qs = Q1
2) There is a shortage equal to Q2 – Q1.3) Producers raise the price.4) Quantity supplied increases, quantity demanded decreases.5) Equilibrium will be reached at P3, Q3.
Q3
P3
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Recht und Ökonomie SS 2011 Microeconomics – Repetition Part 1 Prof. Dr. Friedrich Schneider
3.6 Perfectly competitive markets
Perfect competition
— implies that no individual actor can influence the
market price;
— firms may have positive or negative profits in the short
run;
— leads to zero profits for each firm in the long run;
— will result in a Pareto optimal allocation of resources in
the long run.