Transcript Chapter 1

Chapter 1
Economics proceeds by developing
Models of social phenomena.
By a model we mean a simplified
representation of reality.
Exogenous variables:
taken as determined by
factors not discussed in a model.
Endogenous variables:
determined by forces described
in the model.
The optimization principle:
People try to choose what’s
best for them.
The equilibrium principle:
Prices adjust until
demand and supply are equal.
The demand curve:
A curve that relates the quantity
demanded to price.
The reservation price:
One’s maximum willingness
to pay for something.
From people's reservation
prices to the demand curve.
Fig.
Similarly, the supply curve.
Pareto efficiency:
A concept to evaluate different
ways of allocating resources.
A Pareto improvement is a
change to make some people
better off without hurting
anybody else.
 An
economic situation is
Pareto
efficient
 or
Pareto optimal
 if there is already no way to make
any more Pareto improvement.
Short run and long run
in the short run
(some factors are unchanged)
and in the long run.
Equilibria
Chapter 2
 * Vector
variables and vector functions.
 * The inner product of two vectors.
 * With the price vector p = ( p1, …, pn ),
the value of
the commodity bundle x = ( x1, …, xn )
is pTx = Σi pixi.
However, two goods are often
enough to discuss.
The
budget constraint:
p1 x1 + p2 x2 ≤ m.
The
budget line and the budget set
(the market opportunity set).
The
slope of the budget line:
d x2 /d x1 = – p1 / p2 .
How
the budget line moves
when the income changes, or
when a price changes.
Budget line and budget set
x2
m/p2
Budget line
Slope = -p1/p2
Budget set
m/p1
x1
Increasing income
x2
m’/p2
Budget line
m/p2
Slope = - p1/p2
m/p1
m’/p1
x1
Increasing price
m/p2
Budget line
Slope = - p1/p2
Slope
= - p’1/p2
m/p’1
m/p1
Taxes, quantity taxes, value taxes
(ad valorem taxes), and lump-sum taxes.
A subsidy
is the opposite of a quantity tax.
Rationing.
Their effects on the budget set.