Lecture week 1 Microeconomics:

Economics is concerned with the allocation of scarce resources. It is the study of how people
make decisions, use resources and respond to incentives.
Economics range from the very small to the very large:
1. Microeconomics: the study of individual decisions.
2. Macroeconomics: the study of the economy as a whole.

A microeconomist and a macroeconomist walk into a bar:

- The microeconomist may ask: ‘’Do I consume more or less Belgium Trappist beers if
the price of Irish stout goes up?’’
- The macroeconomist may ask: ‘’Is there a relation between economic growth and the
level of alcohol consumption in a country?’’

In microeconomics we look at models; simplifies representations of reality that focus on the

aspects of reality that are important for the problem at hand.

How to study this course:

1. Familiarize yourself with the course information: what is expected form you in this
course? (course manual and brightspace announcements)
2. Read the book and slides carefully.
3. Solve exercises (tutorials, practicals and old exams)
4. Practice on the MicroApp

What is a market?
Facilitates exchange and is characterized by a specific: (1) product or service, (2) location,
and (3) point in time. Markets have a demand side and a supply side.
- Demand side: Combined amount that all consumers are willing to buy.
- Supply side: Combined amount that al producers are willing to sell.

Four assumptions in the supply-and-demand model of a market:

1. We focus on a single market
2. All products sold are identical
3. All products sell for the same price and everyone has full information
4. Many consumers and producers are in the market

The impact of changes in PL (∆PL) reveal whether K and L are substitutes or complements.
- Substitutes: Goods that can be replaced with one another.
- Complements: Goods that are consumed together.

The impact of changes in B (∆B) reveal whether K is a normal good or an inferior good.
- Normal good: Goods for which demand increases if income increases and vice versa.
- Inferior good: Goods for which demand decreases if income increases and vice versa.

Note: In most exercises we talk of consumer income (I) rather than consumer budget (B)
Consumer surplus (CS): The gain of consumers if the price of a product is less than
consumers’ willingness to pay more for that product. CS is the area between the inverse
demand curve and the market price.

Producer surplus (PS): The gain for producers if the market price of a product exceeds
producers’ willingness to sell the product. PS is the area between the inverse supply curve
and the market price.

Total surplus (TS): The sum of consumer surplus and producer surplus (in the absence of
government policies).

Economists are often interested in how consumers and producers react to change in prjces
and income. For this we use the concept of elasticity: the percentage change in one variable
divided by the percentage change in another variable.