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Intermediate Microeconomics
Econ 301
Instructor: Marek Weretka
Course Description
Textbook
Grading
Attitude (no pain no gain, interactive)
Rules
Please contact me after class
 Mc Burney students
 Not registered students

Class Quiz
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REEF Polling: iclicker
Laptop/smartphone/iclicker

Roadmap
Consumers, Producers, Market Failures
1) Consumers
-
-
Budget set and preferences
Optimal Choice
2) Applications
- Labor Market,
- Finance
3) Producers and Market Failures
- Technology
- Monopoly and Oligopoly
- Other (Externalities, Public Goods)

Rationality in Economics
 Behavioral Postulate :
A decisionmaker chooses its most preferred alternative from the set of affordable alternatives.
 Budget set = affordable alternatives
 To model choice we must have decisionmaker’s preferences.

L01
Budget Set

Consumers: Commodity space
 Commodity (apples, oranges, cars etc)
 A Consumption Bundles
 Math: Consumption bundle is a vector
 Commodity Space - the set of all consumptions bundles
 Budget set - set of all consumption bundles that are affordable given prices and income

Commodity Space: Geometry, 2 goods x
2
(Oranges) x
1
(Apples)

Budget Set =all affordable bundles
 Affordable Bundle?
 (1,1),(2,2),(3,3) p
1
=$2 p
2
=$1 m=$6
 Budget constraint
 Budget set: all affordable bundles

x
2
Budget Set and Real Income p
1
=2 p
2
=1 m=6 x
1
EI: Real income = income in terms of goods

x
2
Slope (Real Price) p
1
=2 p
2
=1 m=6 x
1
Real price: an apple price in terms of oranges

Budget Set
 Budget set depends on prices and income
 What happens to the budget set if
– income changes?
– one of the prices changes?
 Effects of Inflation, taxes

x
2
Income goes down p
1
=2 p
2
=1 m=6 m=4
Budget line: parallel shift x
1

Oranges more expensive x
2 p
1
=2
M=6 p
2
=1 x
1
Budget line pivots counterclockwise p
2
=2

Inflation and Budget set
 Inflation 100% x
2 p
1
=2 p
2
=1 m=6 p
1
=4 p
2
=2 m=12 x
1

Inflation and Budget set
 CPI inflation 100% x
2 p
1
=2 p
2
=1 m=6 p
1
=4 p
2
=2 m=6
Quiz: BL Shift
A. parallel
B. clockwise
C: counterclockwise
D: none of the above x
1

Ad Valorem Tax
 Tax rate t=100% x
2 p
1
=2 p
2
=1 m=6
Effective prices x
1

The Food Stamp Program
 Food stamps are coupons that can be legally exchanged only for food.
x
2 p
1
=2 p
2
=1 m=6
F=2 apples
Black Market x
1

Budget Set with
 Minimal Purchase
 Maximal Purchase (Rationing)
 Quantity discount