Introduction to microeconomics
2023 - 2024
B. Heyndels
Assistant:
Selin Tunç
Bruno Heyndels
Main objective of the course
=
Familiarize students with
(micro-)economic way of thinking
This means …
Analyzing the world
from a rational
perspective
It means first and
foremost …
Also … recognizing the
limitations of this
rational approach
Recognize
Economics
Bruno Heyndels
(… next to you!)
Theory:
Excercises (WPO) :
Advised textbook: Economics, 2020, 4th or 5th or 6th edition,
Mankiw G.N. and M.P. Taylor
Prepare for exercises also
through “questions for
review” in M&T.
Note: even though most
graphs are on slides …
practice drawing ALL of
them yourself!)
Bruno Heyndels
PRELIMINARY
(chapter numbers edition 4)
. Introduction
. CH3: Supply & Demand
. CH4: Elasticity
. CH5: Consumer choices
. CH6: Firms in competitive markets
. CH7:
Efficiency of markets
(edition 5)
CH 3
CH 4
CH 5
CH 6
. CH10: Public goods, common resources and merit goods
. CH11: Externalitiets
. CH12: Information and Behavioural economics
CH 8
CH 9
CH 18
. CH13:
. CH14:
. CH15:
. CH16:
. CH19:
CH 10
CH 11
CH 12
CH 13
CH17
19-9-2023
Production decisions
Monopoly
Monopolistic competition
Oligopoly
Interdependence and gains from trade
(edition 6)
Microeconomie, B. Heyndels
chapter numbers in slides correspond to 4th edition!
Exam
Open and/or multiple choice
(theory & excercises)
The written exam consists of open and/or multiple choice questions. Multiple choice questions are scored
using higher pass mark (questions have 4 possible answers, one of which is correct - a student needs to
have 62,5% of answers correct in order to obtain 10/20 on this part of the exam).
Bruno Heyndels
“Introduction to Microeconomics”
6 SP
Study time (appr.)
Lectures:
Excercises:
Own work :
160 hours
24 h
24 h
48 h
3h per Lecture = 36 h
1h per WPO = 12 h
Studying for exam:
64 h
160 h
(8 days of 8h)
Bruno Heyndels
1. Ten principles of economics
Bruno Heyndels
Economics: definition
‘Economics is the science which studies human
behaviour as a relationship between ends and
scarce means that have alternative uses.’
Scarce Resources
labour (L), capital (K), land (N)
Choice
What?
producing
How?
Unlimited wants
For whom?
Bruno Heyndels
Economics studies …
How people make
decisions
How people
MICRO-Economics
M
I
C
R
O
Studies the way in which households and firms
take decisions and how they interact in markets
Micro-Economics as a way of thinking about
human behaviour in general
interact
MACRO-Economics
How the economy as a
whole works
M
A
C
R
O
Macro-Economics as a study of macro-economic
reality
inflation
Economic growth
unemployment
Bruno Heyndels
M&T principles
MICRO-Economics
how people take
decisions
M&T principle 1:
M&T principle 2: the cost of something is what you give
up to get it
M&T principle 3:
how people
interact
people face trade-offs
rational people think at the margin
M&T principle 4:
people respond to incentives
M&T principle 5:
Trade can make everyone better off
M&T principle 6: Markets are usually a good way to
organize economic activity
M&T principle 7:
Governments can sometimes improve
market outcomes
M&T principle 8-9-10:
Bruno Heyndels
macro-economics
M&T Principle 1:
People face trade-offs
Marginal
Advantages
benefits
benefits
Disadvantages
costscosts
Marginal
“Next Monday from 9 to 10 ...)
“I will attend lecture” (or not)
€ 28
?
“I will study at home”
€ 15
?
“I will go and play football”
€ 32
?
M&T Principle 3:
Rational people think at
the margin
Bruno Heyndels
Marginal
costs
costs
Marginal
benefits
benefits
M&T Principle 2:
The cost of something is what
you give up to get it
explicit
costs
€ 28
-
€?0
=
€ 28
€ 15
-
€?0
=
€ 15
€ 32
-
€ ?10
=
€ 22
Opportunity cost = what you
have to give up
Opportunity cost = explicit cost
+ implicit cost
explicit cost is the amount of
money that you pay if you
choose x
implicit cost is the value of the
best alternative that you forgo
implicit
costs
Bruno Heyndels
€ 28
implicit cost is the value of the
best alternative that you forgo
€ 15
€ 22
implicit
cost
€ 22
€ 28
€ 28
Bruno Heyndels
M&T principle 1:
People face trade-offs
Marginal
costs
Marginal
benefits
explicit
costs
€ 28
€ 15
€ 32
-
€0
-
€0
-
€ 10
implicit
costs
-
€ 22
=
-
€ 28
=
-
€ 28
€6
- € 13
=
-€6
Bruno Heyndels
Marginal
costs
Marginal
benefits
explicit
costs
M&T principle 4:
People respond to
incentives
€ 28
€ 15
-
€0
-
€0
-
€€10
1
implicit
costs
-
31
€ 22
=
-
€ 31
28
=
-
€ 28
-€€63
- € 16
13
Rational actors change their
behaviour if costs and/or benefits
change (sufficiently)
€ 32
=
+- € 63
Bruno Heyndels
3. The market forces of
supply and demand
Bruno Heyndels
market & market structure
markets
market
= group of buyers & sellers of a particular good or service
Market structures
monopolistic
competition
oligopoly
monopoly
perfect
competition
Many firms
1 firm
A few firms.
Many firms
…
Homogeneous
or
heterogeneous
goods
Heterogeneous
goods
Homogeneous
goods
…
And … see next
slide!
…
Bruno Heyndels
Market forces:
assumptions
monopoly
Model D&S
assumes …
oligopoly
monopolistic
competition
perfect
competition
Many buyers & many sellers
Perfect information
perfect
competition
Buyers & sellers are pricetaker
Market for
wheat
Homogeneous goods
Buyers & sellers act independently
Buyers & sellers consider all costs & benefits
Bruno Heyndels
Market power
Power to choose p
100 %
Price setters
Price takers
0%
monopoly
oligopoly
monopolistic
competition
perfect
competition
Bruno Heyndels
Demand
Demand
Individual Demand
Market Demand
= how much a consumer is willing (and able) to buy at different prices
= how much all consumers are willing (and able) to buy at different prices
gives how much qD is demanded as a function of price :
qD = f ( p )
This can also be written as:
p = f (qD)
Both functions express the same but tend to
be read differently:
qD = f (p) : “how many goods – qD – consumers
are willing to buy at given p?”
inverse (market) demand
p = f (qD): “what price (per unit) – p’ - are
consumers willing to pay for a given qD?”
Bruno Heyndels
= how much a consumer is willing to buy at different prices
individual demand
price
Demand
(inverse)
schedule
Demand curve
Quantity
demanded
€5
4
€4
8
€3
Inverse Demand = how much consumer is willing to pay (per unit) for different
qD
12
€2
16
€1
20
(inverse)
Demand equation
p
p = a – b.qD
example: p = 6 – (1/4).qD
5
4
Demand equation
-1/4
D
2
¼ qD = 6 - p
qD = 24 – 4.p
4
8
16 qD
Bruno Heyndels
Higher p has 2 effects:
Income effect:
Purchasing power
falls
qD falls
p
Substitution effect:
Good becomes
relatively less attractive
compared to
alternatives
qD falls
D
Law of Demand:
qD
Quantity demanded falls as
price increases
Bruno Heyndels
= how much all consumers are willing (and able) to buy at different
prices
Market Demand
Market Demand is obtained through horizontal summation of
individual Demand curves
consumer 1
consumer 3
consumer 2
p
p
4
3
2
p
4
3
4
3
2
2
8
12
16
qD
Note: there is only a single
price in the market. For
each p, q’s may differ
among consumers
8
12
16
qD
2
6
qD
10
p
4
(inverse)
3
Market Demand:
2
10
18
34
qD
Bruno Heyndels
Market Demand
curve
Gives the quantity demanded at different prices … assuming that other
factors that affect Demand are constant.
“Ceteris paribus” (c.p.)
More generally,
market demand for good n :
(qD)n = f (Pn , P1 , P2 , …, Pn-1 , Y, T, PLS, A, E)
P1, P2, …, Pn-1
Prices of other goods
Y:
Income
T:
Tastes / preferences
PLS
Level & structure of population
A:
Advertising
E:
Expectations
(inverse) Market Demand curve gives graphical representation of:
(qD)n = f (Pn , given [P1, P2, …, Pn-1 , Y, T, PLSBruno
, A,Heyndels
E])
change in Pn
(qD)n = f (Pn , given [P1, P2 , …, Pn-1 , Y, T, PLS, A, E])
change in quantity demanded qD
Pn
movement along
Demand curve
D
q
Bruno Heyndels
change in other
determinant of D
(qD) n = f (Pn , given [P1, P2 , …, Pn-1 , Y, T, PLS, A, E])
change in Demand
Pn
movement OF
Demand curve
D
qD
Bruno Heyndels
change in other determinant
of D
change in prices of other
goods
(qD)n = f (Pn , given [P1, P2 , …, Pn-1 , Y, T, PLS, A, E])
P1 increases
(qD)n falls
= complements
(qD)n
increases
= substitutes
Pn
P1 increases
D
(qD)n
Bruno Heyndels
change in other determinant
of D
Consumers’ incomes
(qD)n = f (Pn , given [P1, P2 , …, Pn-1 , Y, T, PLS, A, E])
Y increases
(qD)n
increases
Normal goods
(qD)n falls
Inferior goods
Pn
Y increases
D
q
Bruno Heyndels
supply
supply
individual supply
= how much a producer is willing to sell at different prices
Market supply
= how much all producers are willing to sell at different prices
Gives how much qS is supplied as a function of p:
qS = f ( p )
Same can be written as: p = f (qS )
inverse (supply) function
Bruno Heyndels
= how many units a producer is willing to sell at different prices
individual supply
prices
€4
Supply
(inverse)
(inverse)
schedule
supply curve
Supply equation
Quantity
supplied
16
€3
12
€2
8
€1
4
p
p = a + b.qS
S
4
p = 0 + (1/4). qS
2
8
16 qS
Bruno Heyndels
Market supply is obtained by horizontal summation of the
individual supply curves
Market supply
producer 1
producer 3
producer 2
p
p
2
p
2
8
qS
2
12
p
qS
qS
(inverse) market supply:
Law of supply:
2
Quantity supplied increases
as price increases
20
qS
Bruno Heyndels
Market Supply curve
Considers the quantity supplied at different prices … assuming that
other factors that affect supply are constant.
“Ceteris paribus” (c.p.)
More generally, market supply for n is
(qS)n = f (Pn, P1, ..,Pn-1, H, N/S, F1,F2, ..,Fm ,E , Sq )
P1, P2, …, Pn-1 Profitability other goods
H:
Technology
N/S:
Natural shocks, social events
Fi
Costs factors of production
S q:
Number of suppliers
E:
Expectations
(inverse) market supply curve gives
(qS)n = f (Pn , given [P1, ..,Pn-1, H, N/S, F1,F2, ..,F
,E , Sq ])
Brunom
Heyndels
change in Pn
(qS)n = f (Pn , given [P1,P2, ..,Pn-1 , H, N/S, F1,F2, ..,Fm ,E , Sq ])
change in quantity supplied qS
Pn
movement along
Supply curve
qS
Bruno Heyndels
change in other
determinant of qS
(qS)n = f (Pn , given [P1,P2, ..,Pn-1 , H, N/S, F1,F2, ..,Fm ,E , Sq ])
Pn
movement OF
Supply curve
qS
Bruno Heyndels
change in other determinant
of qS
(qS)n = f (Pn , given [P1,P2, ..,Pn-1 , H, N/S, F1,F2, ..,Fm ,E , Sq ])
P1
increases
change in profitability
other goods
(qS)n falls
Pn
P1
increases
qS
(qS)n
increases
goods in “joint
supply”
Bruno Heyndels
(qS)n = f (Pn , given [P1,P2, ..,Pn-1 , H, N/S, F1,F2, ..,Fm ,E , Sq ])
change in other determinants
See Mankiw & Taylor and excercises
Pn
qS
Bruno Heyndels
Market equilibrium
= situation where price is such that quantity demanded equals
quantity supplied
Equilibrium
Law of Demand and supply:
Price adjusts until quantity
demanded and quantity
supplied are equal
pric
es
S
4
equilibrium
3
Equilibirum price = 3
2
Equilibrium quantity = 12
D
8
12
16
qD, qS
Bruno Heyndels
Give equilibrium price (p*) and –quantity (q*) in this market
Demand gives what consumers want
p = 6 – (1/4).qD
Supply gives what producers want
p = 0 + (1/4). qS
Market equilibrium implies that a point is reached that
both consumers and producers “like”
p = 6 – (1/4). q*
in equilibrium : q* = qD = qS
also p is identical for
consumers & producers
p = 0 + (1/4). q*
6 – (1/4). q* = 0 + (1/4). q*
6
=
(2/4). q*
q* =12
p* = 3
Bruno Heyndels
equilibrium disturbed if Demand and/or Supply curves move
disequilibrium: surplus
price
4
3
Excess supply (surplus)
2
8
12
16
quantity
Bruno Heyndels
Application
disequilibrium: excess supply (surplus)
following fall in Demand
Trade war in 2014 between Russia & the West following conflict in
Ukraine (Krim): EU and US boycot Russian products.
As a response Russia does no longer import food from countries that
boycot, e.g. no pears from Belgium.
“While conference-pears typically
sell for prices between 1 &1.1 euro
… prices did not exceed 40, 45 of 50
eurocent per kilo” (Vlaams
infocentrum land en tuinbouw, 20
august 2014)
price
1
Excess supply (surplus)
quantity
The prices of eggs increase this week by 6 per cent. This is a
consequence of the fipronil crisis. The increase in price is a
consequence of increased Demand for Belgian eggs.
disequilibrium: shortage
Following the fipronil crisis, Belgian supply of eggs did not fall
substantially. Increased demand from Germany follows from the
falling supply in the Netherlands (typically a main exporter to
Germany).
price
4
Deredactie.be 8 august 2017
Excess demand (shortage)
3
2
8
12
16
quantity
A shortage can also result from a shift
in the supply curve (give an example &
its graphical representation)
Bruno Heyndels
Prices as signal: how prices allocate
resources
What?
Price mechanism answers …
How?
For whom?
Signal for …
Buyers
Price tells them how much
they have to give up to obtain a
good or service
Sellers
Price tells them what they
can obtain if they produce a
good or service
M&T principle 1:
people face trade-offs
(‘There is no such thing as a free lunch”)
M&T principle 2:
the cost of something is
what you give up to get it
M&T principle 3:
rational people think at
the margin Bruno Heyndels