Introduction to Microeconomics
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 Dr. Matan Tsur (matan.tsur@univie.ac.at)http://homepage.univie.ac.at/matan.tsur/teaching.html
 Office hours Tuesday 9:30-10:30 or by appointement
 Classes: Tuesdays 8—9:30 HS 14 and Thursday 11:30-13:00 HS 6 (but between 8/10-29/10
classes are from 13:15-14:45)
 Grading:
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
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Class Participation
Home Assignments
Midterm Exam- 25/11 at 15-16:30
Final Exam- 28/1 at 11:30-13
 Main textbook: Microeconomics by David Besanko and Ronald R. Braeutigam Wiley, 4th
edition.
What is Economics?
2
• “ The branch of knowledge concerned with the production, consumption, and
transfer of wealth”
-Online dictionary
• “Economics is the study of people in the ordinary business of life”
- Marshall
• Economics is the “study of how societies use scarce resources to produce
valuable commodities and distribute them among different people”
-Samuelson
• “Economics is organized common sense”
- Sargent
Introduction to Microeconomics
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Main Topics:
1.
2.
3.
4.
Consumer Theory
Producer Theory
Competitive Equilibrium
Non- Competitive Equilibrium
Technical tools: Basic algebra and multivariable calculus
Course Outline
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Price
Market for smart phones
Supply
700 Eu
•
•
Demand
0
600
1500
Quantity
Course Outline
5
Price
Market Equilibrium
Supply
500 Eu
•
Demand
0
1000
Quantity
Course Outline: Roadmap
6
Price
1. Construct Demand Curve (behavior of consumers)
Supply
2. Construct the Supply Curve (behavior of firms)
•
P
3. Study properties of a Equilibrium in competitive markets
Demand
0
Q
4. What happens when the market is not competitive?
Quantity
First Topic: Consumer Demand
7
Key questions:
What determines consumer demand? How do Consumers make
choices?
Consumer Preferences
8
Definition: A bundle of goods (or basket) is a combination of
different goods and different quantities.
Units of Clothing
10
• Bundle A
7
•
Bundle B
•
3
0 2
3
Bundle c
12
Units of Food
Consumer Preferences
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Definition: Consumer Preferences tell us how a consumer ranks
any two bundles of goods, assuming these bundles are available at
no cost.
Preferences are answers to all possible questions like:
“Do you prefer 10 apples and 7 oranges, to 7 apples and 10 oranges?”
a. Yes
b. No, I prefer 7 oranges
c. I’m indifferent
Points about preferences:
 Preferences are subjective.
 Preferences are independent of the price.
 Preferences are set for a specific time and circumstances.
Consumer Preferences
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Everyone has their own taste, but at least, preferences should satisfy some properties:
1.
Preferences are complete:
The consumer can rank any two bundles of goods
- A preferred to B;
- B preferred to A;
- Indifferent between A and B.
2.
Preferences are transitive:
If a consumer prefers bundle A to bundle B, and bundle B to bundle C, then she
must prefer bundle A to bundle C.
3.
Preferences are Monotonic: “more is better”.
If bundle A has at least as much as bundle B, with more of at least one good, than
A is preferred to B: (10 apples, 3 oranges) is preferred to (10 apples, 2 oranges)
Consumer Preferences
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Definition: Preferences are rational if they are complete, transitive
and monotone.
Indifference Curves
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Definition:
An Indifference Set contains all the bundles that the consumer is indifferent
between.
An Indifference Curve is the curve connecting the points in an indifference set
Units of Clothing
10
• Bundle A
7
•
Bundle B
•
3
0 2
3
Bundle c
12
Units of Food
Indifference Curves
13
Definition:
An Indifference Set contains all the bundles that the consumer is indifferent
between.
An Indifference Curve is the curve connecting the points in an indifference set
Units of Clothing
10
• Bundle A
7
•
Bundle B
•
3
0 2
3
Bundle c
12
Units of Food
Indifference Curves
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Definition:
An Indifference Map is a set of all indifference curves
Units of Clothing
•
•
•
7
•
0
•
•
•
•
•
3
Units of Food
Indifference Curves
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Property 1: Indifference curves are downward sloping
Implied by Monotonicity- “More is better”
Units of Clothing
F•
B•
A
7
Less preferred
To A
•
E•
C•
0
More preferred
To A
3
Units of Food
Indifference Curves
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Property 2: Preference increse as we move northeast
Units of Clothing
•
•
•
•
F
•
D
B
A
0
C
Units of Food
Indifference Curves
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Property 3: Indifferent curves cannot cross
Implied by Transitivity and Monotonicity
Bundle A is indifferent to C and C
indifferent to B , which implies that A
is indifferent to C.
But by monotonicity B is preferred to
A
Indifference Curves
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Key Properties:
1.
Indifference curves have negative slope (Monotonicity )
2.
Indifference curves are not “thick” (Monotonicity )
3.
Indifference curves do not cross (Monotonicity and transitivity )
4.
Each basket lies on a single indifference curve (Completeness)
Marginal Rate of Substitution
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Definition: At bundle A, the marginal rate of substitution 𝑚𝑟𝑠𝑥,𝑦 (𝐴) between
good x and good y is the maximal amount of good y that the consumer is willing to
give up for an additional “small” increase in good x.
Marginal Rate of Substitution
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Marginal Rate of Substitution
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Properties of MRS:
The MRS depends on the level of consumption
How much of good y are willing to give up for good
x?
If you have “a lot” of y but little of x, (point A),
you may be willing to trade a lot for good x.
But if you already have a lot of good x but little of
y (point B), you may not be willing to trade a lot
Marginal Rate of Substitution
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Properties of MRS:
If the MRS diminishes along an indifference curve as we increase the
consumption of x, then the more of good x you have, the less y you are
willing to substitute it for it.
- The indifference curves get “flatter” as we increase x
Marginal Rate of Substitution
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Properties of MRS:
When averages are preferred to extremes => the MRS
diminishes and indifference curves are bowed toward the origin
(convex to the origin).