Microeconomics
3070 Prof. Barham
Lecture 1: Introduction
Syllabus and Website
Website:
http://www.colorado.edu/ibs/hb/barham/courses/eco
n3070/
 All assignments and solution keys will be posted on
the web site.
 I will send you a notice when they are posted.
 Syllabus
Outline
Cover chapter 1
 What is microeconomics


Tools for microeconomics





Economic models
Constrained optimization
Marginal analysis
Equilibrium analysis
Comparative statics
Next class reviews calculus, may start Chapter 2
What is mircoeconomics
Can you buy all the clothing, vacations, sport
equipment, health care, food, beauty products,
yoga classes, seasons tickets to sport event,
donations to charity you want?
No
Mircoeconomics models our decision making process
on how much you decide to spent on what.
What You Will Focus On
How to make the market demand and supply curves
starting from assumptions
Price (P)
Doctors visit
P*
Qd: demand
Qs Supply
Equilibrium: Qd=Qs
50
Q1
.
10
Q2
Quantity (Q)
Number of appointments
per day
What is mircoeconomics
Official Definitions:
 Microeconomics is the study of how individuals and
firms make themselves as well off as possible in a
world of scarcity and the consequences of those
individual decisions on the markets and the entire
economy.
 Microeconomics is the study of the allocation of
scarce resources.
 Mircoeconomics is also often called price theory.


This is to emphasize the important role that price plays.
Price not only thing studied – think of health care market
think about quantity
What is mircoeconomics
Because we can’t have everything, we need to make
trade-offs and microeconomics provides a way to
think about tradeoffs.
A society faces 3 key tradeoffs:
1.
Which goods and services to produce
2.
How to produce of them

How much labor and inputs should a firm use to
produce a car
Who gets the good and services (allocation)
3.



Based on price
Based on need (flu vaccine when a shortage)
Government
What is microeconomics



Workers need to choose how to allocate their time
between labor and leisure.
Firms need to choose how to allocate their
investment between human capital and machines.
Households need to choose how to allocate their
incomes between savings and expenditure, and
which expenditures
Micro versus Macroeconomics
What is the difference between micro and macro
economics?

Microeconomics: behavior of individual economic units
like consumers, producers, landowners, families, etc.
How and why do they make the decisions they make?

Macroeconomics: analyzes how the entire national
economy performs. It analyzes unemployment,
inflation, price levels, interest rates (many things we
take as given in microeconomics).
Economic Models
How do economists allocate resources?
They develop theoretical model.
“Everything should be made as simple as possible but
not simpler” Albert Einstein
Economic Models

The models are abstractions of the real world




Too complicated to take into consideration all factors
Without simplifications we would not be able to make
predictions.
Like a roadmap, does not give each house, but the bare
essentials i.e. major streets, highways and sometime main
attractions.
It may appear that the model makes heroic
abstractions (assumptions) from the complexities of
the real world.
Economic Models Example
Determinants of Poster Demand on Campus
You are advertising a big event for the freshman class how
many posters will you need?
 Factors in your model:


Factors not in your model:


Price to make poster, size of freshman class
Content of poster, placement of poster, relative size of poster
Are there any constraints to this model?

the amount of budget you have to spend on poster advertising.
Types of Variables in a Model
Exogenous Variable: one whose value is taken as
given in a model.
Endogenous Variable: one whose value is
determined within the model being studied
Which factor(s) would have you taken as given in the
poster example?

Price, size of freshman class (exogenous)
Which factor(s) are determined by your model?

The quantity of posters needed (or demanded)
Tools of Microeconomic Analysis
1.
Constrained Maximization
2.
Equilibrium Analysis
3.
Comparative Statics
Constrained Optimization
Constrained optimization: an analytical tool used
when a decision maker seeks to make the best
(optimal) choice, taking into consideration possible
restrictions on the choice.
Constrained Optimization
This tool has two parts:
1.
Objective function: is the relationship the
decision maker seeks to optimize (maximize or
minimize).
2.
Constraint: limits or restrictions that are imposed
on the decision maker
Constrained Optimization
Examples
You want to maximize your happiness during your
second year at CU.
 Objective function Utility (happiness):
Utility=f(days skied per month (s), beers per
week(b)).
U=s*b
 The thing you are maximizing or minimizing
 Constraints: s.t. (subject to)

Income (I)=S*Ps+B*Pb, where P is price
Many max or min problems have some kind of a
constraint you have to work with
Writing Out Statement of
Constrained Optimization Problem
MAX U = s * b
Objective Function
s.t I = s * Ps + b * Pb
Constraint
s,b
Endogenous Variables
Marginal Analysis

Solution to a constrained optimization problem
depends on the marginal impact of the decision
variables on the value of the objective function.
But what is marginal?

The term marginal tells us how the value of the
objective function changes as a result of adding one
unit of a decision variable.
Marginal Analysis
How much do you spend on beer and skiing to
Maximize your happiness if you have 100 budget?
Happiness
Marginal Happiness
$
spent
0
25
From
beer
0
80
From
skiing
0
4
From
beer
From
skiing
80
4
50
90
10
10
6
75
92
15
2
5
100
94
20
2
5
Marginal Analysis



$100 on beer = 94 units of happiness
$75 beer plus $25 skiing = 96 units of happiness.
$50 on beer and $50 on skiing = 100 units of
happiness.

Yes a day of skiing with a nice apres ski makes you
very happy.
Marginal Analysis
You just did a constrained optimization problem

Optimize happiness (beer and skiing) subject to $100
weekly entertainment budget.
MAX H(b, s)
Objective Function
B,s
s.t. Ps*s + Pb*b=100
where
Constraint
b= quantity of beer; Pb=price beer
s=days of skiing; Ps=price skiing.
Equilibrium Analysis
Price (P)
Doctors visit
P*
Qd: demand
Qs Supply
Equilibrium: Qd=Qs
50
Q1
.
10
Q2
Quantity (Q)
Number of appointments
per day
Equilibrium Analysis

In a competitive market, equilibrium is achieved at a
price at which the market clears –


price at which the quantity offered for sale = the
quantity demanded by consumers.
Since Qd = Qs at P*, there is no upward or
downward pressure on price. Hence, price could
stay at P* indefinitely.
Equilibrium Analysis
What if price is higher than P*?
Excess Supply or Demand
P
Price ($)
Doctors visit
Qd: demand
Qs Supply
Excess Supply
70
50
8
13
Quantity (Q)
Number appointments
per day
Equilibrium Analysis
What is price is lower than P*
P
Price ($)
Doctors visit
Qd: demand
Qs Supply
70
50
30
Excess Demand
5
13
Q Quantity
Number of appointments
per day per doctor
Comparative Statics

Examine how a change in an exogenous variable
will affect the level of an endogenous variable.


First, look at the value of the endogenous variable at
the initial level of the exogenous variable
Second, look at the value of the endogenous variable
at the new level of the exogenous variable.
Comparative Statics Example
Endogenous variable:
movement along curve
P
Price ($)
Doctors visit
P*
D
How do the exogenous
variables affect the graph?
S
Moves the curves
50
Endogenous variable:
movement along curve
.
10
Q*
Q
Number of appointments
per day per doctor
Comparative Statics Example

Suppose we are in China and there is an outburst of
the Avian Flu. A few weeks later there are some
new regulations put on doctors and they are
unhappy about it. So they do a rotating strike.

How will these factors affect our Supply and
Demand curve and the price?
Comparative Statics Example
P
Price ($)
Doctors visit
Outbreak of avian flu,
D1
D2
S1 Moves demand to the right,
but supply curve does not
change
P2
60
P1
50
.
10
13
Q1 Q2
Q
Number of appointments
per day per doctor
Comparative Statics Example
The rotating strike will lead to
P
Price ($)
Doctors visit
D1
D2
S2
S1
A reduction in supply
This is a shift to the left
P3
65
11
Q3
Q
Number of appointments
per day per doctor
See You Next Class