Microeconomics

CHAPTER 1
THINKING LIKE AN ECONOMIST

ECONOMICS IS REGARDEDAS A SOCIAL SCIENCE BECAUSEITUSES SCIENTIFIC METHODSTOBUKDTHEORIESTHATCANHELPTO UNDERSTAND

THE BEHAVIOUROF INDIVIDUALE GROUPSAND ORGANISATIONs

= SCIENTIFIC
STUDY OF OWNERSHIP, USE AND
>
EXCHANGE OF SCARCE RESOURCES
v
✓
" " ✓
IT CAN BE DISTINGUISHED IN :

" "
OIKOS SCIENCE OF scarctty
+
House •
MICROECONOMICS
" " STUDY OF INDIVIDUAL CHOICES AND OF GROUP BEHAVIOUR IN
NOMOS INDIVIDUAI MARKETS
LAWIRUE SHOW
peopte CHOSE IN CONDITION OF
SCARCITY GOODSITIME
=
: TRADE OFF
-
OF MATERIAL
HOUSEHOLD
MANAGEMENT
FÉÉIÉEFÈÉÉ
• MACROECONOMICS
STUDY OF BROADER aggregati ONS OF MARKETS

THE COST BENEFIT -

appronta
SYSTEMATIC approntato ESTIMATE STRENGHTSANDWEAKNESSES OF alternative

USED TO Detersive WHICH IS THE BEST

>
OPTION
CACHIEVE BenefitSt PRESERVE SAVINGS)

1
> RATIONAL DECISION

BG) ) (G) SDOX * RESERVATION

=
PRICE OF AN ACTIVITY
PRICE AT WHICH a PERSON WOULD BE INDIFFERENT

BG) < CG)

BTWDOINGX AND NOT DONG X
> DO NOT DO ×

✓ * SOME COSTS Mayfair

PREDICTIONS MADE on
peopue WHICH ARE

ffffhed
not in
By Economist
May BEUSEFULAS =
EXTERNALCOSTS
GUIDANCE for DEMONS

HOMO Economics
HUMAN BEING WHO ONLY CARES ABOUT PERSONAL MATERIAL cost AND BENEFITS
> SELF INTEREST
-
IS THE HOST IMPORTANT HUMAN MOTNES
but is not the any ONE (# Egoistico behAVIOUR)

self - INTERÉÉED CONSUMERs alt as

THEIR AIM
ARE DRNEN
THEY BY AN
INVISIBLE s is
to
product
THE GREATEST

HAND social GOOD

(ADAM SMITH)

QUESTION s

> NORMATIVE QUESTION :

INVOLVES VAWES JUDGEMENT
NI DEFINITE ANSWER

> POSITIVE QUESTION :

INVOLVESTHE CONSEQVENCES OF specific partes OR INSTITUTIONal APRANGEMENTS
Ytes DEFINITE ANSWER (Objectives
COMMON PITFalls IN DECISION MAKING

① IGNORINO IMPLICITCOSTS
IF DONG AN ACTIVITY X MEANS, not to DO AN ACTIVITY Y
'

cost =
"
PICK COST
>
THE value OF

OPPORTUNITY
DONG
Y IS THE _ Not gettino a benefit
COST OF DONG X
MEANSINCURRING
OPPORTUNITY COST

A COST

THE VALUE OF allTHAT MUST BE

SACRIFICED TO DOTHE ACTIVITY

EXAMPLE
40 CHARGE for SKIING STAY HOME NOSKHNG : BENEFIT 40 CHARGE for SKIING DO AN AMAZING 45 COST
JOB
:
,

60 BENEFIT for SKHNG 60 BENEFIT for SKHNG

✓ v

OPPORTUNITA COST ANALYSIS OPPORTUNITY -

cost Analysis
60 40 → Bsc
gf-4ftg.gs
> →
GOSKIING → Bc c > DO NOT GO
SKIING

40 CHARGE for SKIING DO ANHORRIBTE JOB : 45 COST

60 BENEFIT for SKHNG 30 BENEFIT

OPPÒÉTUNITY -
cost Analysis
G- 40745 > B > C > 60 SKIING
a
13=601-30
90 > 85

G- 40+(45-30)
40T 15

Beoo
② Falling TO IGNORESUNKCOSTS 60 > 55
AN EXPENDITURE May SEEM RELEUANT WHEN IN REALITY IT IS NOT

JUNK COSTSMUST BE IGNORED

COSTSTHATÀRE BEYOND RECOVERY

IN THE MOMENT IN WHICH THE
DECISION IS MADE
=
ALREADY BEEN INCURRED

Example
10000 EXTRA PROFITS =
B

NEW APARTMENT B>C

YOU DO it

}
2000 ARCHITECT
3000 ELECTRICIAN 9000 =
C
4000 PLUMBER

BUT
5000 + = 9000
'
5000 ELECTRICIAN s
you SHOULD ( =

4000
STKL DO IT
2000 SUNK COST !
THEYAREGONE

③ MEASURINGCOSTS AND BENEFITS as PROPORTIONS

RATHERTHAN AS ABSOLUTE MONETARY AMOUNTS

EXAMPLE
✓
15mW walk =
aIIe NEARBYSHOP '
RÈÌÈ 10€ Has ALWAYS THE
,
> You CHOSE this game VALUE ! !
BECAUSE SAVE THE 50%
YOU

¥5 min WALK = Ìtooò NEARBYSHOP =

ÌOVAOE
> YOU With Chase THIS
BECAUSE IT IS MOSER
10€ ON 1000€ DO NOT
MAKE ANY differente
⑨ FAILURE TO UNDERSTAND THE AVERAGE -
MARGINAL DISTINCTION

AVERAGE COST < >

MARSHAL COST
INCREMENT IN TOTAL COST IN curato WHEN ADDITIONAL UNITS
TOTAL COST PRODUCING
CHANCE IN COST
Na UNIT of MC =
,
QUANTITY
Activity CHANGE IN

AVERAGE BENEFIT < > MARGINAL BENEFIT

TOTAL BENEFIT INCREMENT IN TOTAL BENEFIT INCURRED WHEN THE ADDITIONAL UNITS ARE CARRIED OUT
Na UNIT of CHANCE IN BENEFIT
Activity My =

CHANCE IN QUANTITY

WHEN DECIDYNG ,
IT IS USEFUL
TO COMPARE THE Benefits/ COSTS
of Orte ADDITIONAL UNITY :

KEEP INCREASING THE LEVEL OF AN AS LONG AS

>
ACTIVITY
ITS MARGINAL BENEFIT EXCEEDS ITS MARGINAL COST
> MB Me
DO it ! =

* you HAVE to React

THE
OPTIMAL QUALITY
 EXAMPLE tube

I
→
30¥
→
4¥
→
%
È
0 Me-100 MC-150

MARQNAL Benefit 0-71--300 300>1-00 MB > MC 300 > 150 MB > Me

" "
1-72--480-300=180 180 > 100 MB > MC 180 > 150 MB >
Mc
" "
2-73=600-480--120 120 > 100 MB > MC 120<150 MBLMC
3-74=640-600--40
" "
40<100 MBLMC 40<1-50 MBLMC

MB-TTBn-TB.cn -1)

f-
sunt
costs

WHAT ARE THE COST OF the THREE Options? ② WHAT IS THE COST OF SKHNGATHIRDDAY ?
1) 0€ 2) 20×2+25×2 -90€ 3) 75€
2daiy-753day-75-cost3rdday-of-75.EC
90€
no ,

⑤ WHICH IS THE BEST option ?

Me = 25

MB >Mc → GOSKII 3 days !

MB -30

I
North
FORSKHNG
1- day
?⃝
[µA[[ [
AND DEMAND MODEL :
>
SUPPLY
INTERACTION BTW CONSUMERS AND Sellers

>
PRICES

SUPPLY AND DEMAND THEY Guides Decisions

> MARKET
THE SEUERS OF a GOOD / SERVICE
SUN TOTAL OF ALL THE
BUYERS AND
REGION
IN AN a specificarea or

È
DEMAND CURVE E
- - - -

HORIZONTAL
INTERPRETATION I

> DIRECT Qd-7 '

I III:L:*
"
PRICE THE Buyer

(
>
'

Buy MORE LESS/

HOW MUCH OF A ! D QUANT'TY
PRODUCT CONSUMERS i
/ HEWIKBEUNHAPPY
WANTTO BUY FOR EACH POSSIBLE UNITARY
CETERISPARIBUS
PRICE ,
! ⑨
;
f-
- - - - - - -
- - - - - - - - - -

;
- - - - -

VERTICAL
Interpretation
> INDIRECT P ffqd)
=
; ; >

QUANTITY
THE PRICE AT WHICH BUYERS WOULD DEMAND
SPECIFIC QUANTITIES OF THE
PRODUCT ←
ANY POINT ON THE CURVE REPRESENTS
CETERIS PARIBUS THE
QUANTITY THAT THE BUYERSWANT TO
BUY
µ
WITH OTHER CONDITIONS
GIVEN THE
=
PRICE THEY
PRICE QUANTITY PAIRS
-
FACE
FOR WHICH
BUYERS ARE SATISFIED
REMAINING THE SAME ✓
KEEPING THE OTHER CONDITIONS
DOWNWARD
=

CONSTANT

SLOPING
WHEN THE
PRICE OF A
PRODUCT Faust pt QT
=

QUANTITY DEMANDED RISEST

✓
= LAW OF DEMAND
SUM OF THE DEMAND

1
OF THE INDIVIDUAL
CONSUMER

Exception ?
WHY
: >

GIFFEN
GOODS •
MANY PEOPLE SWITCH TO OTHER PRODUCTS
•

PEOPUE ARE NOT ABLE TO BUY AS MUCHAS BEFORE :

SCARCITY
•
LESS EASY TO
SATISFY THE COST BENEFIT -
CALCULATIONS

ITBA SET
= -

→ OF all THIS
Factor

a
FACTORS THAT SHIFT THE CURVE

↳ INCOME

RISES WITH INCOME

NORMAL THE
QUANTITYDEMANDED
:
>
GOODS pasta , BREAD

INFERIOR THE
QUANTITY DEMANDED FALLS WITH INCOME
:
-
GOODS JUNKFOOD, CANNEDFOOD

↳ TASTES

↳ PRICES

AN INCREASE IN
> COMPLEMENTI :
THE PRICE
DECREASES DEMAND FOR THE OTHER
OF ONEGOOD,

SUGAR
PTYTEA al

SUBSTITUTES : AN INCREASE IN THE PRICE OF ONEGOOD,

-
WILL TEND TO INCREASE THE DEMAND FORTHE OTHER
COCACOLA pt / PEPSI QT

↳
EXPECTATIONS
*
POPULATION SIZE

CHANGES IN DEMAND
=
CHANCES IN FACTORS OTHERTHAN Px
WILL DETERMINI A PARAVEL SHIFT OF
THE WHOLE DEMAND CURVE
 ^

ÈÈ
SUPPLY
. _ _ . _ . - - - - -

CURVE
_ _ _ . . . . . . _ . - - - - - - -

:
i IF for the sane
HORIZONTAL i
>
PRICE THE seller
INTERPRETATION I IS FORCED TO

> DIRECT =

ffp)
I
1
SELL MORE /LESS
Quant'TY
I HE WILL BE UNHAPPY
HOW MUCH OF A
PRODUCT SELLERS ARE WILLING ⑨ '

i
TO
SUPPLY FOR EACH POSSIBLE UNITARY PRICE , '

CETERISPARIBUS
) "
i
- - - . _ . . . . . _ . - - - - - - - - --

y s
! !
VERTICAL
Interpretation ; ;
> INDIRECT P ffqs )
-
>

QUANTITY
THE PRICE AT WHICH SELLERS WOULD SELL
SPECIFIC QUANTITIES OF THE
PRODUCT :
ANY POINT ON THE CURVE REPRESENTS
CETERISPARIBUS THE
QUANTITY THAT THE SELLERS WANT TO
SUPPLY
~
WITH OTHER CONDITIONS
GIVEN THE
=
PRICE
PRICE THEY
QUANT'TY PAIRS FOR WHICH
-
FACE

SELLERS ARE SATISFIED

REMAINING THE SANE ✓
KEEPING THE OTHER CONDITIONS
UPWARD
=

CONSTANT

SLOPING
WHEN THE
PRICE OF A PRODUCT RISEST PT QT
-
-

FIRMS OFFER MORE OF IT FOR Save

v
= LAW OF
SUPPLY
SUN OF THE SUPPLY
OF THE INDIVIDUAL
SUPPUER
?
WHY
'

• WHEN PRKES RISES , MORE PRODUCERS SWITCH TO PRODUCING THE PRODUCT

THE
PRICE MUST COVER THE MARGINAL COST OF PRODUCING THE
•
GOOD
(often RISES AS MORE UNITS ARE
PRODUCED)

ITBA SET
=

☒→
-
OF all THIS
Factor

a
FACTORS THAT SHIFT THE CURVE

TECHNOLOGY
↳ St
>
improvement
-

↳
FACTOR PRICES Fptystr

↳ NUMBER OF SUPPUERS moresuppuers.si

↳
EXPECTATIONS
↳ WEATHER
EQUILIBRIUM COMPARATIVE STATISTICS
=
COMPARISON OF TUO DIFFERENT ECONOMIC OUTCOMES
BOTH BUYERS AND SELLERS ARE SATISFIED BEFORE AND AFTER THE CHANCE IN SOMEPARAMETER

1- CURVE MOVES :
d' t
*
*
#
DT =p t an Dp =p t
> THE DEMAND
AND Supply Waves
% Poi
INTERSECTS "
•
% è
Excess Supply AND
D= QS
EXCESS DEMAND
ARE -2-1=120
① >

a ☒

✓
Steph
*
① ti sto =p# t off
IT
HAPPENS % Poi
SPONTANEOUSLY 7
a
⑨

PRICESAREDETERMINED
• •

→ @

BYTHE MARKET
à à

^
STEEPNESS Supply CURVE

' s
ÈÈ
Excess
SUPPLY

#
# EQUILIBRIUM E
p _ - - - - - - - - - - >

:
I
EXCESS i BOTH DEMAND &
SUPPLY CURVE CHANGE :

DEMAND ,
1 St
,
i
☐ shift >
Ssheft pt
'
☐ shift ssheft
*
>
<
pt
① QUANTITY
☐ shift =
Ssheft p
=

#
DOWNWARD SI
P> P EXCESS
SUPPLY Buyers aresaisfiedi
seuersarenot
> ON PRICE
PRESSORE
UNTIL

p =p
# ☐ shift >
Ssheft Qf
☐ shift < Ssheft QT
#
UPWARD PRESSORE
P< P EXCESS DEMAND Sellers are satisfied'
BUYERSARENOT
> ON PRICE UNTK 1) shift =
Ssheft ☒=
#
p =p

THE EQUILIBRIUM OUTCOME IS D

PARETOEFFICIENT ÈÉ
> ARE Allocation IMPROVES sone -
People' S POSITION BUT HARMS CONSUMER
THE POSITION OF OTHERS SURPWS
#
>EQUILIBRIUM E

HIS NOT NECESSARY

f
FAIR
BECAUSETOACTIIEVE
PRODUCER
)
FAIRNESS :
TOTAL
SURPLUS SURPWS
REDISTRIBUTE WEALTH WITHIN SOCIETY
> WE
May MAXIMISED
> UESS UMITATIONS TO FREE MARKET EXCHANGE ,
QUANTITY

v CONSUMER SURPLUS
:
CONSUMER'S BENEFIT IN A TRANSACTION
LIKE :

PRICE CEILING
PRODUCER SURPLUS FIRM'S BENEFIT
-

BY SELLING output
:

PRICE SUPPORT
 CEILING
PRICE
LEVEL BEYOND What PRICES ARENI PERMIITEDTO RISE
^
#
D S >E
=
NO Effect
ÉÉ

T.bffgg.gg
< È =
EXCESS DEMAND
""

>
*
E
surplus

[
- - -

ITIS
- - -
-

; INEFFICIENT
BAD CONSEQUENCES :

i •
ILLEGAL TRADE

< È '
•
•

/
NO LENDING SELLING

Bff Ì
' Excess

| DEMAND

>
QUANTITY

PRICE supporto >E

*
)
WAYS
^
PRICES ARE Kept ABOVETHEEQUIUBRIUM level
GOVERNMENT IS AN ACTIVE IN THE MARKET
S
>
BUYER

MiLB
D (TPUROHASES the Excess)
ÉÉ
È,
e

Effy
.MEpt
N
BAD CONSEQUENCES :

•
WASTE OF Goods
%/

WASTED
surplus

>
QUANTITY

PRICES SERVE tuo FUNCTIONS

> RATIONING
EQUILIBRIUM PRICES RAMON Searle Supplies TO THE
USERS WHO PLACE THE HIGHEST VAWE ON THEN

>
ALLOCATNE
SIGNALS TO DIRECT
PRODUCTIVE RESOURCES AMONG
DIFFERENTSECTORS OF THE
ECONOMY
 CHAPTER 3
GAME THEORY
STRATEGIC
THE
PAYOFF OF AN ACTION OFTEN
DEPENDS NOT
ONY ON
>
INTERDEPENDENCE
THE ACTION ITSELF BUT ALSO ON THE ACTION OF OTHERS
BETWEEN ECONOMIC
ACTORS
✓

WE CANNOT USE V
USE THE Simple
COST BENEFIT
-
APPROACH
ITISANALYSED
THROUGH
BECAUSE
THERE ARE ALSO EXTERNAL EXTERNAL/TIES
GAME THEORY
>
AND NOT ONY ✓

PRIVATE COSTS AND 1) DESCRIBEPLAYERS AND STRATEGIES

BENEFITS
2) SUMMARDEPAYOFFS COMING FROM STRATEGIES
IN a
payoff MATRIX

COOPERATE & DEFECT STRATEGY

EXAMPLE
HAUL = -20€ BURN =
-1€

→ GILE
= READACROSS
RAWS
SMOKECOST -15€
-_

EXTERNAUTY =
DOMINANT STRATEGY
THEIR OWN
JILL PIAYERS MAXIMISE PAYOFF
By CTIOOSING A PARTICULAR STRATEGY
MATER WHAT Otter PLAYERS DO
BURN HAUL NO

31€ JACK > IT

May NOT BE EFFICIENT > SOMETIMES IT IS NOT CLEAR
-16€ JACK
BURN
-

§§
FOR THE GROUP THAT AN action SHOULD BE
31€ JILL -35€ jill
PRIUATEB > PRNATEC
-

TAKEN IF

|
HAUL -35€ Jack -20€ JACK
-
16€ JILL -20€ JILL
SOCIAL DILEMMA
✓
IT IS THE SITUATION IN WHICH THERE'S
BEST
CHOICE A TENSION BETWEEN :
READACROSS
=

COLUMNS
> DOMINANT
STRATEGY
NASH EQUILIBRIUM
L ✓

INDIVIDUAL
PARETO
INCENTNES EFFICIENCY

THE
" INÌDIBUEHAND
"

BEST DOESNOTALWAYS
PRISONER' S DILEMMA → Chace work

PRDONER 2

CONFESS SILENCE

t
Confess TOYEARS 1 OYEARS 1
v
ONE-SHOT GAMES =/ REPEATED GAMES

off
2
TOYEARS IOYEARS 2
WHEN INTERACT IN
prayers
SOCIAL DILEMMA ONLY ONCE
a

,
È SILENCE LOYEARS A 1-
YEAR 1-
COOPERATION IS Difficult to actleve > Ttt -
FOR Tat
- :

[
AND THEN
2 COOPERATE
OYEARS 1- 1
YEAR copy WHAT THE Otter

BEST PLAYERSDIDTHELAST

)
CHOKE PERIOD
= LIVE AND LET LIVE
✓
-
- -

SYSTEM IN IWW

WIll BE
THEY
BETEROFF IF the
both CHOSE TO REMAIN
SILENT
BUT to

THEY CANNOT TRUST

>
SELF -

INTERESTMAY
EACH OTHER
NOT PROMOTE SOCIAL
OBJECTNES WHEN
THERE ARE EXTERNAUTIES
EXAMPLE
HAUL = -20€ BURN =
-1€

SNOKE COST -15€ for

EXTERNAUTY =

JILL
-
-

-20€ FOR
JACK
HAS A
DOMINANT
JILL STRATEGY NASH EQUIUBRNM
Shawn
BURN HAUL Dunn A COMBINATION OF STRATEGIES SUCH THAT
anyway
EACH
PLAYER IS DOING THE BEST HE CAN
GIVEN THE STRATEGY CHOICES OF OTHERS
41€ JACK -16€ JACK
BURN
-

È 31€ JILL -35€ JILL

-

-35€ Jack -20€ Jack NOBÓDY Has a ✓

HAUL "
Beyer "
Incentive CELL OF THE
PAYOFF MATRIX
-
16€ JILL -20€ JILL IN WHICH THERE ARE TWO
incitavano THE payoff "
"
UNDERUNED
PAYOFFS

> NASH EQUILIBRIUM

= both ARE ACTING
GIVEN THE
optimally
Chace OF the OTHER

JILL COORDINATION GAME

BURN HAUL ASYMULTANEOUS GAME IN WHICH

PLAYERS
ARE FACED WITH multiple PURE STRATEGY
NASH EQUILIBRIUM

BURN
-
41€ JACK -16€ JACK ÙASH
È -
41€ JILL
-35€ jill EQUIUBRNM
E
L

HAUL -35€ JACK -20€ Jack NOT ALL OF THEN

-
16€ JILL -20€ JILL Have a CONFUCTOF

✓ INTERESTSBETWEENPLAYERS
NASH
MULTIPLE
> NASH >
EQUIUBRIA
EQUIUBRIUM

COORDINATION GAME
have TO COORDINATE
=
they TO CHOSE
IN ORDER ONLY
ONE EQUILIBRIUM

1
IT WILL BE RESPECTED
BECAUSE Of THE
DEFINITION OF NASH EQUILIBRIUM

MAXIMIN STRATEGY
AN INDIVIDUAL HAS TO CHOSE A STRATEGY
THAT MAXIMISESTHELOWEST
POSSIBLE VAWE OF
HIS OWN PAYOFF

>
* RATIONAL

TOYFORAIL STRATEGY

ENTER
'
* MAXIMIN TOYSfor all
STAY OUT
STRATEGY OUT =P
IMMPAYOFF STAY
E 100 ts OTS 90
min
payoff Enter =

Stay out 0 TA 9017

È 110 TS 10 TS
ENTER worsttnemgtnat
100 TA gota can if TSENTERS
happen

✓
v
DOMINANT IF
THEY CHOSE THIS
STRATEGY TO ✓
ONE ,
Toys for all ,
ENTER WILL MAXIMISE the
THIS WOULD
UAWE
BE THE NASH LOWEST POSSIBLE
EQUILIBRIUM OF ITS
PAYOFF

NEÙNASH
EQUILIBRIUM
differenti FROM
the predicted ora
 SEQUENTIAL GAMES
DO NOT CHOSE THEIR STRATEGIES AT THE sane time,
PLAYERS
CONDITION HIS CHOKE AFTER THE
a
player can
Potential
HAS CHOSEN
OTHER
PLAYER
BAÌKWARD
INDUCTION
= BEGIN By WOKING AT THE
505 LASTCHOICETO BE MADE AND
COME 505 THEN CHOSE THE BEST
in
EXAMPLE Local PAYOFF
COME ALICE DILEMMA
IN WOULD BE
THEY
-105
BELTER as a
NOT FOR botti
COME 60A payoff
OF THEN

SARAH
COME 605
IN -10A

NOT ALICE
COME

NOT 05
COME 0A

> SARAH NOT COME

> ALICE NOT COME L A NASH EQUILIBRIUM COME ABOUT WHEN THERE
= SUB game
-

PERFECT ARE COMPLETE INFORMATION

NASH EQUILIBRIUM BUT

LACK INFORMATION
GAME OF
INCOMPLETE
OFTEN PLAYERS >
INFORMATION
AND HAVE TO BE ABLE TO

TYPES OF
DISTINGUISH POSSIBLE
OTHERPLAYERSOBSERVING
THEIR Actions
ULTIMATUM GAME
EXAMPLE

10A
accept 1-OR

10€ RECEIVER

O A
REJECT OR

ALLOCATOR
19 A
ACCEPT
1 R PERFECT
SUB GAME
-

NASH EQUILIBRIUM
RECEIVER
€
AN THEORY)

O a
REJECT OR

GUESSING GAME
GAME BETWEEN N people
WHO HAVE TO CHOSE A NUMBER
BETWEEN 0 AND 100

BEHAVIORAL GAME
✗=
f- Sia >
THEORY
CAN MAKE MISTAKES
PEOPLE DOUBTS ABOUT THE
OR HAVE

THE NASH EQUILIBRIUM OF THE CovesSing game RATIONAL/TY OF OTHERS

~
IS ZERO

2%50--33,33
✓

ITDID NOT COMMON

7g -33,33=2722 HAPPEN RATIONALITY
REDUCES this
-22,22=1-4,81 POSSIBILITY
%
CLÒSEST
TOZERO

un

ITERATED BEST RESPONSE

=
LEVEL OF REASONING
CHAPTER RATIONAL CONSUMER CHOICE
4

BUNDLE
> BUDGET CONSTRAINT PARTICULAR COMBINATION
OFTWOOR MORE GOODS

SET OF ALL BUNDLES THAT EXACTLYEXHAUST SIMPIESTWAY

REPRESENTING
^
of
THE CONSUMER INCOME AT A GWEN
PRICE Then :
- -

i.
a

=
no
/ ) ② D'USIBLEGOODS -

f- :B
. _

,
THE CONSUMER IS
SAVINGS
TAKER
PRICE
the QUANTITY hebvys
DOES NOT INFLUENCE THE
PRICES

TOT EXP
BUDGET CONSTRAINT
. .

1-e-
pxtot.FM?=pxX >
☒✗ +
pyy
M
1- a-
Py totexppyy PXXTPYY
-

ITHASÌO BE
EQUALTO INCOME
IN ORDERTOREPRESENT
THE BUDGET CONSTRAINT

µ
bundes > M
NOT AFFORDABLE

AFFORDABLE
bundles -
M
EXAMPLE
→

pxxtpyk.MG/t3y--
A- 600 px -6 py =3 BC

f >
×
600

AFFORDABLE
bundlestm AGO 20), 6×50+3×20=3001-60--360 360<600 -
AFFORDABLE

B. (1-0,7) 6×10+3×7=60+21--81 81<600 =

AFFORDABLE

( (1-00,7) 6×1001-3×7=6001-21--621 621 > 600 =

NOT AFFORDABLE

THEY May ALSOBE

WHEN RELATIVE
NON UNEAR,
PRICESARENOT CONSTANT
:

QUANTITYDISCOUNTS
1- GET 1- FREE
•

BUY J
a
•
FREE
DELIVERY IF
YOU SPEND OVER 2- Y
• RATIONING

ii. '
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È
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r

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,

>
30
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VERTICAL
INTERCEPT Slope =
PENDENZA

pxxtpyy-M-y-M-o-P-x.it
di /
✓
] py py
→
/ B
v
DX
THE Slope ISALWAYS
NEGATIVE BECAUSE
ITRE PRESENTS the
VERTICAL
WENEEDTO
concept of SCARCITY >
RENOUNCETO
>
Intercept
=
DECLINING SOMETHING'N HORIZONTAL
ORDERTO Obtain
> INTERCEPT
] ✗ Sorrentino ELSE

t
✓
BUDGET

ftp.#---oE--oppoRTUNlTY-
dytaxt " ne

cost
py

VERTICAL :
IF I
SPEND all
MY INCOME TOBY GOODY ,

INTERCEPT ICOULDBUY THE

QUANTITY M/
PY
-

↳ MAXIMUM
I
QUANT'
CAN afford TYOFY
GWEN
MANDPX

HORIZONTAL :
IF I
SPEND all
MY INCOME TO BY GOODY J

INTERCEPT M/
SLOPE REPRESENTS
:

ICOULDBUY THE
QUANTITY -
px
↳ Maximum QUANTITYOFX ① THE RATE AT WHICH GOODX CAN BE "
-

apenas on

f-✗CHANGED FOR
CAN Afford
GOODY
MARKET
1 THE
>
coniatore

GWEN
MANDPY ON THE MARKET
WITHOUTMODIFYING
THE TOTAL
EXPENDITURE

EXAMPLE

px 2€/ PY 4€49 TÈ I
-
- =

rg
- _ -

1kg ✗ =

tzkgy
t t
2€ 412 -2€

② THE
OPPORTUNITY COST
UNIT OF ✗ in TERMS OF
-
OF AN ADDITIONAL

Y
M ADD UNIT OF X

1¥
> IF I SPEND TO
buy AN .

VERTICAL I am rendinano
1¥
to
UNITSOFY
INTERCEPT
EXAMPLE

¥
HORIZONTAL
INTERCEPT ,
PE 2€/kg PY - 4€
/kg -1¥ = -

£
IN ORDER TO
BUY 1kg4 we RENOUNCE
TO
112kg Y
E
SLOPE
-

py
BUDGET SHIFTS VERTICAL
INTERCEPT 1¥
> BOTH INTERCEPTS WIll CHANGE
>
PARALLEL
MOVEMENT HORIZONTAL M
Due to yyggye Intercept
☒
>
THE
Slope DOESNOTCHANGE
>

M ya
E
SLOPE
-

M PY
INCREASES
→
M
DECREASES
•
>
✗
MI =
SHIFT TO THE RIGHT

MI =
SHIFT TO THE LEFT

DUE TO CHANCES
>
PRICE
THE VI DOESNOT CHANCE
ROTATION
>
>
>
µ >
OI CHANGES
THE

✗ ^

JTHE Slope Chances

Px
DECREASES
→
✗ ^ Pk
INCREASES

%
•

ÉÌREASES
> py pxti
=
ROTATION INWARDS

pxtr =
ROTATION OUTWARDS

ftp.NCREASES
I
PYM =
ROTATION INWARDS

PY f- ROTATION OUTWARDS

>
BOTH

>
SANE
> BOTH INTERCEPT CHANCE >
PARALLEL
MOVEMENT
PROPORTION > THE Slope DOESNOT CHANCE
RATIO IS the sane
PRICE
✗
-

PXANDPY
DECREASE
µ
PXANDPY
INCREASE
•
>
✗
PX AND Py F- SHIFT TO THE LEFT

PX AND PY ti =
SHIFT TO THE RIGHT

> BOTH INTERCEPT S CTIANGE

>
DIFFERENT
PROPORTIONS > THE Slope Chances

examptepx-5py.to A- 100

VI -

¥y=¥f -20

HI =

#
,
17--20 =

P§ §¥z= §
- -
-
=
10 •

BCROTATESOUTWARDS
AND V.1 IS Kept CONSTANT
.

↳
• • >
20 25
px 4
1¥ 25 VI
→ -
-
=
 >
PREFERENCES
WHAT THE CONSUMER
PREFERS TO BUY

1-
PREFERENCE ORDERING

> ENABLES THE CONSUMER TO RANK BUNDLES

ONLY ORDINAL INTERPRETATION
>
QUANTITATIVE PREFERENCES >
NOT CARDINAL

>
DIFFERS AMONG CON

1.
COMPLETENESS
THE CONSUMER IS ABLE TO RANK all POSSIBLE COMBINATIONS OF GOOD AND SERVICES

a > B ; B > a ; ANB

* WE DO NOT KNOW
> EUENNOTCHOSING HOW multi SDTTSFACTION
is a Chace ques que option
IN Respect TO THE Otter

2 .

TRANSITNITY
FOR ANY THREE BUNDES a / B AND C , # THE CONSUMER PREFERS Ato B AND BTOC , then he
ALWAYSPREFERS ato c

✓ a> B an B ANC
→ A> c →
IF WE DROP IT WE FALL
,> g BNC
MONEY
INTO THE PUMP
PROBLEM
= IRRATIONAL
BEHAVIOUR
(PIZZA PIADINA
, ,

HAMBURGER example)

3. MORE -

D BELTER
-

BELTER
OTHER THINGS EQUAL , MORE OF A GOOD IS PREFERRED TO LESS A → "" °

→
free
+ WE NEEDTO ASSUME THAT DISPOSAL •

CONSUMER CAN STORE /

A FREELY principe a
OF GOODS HE DOESNOT
DISPOSE
WANT
WORSE
tisana

>

ÈÈ
$3 4. CONTINUITY
¥? SMALL CHANCES IN THE BUNDLE SHOW NOT LEAD TO A JUMP IN
PREFERENCES
92 IN DIFFERENCE
AG CURVE
☐
Z> a ☐< B
]
^
^ ^
A>W
Z
.
Z
.
B. < E

• •
E
a a •

⑤ comparative
• •
>
B
point 00

AIB
w • ⑨
W W
f D
. .
↳ comparative
a ISEQUAKY POINT
AITRACTIUE AS B
>
BAC
>
Caa

5.
CONVEXITY
MIXTURES OF GOODS ARE
PREFERABLE TO EXTREMES CONSUMERS LIKE
VARIETY
:

AG :
)
17 ANB E (95,1-0)
LOW DEGREE OF
EASILY SUBSTITUTEDr
BAG ; 3)
:
> ^
E > a,B conventi

(
HIGH DEGREE OF COMPLEMENTS <
:

> >

CONVEXITY
 2 IN DIFFERENCE CURVE >
wecanrepresentit
THROUGH THE
OF
Properties
:

a SET OF BUNDES AMONG WHICH THE Consumer is indffeaent

•
COMPLETE NESS
•

TRANSITNITY
CONTINUITY
•

L> a ITDABOVE
THE Indifferente curve

o
↳ Kca
ITIS BELOW
THE IN DIFFERENCE
CURVE

OF THE SET OF
REPRESENTATIVE SAMPLE
>
INDIFFERENCE = A CONSUMER'S INDIFFERENCE CURVES

Map f- ORDINAI REPRESENTATION)

INDIFFERENTE CURVES
PROPERTIES OF
>
UBIQUITOUS :

INDFFERENCE CURVE
any BUNDLE Hasan
PASSING THROUGH IT
>
COMPLETENESS PROPERTY OF
PREFERENCE ORDERING
a

ANBNC
• A

>
THEY CANNOT CROSS IFTHEYBELONGTOTHE
>
"
• •
B Due

SANE INDIFFERENCE Map e

°
B>☐ more > È > B
•
C - QUANTITY
ORDERING
TRANSITIVITYPROPERTY
>
OF
PREFERENCE

/
E MORE
>
> C
QUANTITY

M¥8113 <

TÈ
>
DOWNWARD -

Scoping + THIN
" "
is ORDERING
PROPERTY
→ BEITER
MORE OF
PREFERENCE
-
-

IS not ALWAYS RESPECTED

>
BECOME LESSSTEEPASWEMOVE DOWNWARD AND
TO THE RIGHT ALONGTHEM in ORDERÌOBE ON THE sane
INDIFFERENCE CURVE :
>
CONUEXITY PROPERTY PREFERENCE ORDERING
OF

is Not away s RESPECTED ①✗ I Qy t

t
ONE OF THE TWO
THE SLOPE ' GOODS IS NEGATIVE :

'
SALWAYS
SYE SCARCITY
:

> NEGATIVE
DX
DX > 0
< o
dy

DX > 0
o
Ay <
?⃝
MARGINAL SINCE the
Negative ,
Slope is always
with this MINUS THE
>

RATE of
gg
MRS Will be positive
✓

SUBSTITUTION
SLOPE INDifference ✗ ^
=
①
CURVE ☒

MARGINAL RATE
OF SUBSTITUTION
MRS =
-

FÈ
A
the by
AT
ANY POINT OF 2 •

INDIFFERENCE CURVE ,
THE RATE AT WHICH
1-
THE CONSUMER IS WILLING
DX
Fg
L TO EXCHANGE Gx for
Gy
AN EXTRA UNITY OF Gx is
VAWED MRS UNITS OF GY
> IT REFERSALWAYS to the othepgood :
¥
HOWMANY UNITS of
Que
y I have to ✓
UP IN ORDER to have 1 EXTRA
UNIT of ✗
WE ARE IN A CONTEXT
TRADE-OFF BECAUSE
OF SCARCITY
:

CAN BE REPRESENTED
> IT , → CONVEXY
THROUGH a STRAIGHT LINE
usually
THE MRS ☐ IS NOT AIWAYS
THE
✓
EXCHANGE DEPENDS DEC LINING Respect and
ON THE CONSMER > CONVEXITY r

> his WILLING

Ness
May PROPERTY
cttange ALONG the Line

]
V

THE MORE A CONSUMER HAS OF ONE GOOD

THE MORE HE MUST BE GIVEN OF THAT GOOD
IN ORDER TO BE WILLING TO QUE UP A UNIT
OF the otheroaod
ALSO DUE
TO TASTES :
→
CONSUMERS LIKE VARIETY

!
LIKES MORE
!
LIKES LESS
Potatoes POTATOES

MRS -7 MRS-2

VIOLATI ON OF PREÉRENCE
ORDERING PROPERTIES
> CONVEXITY ^
IS NOT RESPECTED

MRS ISCOSTANT

THIS WTTORKSFOR
(
PERFECTSUBSTITUTES
GOODS THAT ARE
>

PERFECTLY EQUIVALENT
AND CAN ALWAYS BE
EXCHANGE DATA
CONSTANT RATE
CUARIOUS BRANDS OF

pasta)

THEY
ARE ^

4Mt CASES > MORE IS BEITER

- -

^ IS NOT RESPECTED
D
2- E
;
- - . - - - -

✓ MRS È0 a :B
1-
q &
L FORM of THE
- - - - -

>
indifferente CURVE ; ;
LOW DEGREE OF :
Easily SUBSTITUTEDr a : i
CONVEXITY 1- 2
>

(
HIGH DEGREE OF COMPLEMENTS <
:

>

CONVEXITY L
THIS WORKS for
PERFECTCOMPIEMENTS
GOODS THAT ARE ALWAYS
CONSUMED TOGETHER, IN THE
sane PROPORTION
3 UTILITY FUNCTION
> ITYELDS A NUMBER WHICH RE PRESENTS THE AMOUNT OF SATISFACTION
A BUNDLE
PROVIDED BY
> THE HIGHER THE NUMBER THE
,
HIGHER the SATISFACTION

>
ORDINAL INTERPRETATION

> IT PROVIDE S A COMPLETE DescriptioN OF CONSUMER'S PREFERENCES

U ASSIGNS THE SAME NUMBER to a l l NUMBERS WHICH ARE ON THE SANE IN DIFFERENCE CURVES
>

FUNCTIONS ASSIGN HIGHER NUMBERS BUNDLES THAT BELONG TO HIGHER INDIFFERENCE CURVES
> UTILITY TO

EXAMPLE
U =
2×+1/2
BUNDLE AG 3)
,
→ U = 2.81-32=25

a>B
BUNDLE BG 4)
,
→
U = 2.21-42=20
Anc
MARGINAL UTILITY OF A GODD BUNDLE C (8 , 2) → U -2 .
81-22=20 ARE on the
sane erence
,

THE RATE AT WHICH TOTAL

UTILITY CHANGES
WITH CONSUMPTION OF AN EXTRA UNIT OF THE GOOD

KEEPING THE OTHERGOOD CONSTANT

* IT DEPENDS ON THE AMOUNT

GOODCONSUMEDVdu-@x.dXtMUy
OF THE

DY
.

# :* =

§
>
-

=
*
" a" """""⇐ ""e ,
THE LEVEL OF U IS CONSTANT

t
PTARTIAL
Mµ
IT IS THE
SHAPE OF THE IN DIFFERENCE CURVE
DERNATNEOFU MRG = >
THE
IS
STRICTLY RELATED TO THE FUNCTION
WITH RESPECT TO X UTILITY

E
dx

DIFFERENTTYPES OF
UTILITY CURVES :

uqyj-q.lt b- Y
PERFECTSUBSTITUTES

> MRS =

Y f- = =
CONSTANT

ÈÈ ci

:
:
:*
"
"

88
UH y) ninfa Y}

:
X , b-
PERFECT COMPLEMENTI

::
= -

,
a

:*
:*
÷
8
example
✗ = 1- tea
E f- 2 SUGAR
¥2
3¥ U -
Ming 1-× ;
Gy }
¥, :
AH 3) VA) minga -1 ; E -3}
÷;
> =
,

0 È
=

minga ; Zz }
=
minga; 1,5 }
> va

BG 4) ,
>
UCB) -
min
{ 1.3; § # } .

=
Ming 3:23
> UCB) = 2
 > BEST AFFORDABLE BUNDLE

THE CÓNSUMERS GOAL HIGHER INDIFFERENTI

IS TO CHOOSE THE BEST =
CURVE GWEN A CERTAN IN THIS AREA THE "
AFFORDABLE BUNDLE BUDGET LINE "
NON OVERLAPPINGRULE

|
7 IS NOT RESPECTED

MA INTERIOR
A
POINT OF
=
POINT OF
TANGENCY
EQUILIBRIUM IN LUTIÒN BTW THE Hottest INDIFFERENCECURVE
WHICH THE CONSUMER AND THE BUDGET LINE

HAS NO INCENTIVE
IN MODIFYINGHISCTIOICE a.

GOSSÉN SECOND LAW 6> F BUTG IS NOT AFFORDABLE ANEND

F> D } e>e

¥
'
= MRS
ARE BOTH
THEY
DOWNWARD
scoping BALANCE
=

they
their NEGATIVE

# :*
SIDE
" =

ME -7¥
>

7¥ -7¥
L

☒ = MRS

Py CONTEXT
'
OF
SCARCITY

|
marginale
gene, ,, marea, , # gg, ma,
OF ✗ IN TERMS
GOOD ✗
GOODY

# UNITSMORE
OF
OFY ✗
MARGINALCOST
# UNITSOFY
=

§ Mux ← ¥ MUY
=
→
.
.

(Ess

]
OF ✗ IN

]
TERMSOFY = THE RATE AT WHICH WE
CAN SUBSTTNTEYFORX
= THE RATE AT WHICH WE WITHOUT CHANG/ Ng the
CAN SUBSTITUTE YFORX TOTAL SATISFACTION EACH UNIT GIVES EACH UNIT GIVES
WITHOUT CHANGING the AN EXTRA UTILITY MUX AN EXTRA UTILITY MUY
TOTAL
EXPENDITURE

IF MRS > ☒

for
py
the Consumer 1- Unit of X
E
7¥ If >

has MORE NORTH than for the MARKET belter off if I SPEND 1€ MORE ON Gx
= MORE UNITS OF X

IF MRS < ☒
for
py
the Consumer 1- Unit of X
has LESSWORTH than for the MARKET
E
7¥ -7¥
MORE UNITS OF
belter off if I SPEND 1€ MORE ON
Gy
=
y
IN ORDERTO COMPUTE
THE BEST AFFORDABLE BUNDLE :

✗ +17km ✗^

>

:* ¥,
>

THERE
o.ao.BY
L

ISONLY DI
>
×

AFFORDABLE
BUNDLE
EXAMPLE
f- 3×42 BL →
pxxtpyym
A- 60 6×+39--60

{ 2×7=2 { 240×-2×1--2
Px 6×+39=60
6
3¥ GOJI 20 2x
-

g-
= -

>

Py =3 MRS →

Mmtfy-1¥ ,

THÈ ¥-12
{
f- 20 -2.4

{ Éj
162
→

¥ -2

39×44=-34
→
,
40-4-1=2-3/1
40=6×+4/1
¥4
%
?⃝
 NO
ME INTERIOR =
POINT OF
TANGENCY
SOLUTION

PERFECT COMPLEMENTI Vay) ninfa

-
- -
X , b-
Y}
Y
"

{
Pxxtpyym >

> BEST AFFORDABLE

BUNDLE BAB

Fox
•
IS NOT
Y
A - >

TANGENCYPOINT

EXAMPLE
EMMA ; 127) AH 2) mina;D -1
,
=
-

they are on the

sama indifferente
""e
A- 60 1312,2) nuna;D -1
-

px -6

{ y=zy
6×+39=60 6×+34×7=60
?
{
# %É

{
✗
Bis →
6×+6×-60
→

9--2/1 y -5.2--1-0
9=2/1

ME CORNER
SOLUTION
= ONE GOODIS NOT
CONSUMED

uqyj-q.lt b- Y
PERFECTSUBSTITUTES

CONSUMPTION
> BEST AFFORDABLE
BUNDLE
IF MRS >
§ >
OFXONLY
IS NOT a

TANGENCYPOINT

ETF :o) ,

consumatori
IF MRS <
È
>

OFYONLY

È
Gimpy)

EXAMPLE

§
0--7+10/1 :# E
{
9%9-2, I
{7+0--1=(10-3)
-
-

→
Px-1 ✗= 10 -2g
→

-70
✗+ Zy
Py -1
M -70
5- y

{¥10
-

→
Zy -5
y= -02,5
=

t
CONSIDERA
WE CANNOT
NEGATIVE QUANTITY

y-0 → ✗
=¥× # -10
CHAPTER 5
INDIVIDUAL AND MARKET DEMAND
> CHANGES IN PRICE
pcc
> PRICE CONSUMPTION CURVE

SET OF OPTIMAL BUNDLES

TRACED ON AN IN DIFFERENCE
MAP AS THE PRICE OF ✗
VARIES
FNCOME & PRKEOFY
CONSTANT) PCCIV DOWNWARD
→ SUBSTITUTE GOODS
SUOPING

PCCT UPWARD Shaping

>
complementoOODS
PCÈ HORIZONTAL LINE
> NOT CORRELATED GOODS

ÈÈ
PCC > IN THIS GRAPH THE LAW OF DEMAND

;D
is RESPECTED
pxf Qx 9

Also 131 IS
>
. BECOMING LESS
STEEP

1%0--24
<

☒
BEST
AFFORDABLE
=
→
Pt =
131
BUNDLE
HI
P2 1¥ 132
> =
= 12

>
pg =

1%1=6 133

>
pit =

1¥ = 4 134

-
>
INDIVIDUAL DEMAND CURVE

HOW MUCH THE CONSUMER

WANTS TO PURCHASE AT
DIFFERENT PRICES
(ETERIS PARBUS) < ✓
WE DERIVE 1T ALGEBRICALly
COMPUTING A SYSTEM FOR
A NON
SPECIFIC VAWEOFPX
-

→ ✗ =

QUANTHY
OFGOODX

THE POINTS ÓN
THE HI REMAIN
THE SANE

>
CHANGES IN INCOME
Icc

>
INCOME -

CONSUMPTION CURVE

SET OF OPTIMAL BUNDLES

TRACED ON AN IN DIFFERENCE
MAP AS INCOME VARES
Price ☒ ✗ & PELÉE
)

BEST AFFORDABLE
BUNDLE _ZGfgÉ
120,2)
I
THE NUMBER OF AFFORDABLE >
WE DERIVE 1T ALGEBRICALly
COMPUTING A SYSTEM FOR
BUND LES INCREASE S AS THE BL
MOVES OUTWARDS
A NON
specific VAWEOFM
-

M =
. . . ✗
↳[ ¥ te

>
ENGEL CURVE ✓ andò#Io
☐

BABE 60,3
Slope :

RELATIONSHIP BETWEEN the s

QUANTITY OF ✗ CONSUMED AND

INCOME
< CCETERBPARIBUS)
IT CAN ALSO BE
BACKWARD BENDING -

ma
^ v

] hotel NORMAL GOODS

•
v
>
a

] hostel
"
^

* the
consumista
È • INFERIOR GOODS
INCREASING TO A
UP
CERTA IN POINT AND then
IT WILL DECLZEASE
>
=
changa in
preferenze Q
L

FOR WHO
any CONSUMER
SPENDS
All GOODS
All HIS INCOME , NOT
CAN BE INFERIOR THE POINTS ÓN
THE HI REMAIN
THE SANE
 SUBSTITUTION EFFECT INCOME EFFECT
COMPONENT OF THE TOTAL EFFECT
CHANGE THAT RESULTS FROM
COMPONENT OF THE TOTAL Effect
OFA PRICE OF
PRICE CHANGE THAT RESULTS FROM
THE ASSOCIATED CHANCE IN
THE ASSOCIATED CHANGE IN THE
REAL PURCHASING POWER
RELATIVE AITRACTNENESSOFOTHER
GOODS

NORMAL GOODS -

pp
-

PT :
IT IS ALWAYS NEGATIVE INFERIOR GOODS t

TOTAL EFFECT
SUBSTITUTION EFFECT t INCOME EFFECT

^
^

IT IS Parallel TO B1
> =
sane SATISFACTION ON
THE SANE RATIO
'

THE
PRICE DECREASES ti
>
= MORE AFFORDABLE BUNDES
= ROTATION OUT WARDS
THE
PRICE INCREASEST
= LESS AFFORDABLE BUNDLES
7 =
ROTATION INWARDS

B1
B

B
qu
a
B1
'
•
^
i I
TOTAL '
B l
EFFECT 1
È
!
•

pqkei.IE
•• >

Al •
C ' i

I > i 1 |
' l

i i i i : i

ii.
|
'
! INCOME
!! ! SUBSTITUTION
>

I / EFFECT EFFECT
,

i ! ! ti
>
< >< >

SUBSTITUTION INCOME
EFFECT EFFECT

"
HYPOTHETICAL
BUDGET LINE TANGENT
TO THE ORIGINAL IN
DIFFERENCE
CURVE

NORMAÌGOODS
Apt NEGATIVE SE
NEGATIVE IE

INFERIOR GOODS
f- ifpt POSITIVE SE

POSITIVE le
>
OPPOSITE DIRECTIONS

A PT NEGATIVE SE
IE
POSITIVE

lf Pt POSITIVE
NEGATIVE
SE
IE

GFFEÙ GOODS
INCOME > SUBSTITUTION
EFFECT EFFECT

at pa
The LAW OF DEMAND
IS RESPECTED

THEY
HAVE TO Occupy
a LARGE SHARE OF
THE CONSUMER'S BUDGET
> OTHERWISE THE
INCOME Effect would
NOT Have a GREAT
Impact
PERFECT COMPLEMENTS
ALSO BE Realty
IT CAN
' "se ZERO Whan the
^
B L Shape IS MORE ROUNDED
-

SUBSTITUTION Effect
B
TOTAL EFFECT -
INCOME EFFECT
A- C
•

D
•

Ba
^

>

§
^ NO CHANCE IN
> MRS
TOTAL EFFECT
→ = O

PERFECT SUBSTITUTES
¥y
*
E- = EI > a
SIGN DOES NOT CHANGE :
•

IC
>
SUBSTITUTION EFFECT O -

>
TOTAL EFFECT =
INCOME EFFECT
B
B1
>

^
CHANGE IN TOTAL
EFFECT =
INCOME Effect
< MRS > SUB Effect
.
=
0

'

IC
B1

B
'
E:
*

f- = E
.
>
1-

INCOME
EFFECT

Ice

CHANGE IN TOTAL
^ EFFECT =
SUBSTITUTION Effect
IC
*' > INCOME EFFECT = O
•
f-
SIGNCHANGES :

ICI
>
INCOME EFFECT =
O
•<
SUBSTITUTION
E ; EFFECT

>
TOTAL EFFECT =
SUBSTITUTION EFFECT

° *
B E
B1

È > MRS
B
'
• >

131

# < MRS
 REMAINSTHE Sane BECAUSE
'
> THIS PART
MARKET DEMAND CURVE
INDIVIDUAL 2 DOES NOT
consone ATTHESE pares
ITIS THE HORIZONTAL SUMMATION OF
THE INDIVIDUAL DEMAND CURVE

MARKET DEMAND
CURVE

EXAMPLE Direct form

) 39¥
}
C1
f- 30 -20 > a. = a- + Qz
>

G) f- 30 -30
30¥ 30¥ + = O

qi-30.jp
>

15 -

¥+10 Pg - = 0

25--3%+7=0
25 -

5¥

PRICE ELASTICITY OF DEMAND

THE PERCENTAGE CHANGE IN THE 100
QUANTITYOF A GOOD DEMANDED 1% P 1

¥§ ¥
1- % CHANCE
E=
RESULTS FROM
= =
THAT a ' = '

A% Q
SLOPE
pay)
OF THE
IN ITS
PRICE CURVE
,@ DEMAND

ON THE UNIT
ITDOESNOTDEPEND
OF MEASURE AND CAN VARY
ALONGTHESAME DEMAND CURVE

-
1- < E < O
> THE TOTAL EXPENDITURE IS
INELASTIC SEEN FROM THE point , OF
CONSUMER
1 VIEW OF THE
VIEW
DEMAND POINT OF
CHANGESPROPORTIONALLY LESSTHAN
FROM THE
PRICE arene severe ☐

EXPENDITURE L
Revenue

pt
TOTAL = THE TOTAL

<
ELASTIC
INELASJIIC pt-p.at
E = -1
i 1 1
i
>
UNIT ELASTIC
-
a -3 -2
0
t DEMAND CHANCES PROPORTIONALLY THE SANE AS
PRICE
MAXIMUM
- 1 > PERFECTLY TOTAL EXPENDITURE =

PERFECTLY
ELASTIC
UNIT INELASTIC
ELASTIC
Es -
1
s
ELASTIC
MORETHAN PRICE
DEMAND
CHANGESPROPORTIONALLY
pt
TOTAL -
-

EXPENDITURET
pt Pat
-
-

✓ v

Slope -0
co
pa Slope
-

a
p
Bè 0
1-
E-
f- Bè-
-00 E-

EXAMPLE
>
ECLOSER < ¥
Ò Q TO -
co a

it is Impossible to remain
• A
like this time
for a
Long
:

with
→ the Income effect demanded
reduce tra quanti ty

C
•
☐3
B
•

D2

> E CLOSER
>
TO ZERO

DI LESS ELASTIC THAN D2 IN POINT ⑦

YES → tre scope in
deis hlgter

D2 sane ELASTICITYATBO that Dghas IN @

①
↳
Pais differenti
entrature D

DI HAS THE sane Elasticlty at ⑦ AND ③

Esa >B

⑦ INDI IS tess Elastic thah ⑨ IN Dg

ne
 E 'SCIOSER DETERMINANO OF
PRICE ELASTICITY OF DEMAND
a
P TO -

/E/ I
< > SUBSTITUTION
if theRE ARE AVAILABLE SUBSTITUTES
POSSIBILITIES =
LARGER SUBSTITUTION Effect

8
BUDGET
L
>
SHARE E THE SMOLLER THE SHAPE OF TOTAL
6
EXPENDITURE ACCOUNTED BY THE GOOD
=
SMALLER INCOME EFFECT

4
E ' SCLOSER
2
TO ☒
NORMAL GOOD HIGHER E THAN INFERIOR GOODS
> DIRECTION OF
IEAND SE GOINTHESAME DIRECTION
>
INCOME EFFECT
=

2 4 6 8 &
E ISHIGHER IN THE LONG -
RUN THAN IN THE SHORT RUN -

> TIME =
ttepe is MORE TIME
to
adapt AND TO SWITCH TO

SUBSTITUTE PRODUCTS
16 •

P ^
funen E- 1- DLR IS MORE
'

THE TOTAL EXPENDITURE FLAT THAN DSR

IS AT HIS MAXIMUM
12 (1-6)
[
4% 10

8 EXAMPLE

f- 16
-
Q Èèdi È
f- 4
÷ :$; :
6
-

Q -16 -4
-

4
EEEE e
→
0=12 ,

pt TEL
2
1
TOTAL EXPENDITURE
12×4=48
>
2 4 6 8 a
DECREASE
)
f- 16 Q TOTAL EXP
-

=3 1-3×3=39
p
0=1-6-3
0=1-3

INCOME ELASTI CITY OF DEMAND

1% Q 100

§
1
PERCENTAGE CHANCE IN THE
È
THE
µ
=
= = =

QUANTITY OF A GOOD DEMANDED

' •

☐% M
SLOPE
µ
OF THE
THAT RESULTS FROM a 1- % CHANCE
IN INCOME ,@ ENGEL CURVE
µ

ITALLOWSTHÉ PREDICTION
OF CONSUMPTION CHANCES
NORMAL GOODS
IN THE FUTURE IF
p 0 :
>
^
INCOME TORI INFERIOR
GOOD
NECESSITY
> 0< p<1 :
NECESSITIES

>
µ>1 : LUXURIES
È
0 INFERIOR GOODS
LUXURY
p < :

DOWNWARD doping

>

QUANTITY

MARKET ENGEL CURVE

> NO stable RELATIONSHIP BETWEEN
AVERAGE INCOME AND QUANTITY DEMANDED
IT CANNOTBE CONSTRUCTED AS THE > be cause
HORIZONTAL SUMMATION OF INDIVIDUAL
ENGEL CURVES >
INCOME DISTRIBUTION
IMPORTANCE OF

CROSS PRICE ELASTI CITY

-
OF DEMAND
1% ①× 100

¥9 ¥
THE PERCENTAGE CHANCE IN THE E = = =

QUANTITYOF A GOOD DEMANDED

.

A%
THAT RESULTS FROM a 1- % CHANCE py 100 ,
IN THE OF THE OTHERGOOD
PRICE

TIÌETWO

DIFFERENTE
AGE
1% QY 100
< 0 > ✗
ANDY ARECOMPIEMENTS pytiqxtr Eyx = = = fly .

A%
px
Exy > 0 >
✗
ANDY ARE SUBSTITUTES
Pyt Qxt tappe;) spx Qy
CHAPTER 6 I

APPLICATION OF RATIONAL CHOKE AND DEMAND THEORIES

TAX ON SELLERS TAX ON BUYERS

DEMAND C B DECREASING
Supply is
r BECAUSE 0ft
DECREASING
BECAUSEOF
E!
T

TFÌUYER EI
<

^
•

• *
^
È
7 TAXB E •
•

*
TAXS
<
•
V TAX
•
e
SELLER
"
EI

AMOUNT OF
Monty RECENED
^
By THE SELLERTAX r
NET OF THE r

IN BOTH CASES :

IN THIS CASE :
• 0*1
• 0*1
PET
*
• over p
PIL
*

✓
• over p
PÌ t *
•
- t over p ✓ *
THERE IS NO DIFFERENCE
B. + T T
*
•
OVER P
IF THE TAX DON SELLERS OR ON BUYERS
THE BURDEN OF THE TAX D
ALWAYS DIVIDED BETWEEN :

>
BUYERS tb =
p:-p
*
TÀX
T

BURDEN
> SELLERS ts
=
PEGI t) -

S' D- tbandts
-
✓
→ are t

THEY DEFEND ON THE PRICE ELASTICITY

:

S D-
-

> tb OR tsiso
☒ INELASTIC tb > 1 gtpt
1- 0
fs 0 '
-
< «
>
BUYERS pay nost OF
THE TAX BURDEN
Gut also Sellers ARE affected
BECAUSE ☒ t )

7-
SELLERS MOST
pay BURDEN
OF THE TAX
• ELASTIC fb > O a

ts
e
si
1
-

>

LEGAL INCIDENCE OF A TAX :

whather buyers or Sellers are
responsible for Praying the TAX
to the
=/ government

ECONOMIC INCIDENCEOFATAX :
respectwe share of thetax borne
by buyers and Sellers aepaeasaepnce
>
elasticety

ÀÌSISVAUD
ALSO FOR SUBSIDIES

EXAMPLE of SUBSIDIES
for ftp.st time HOUSE
-

BUYERS
=
IT BENEFIT Sellers
THE MOST
EXAMPLE
DEMAND EQUILIBRIUM POINT
f- 24 -
Q BEFORETAX

{
£-24 30=48

{
a
F- 2" a

{ E- =p
-
-

SUPPLY → →

f- 92 paga -
¥-1
Tax -9€

→ shift of the Supply curve

THETAXISONSEUERS

Èȧ+g
'
7- ts

EQUILIBRIUM POINT
"
:
F- 24-10 Fà =p

{ { {
Q
F- 24
-

→
→
48-20=9+18
←← g- + g.

Q-ji-QEtg-H-q.IT#8-G-g4-9)---8j-=Zfg--j
301--30

↳ = =

1%8--23 -their
/
SUMISALWAYS
1-
INCOME -

COMPENSATED DEMAND CURVE RAISING MONEY

FOR GOVERNMENT
*
THE GOVERNMENT WANTS TO REDUCE THE
DEMAND OF A PARTICULAR GOOD AND
A TAX ON IT
IMPOSES
✓ AND THEN
OF THE
HOW MUCH , CONSUMERS , WOULD RETURNS SONE
BuyD
IF THEY WERE FULLY compensate MONEY RAISED TO
for INCOME Effect VOTERS :

IN BOTHCASES
✓ >
THE SUBSTITUTION
THIS IS RELEVANT WHEN IE > SE
>
IF NORMAL GOOD : THE RETURN offSETS THE INCOME EFFECT Effect is not
ALTERED
prelature changa
netta prece
ALWAYS MEANS
IF INFERIOR GOOD : THE RETURN offSETS THE INCOME Effect introduction 08
> a Substitution
+ DEMAND FALLS MORE effect)
> Morey in Return =

ESEMP

NORMAL GOOD :
INFERIOR GOOD
INCOME 4
consumptiont INCOME 9 CONSUMPTION
=
=

> INCOME COMPENSATED

-
>
ORDINARY DEMAND CURVE

STEEPER STEEPER

WELFARE MEASURES
THE EFFECT OF CHANCE IN PRICES
CAN BE MEASURE D THROUGH :

CHANCE IN CONSUMER
> SURPLUS
MEASURE OF THE EXTENT TO WHICH
A MONETARY
A CONSUMER BENEFITS FROM PARTICIPATING IN A TRANSACTION

IT IS USEFUL TO COMPUTE THE VARIATION

THIS IS USED WHEN

s
COMPENSATI NG VARIATION GOVERNMENT RETURN
>
HOW MUCH
MONEY
THE CONSUMER WOULD NEED TO THE MONEY RAISED FROM
for CHANCE THE TAX BACK TO VOTERS
COMPENSATE a PRICE
> WILLING NESS TO ACCEPT

DIFFERENCE FROM HYPOTHETICAL INCOME

GERT INTERCEPT
- OF BY THE
AND
REAL INCOME

(VERT INTERCEPT
-
OF B1) v

>

>
EQUIVALENT VARIATION
MUCH THE CONSUMER WOULD NEED TO
HOW
MONEY
CHANGE
PAY TO AVQD A PRICE
> WILLING NESS to pay

✓
>
HYPOTHETICAL BUDGET CONSTRAINT
BUILT ON THE NEW INDIFFERENCE
CURVE :

REAL INCOME
-

HYPOTHETICAL INCOME
WITHOUT INCREASE
WITH INCREASE
CHAPTER 7
CHOICE UNDER AND THE ECONOMICS OF INFORMATION
UNCERTAINTY
Exampie
1) W -100€ f- 0,5 € →
prob %
.

2) W -200€ f- 1-OOE A-10000

3) W -20000€ f- 10000€

EXPECTED VALUES OF GAMBLES >

EXPECTEDVAWE
THE SUM OF ALL POSSIBLE Outcomes
WEIGHTENED by THEIR RESPECTNE
,
1) EV; % (1-00) +
% (-0/5)=49 75€
.

PROBABIUTES
2) Ele % Goo)
OF OCWRRANCE

t % (-1-00)=50€
+ .

IT CAN BE CONSIDERED THE

AVERAGE OF WHAT YOU ARE
3) Evg -

1/2/200007 1/2-(-1-0000)=5000€
+

VAWED V
TOWN
EXPECTED MORE

OF GAMBLES
EXPECTED UTILITY > EXPECTEDUTIUTY VAWED
MORE

%( ) (10000-0,5)--100,248
^
THE EXPECTEDVAWEOFUTIUTY OVER ALL
1) Eva =
10-0001-1-00 1-
% .

POSSIBLE OUTCOMES
→
ITDEPENDS ON THE INDIVIDUAL
utility
> INCOME
plays 2) EUZ % (10000+200)+1/2
=
.

(10000-100)=100,247
FUNCTION A
KEY ROLE
3) Evg % (10000+20000)+1/2 (1-0000-10000)=86,603
- .

> AT THE END YOU WILL HAVE CU =

10000=100
be
TO
COMPARE
IT TO THE
ft HAS TODTOEU)
CERTA IN UTILITY OF NOT compare
TAKING THAT GAMBLE

EXAMPLE
Hm) = M Ue 36=6

A- 36€ Hot 2g (361-13) § / 36 -11)+

-
_

f- 43
2g / 49 ) § / 25)
W -13€ 1-
=

f- 11€
f- % =

Eg .
7- 1-
§ 5--1-{-1-5}=1-39--6,33
.

> I WIll accept

the GAMBLE
UTOT > Uc
6 > 6,33
 DIMINISHINGMARQNAL
UTILITY OF WEALTH
> =THE MU DECUNES AS WEALTH RISES

RISKPREFERENCES SANE UTILITY

AS IF I DO NOT
THE CURVE IS
BECOMING FLAT
^

PLAY r

1- 1€
>
RISKAVERSE I
FAIR
= CONCAVE UTILITY GAMBLE
•• •
^

FUNCTION W = 30
+ qow

✓
[ •

5090W
50%1
f- 30
M-40
FAIR GAMBLE
UTKITYIFI
REJECTS DO NOT
play <
+90L
GAMBLE WHOSE
ZERO
EXPECTEDVAWEB
A FAIR
GAMBLE
aetatainity CERTAINTYEQUNALENTVAWE
EQUIVALENT VALUE
SUMOFMONEY FOR WHICH AN INDIVIDUAL
WOULD BEINDIFFERENTBETWEEN RECEIVING
THAT SUM AND TAKINGTHE GAMBLE

MÌ
t I
MI FIDO Mtw
NOT L
=
40-30 PLAY =
401-30
ITISSMAUERTHAN
THE
EXPECTEDVAWE
A GAMBLE
OF
for a RISKAVERSE PERSON

>
RDK SEEKING
=
CONVEX UTILITY
FUNCTION
> INCREASINGMARQNAL
UTILITY OF WEALTH
=THE MUINCREASES AS WEALTH RISES
✓
ACCEPTS
A FAIR
GAMBLE 5090W
50%01

>
RISK NEUTRAL
=L/ NEARF

INDIFFÉRENTABOUT
A FAIR
GAMBLE
 REDUCE UNCERTAINTY LAW OF LARGE NUMBERS
THAT IF AN EVENT
STATISTICAL LAW THAT SAYS
HAPPENS INDEPENDENTly WITH PROBABILITY p in EACH of N INSTANCES,
THE PROPORTION OF CASES IN WHICH THE EVENT OCWRS
APPROACHES pas N GROWS LARGER
>
INSURANCE ITREDUCESTHELOSSES ASSOCIATED WITH BAD EVENTS

"

✓
POOLING
ARRANGEMENTS
you ACCEPT A < =/ NSURANCES
SMALL LOSS FOR ,

SURE , the premium,

IN RETURN FOR THE
BELTER UTHAN NO
GUARANTEE THAT YOU
LARGE
INSURANCE
WILL NOT BEAR
ANY
LOSS IN CASE of BAD EVENTS

\
113

113
THE
ARE
MAJORITY
RISK
PÀÉTOFPEOPIE
AVERSE
,

al }

>
ACQUIRING IT REDUCES THE UNCERTAINTY ASSOCIATED WITH CERTAIN OUTCOMES

INFORMATION
✓

EXAMPLE

> PERSONAL ELF

CHARACTER/ STICS
Ma = 5 Milton €

Ma = 400 milione Pz =
0,01

①
Mg = 2 milione pg = 0,99

4- =
1--5--0,8
Va =
0,01%1--0) +0,99 Gif) =
0,505
A
PRINCIPAL EMPLOYSAN AGENT
0,01€ 1)
-

TO DO A FOR HIM
JOB 0,99 + =
0,8 outcome Chosen
400P -

> IFSHEDOES NOT

GET THE IN INFORMATION
< > UTILITY FRÉM PRICEYNORDER
THE AGENT HAS GETIING THE TOGET A
THE PRINCIPAL
WANTS THE AGENT AN INCENTIVE TO EXERT INFORMATION more precise
>
P =
49400€
MINIMUM EFFORT INFORMATION
TOEXERT MAXIMUM
(because it is
EFFORT
Costly)
BI >

TELL HOW Multi

UNCERTAINTY
CANNOT ABOUT > AGENTS
EFFORT THE AGENT IS ACTION'S
USING
MORAL
HAZARD

HIDDEÙACTIONS MADE ONCE THE

V AGENT HAVE BEEN SELECTED
THAN
INCENTIVE TO EXERT LESS EFFORT
AGENT'S the Wage
=
WOULD LIKE
THE PRINCIPAL is earned
CHARACTERISTICS
anyway
ADVERSE
SELECTION

SOLUTIONS :
"

CAR INSURANCE PROCESS BY WHICH >

PERFORMANCE
-
RELATED
pay
MADE BY MORE THE LESS DESIRABLE AGENTS
Risky PEOPUE VOWNTEER TO WORK
> FUTURE
PREMIA CONDITION AL ON CURRENT CLAIM

FOR THE PRINCIPAL

✓ MORÉHEALTH
Differenti PREMIA problems
TO INDIVIDUAL WITH =

DIFFERENT LEVELS HEALTH

OF FISK ✓
INSURANCE
= STATISTICAL DISCRIMINATION THE PRICE OFFERED

{
BY THE PRINCIPALIS "
GOOD AGENTS
"
SUCH THAT
TRADE
DO NOT WANT TO * SIGNALING May be Useful but any Whan :

THIS IS MORE
• IT IS COSTLY TO FAKE
LIKELY

.me#-m;:::::::?:
WHEN :
area,# average µ, paura,, an,
.
pampa, UNFAVOURABLEQUAUTIES
" "
• SHARE OF
GOODTYPES ISSMALL
> SILENT MEANS
✓
SOMETHINGEVEN ¥,
MUTUALLYBENEFICIAL WORSE
EXCHANGES DO NOT
TAKE BECAUSE
PLACE
THE INFORMATION ON TYPES
IS hacking
?⃝
CHAPTER 8
THE OF ALTRUISM
IMPORTANCE
AND OTHER NON EGOISTI C BEHAVIOURS -

PRESENT -
AIM STANDARD ¥ SELF -

INTEREST STANDARD
a PERSON IS RATIONAL IF SHE IS EFFICIENT a
PERSON IS RATIONAL IF HER MOTNES ARE
IN THE PURSUIT
OF WHATEVER AIMSSHE HAPPENS TO CONGRUENT WITH HER NARROW MATERIAL
HAD AT THE MOMENT OF ACTION INTERESTS

v v

EX CRITICISM TOO NARROW DEFINITION,

CRITICISM : IT CAN JUSTIFY POST :

ARE NOT ONLY SELFISH

PEOPLE
ANY BEHAVIOUR

"

ALTRUISTI BEHAVIOUR

^
È INCREASING
> SATISFACTION
ÈÈ
L

TASTE FOR FAIR PÌS INCOME

INCREASING
^
È
a
SATISFACTION
; ✓ INDIFFERENCE
È FOR AN
Map
È i
I ALTRUISTIC
'

i
PERSON :

> > NEGATIVE LYSLOPED

0,5 PIS
> DIMINISHING MRS

PEOPÉARE Happy
ALSO WITH the
50 % SHARE
CANNOT
FRANNY
TAKE away HER
<
L
FRIEND INCOME

THIS
POINT "IS
"
AVAILABLE
ONLY
IF WE CONSIDER
> a as THE no

HIGHER
IT IS ON a
curve
INDIFFERENCE

TO REFUSE
IT IS DEITER
THE OFFER RATNER
THAN accept it
Theft
G-VEN THOUGH LOSS
IS A MINIMAL )

ECOLOGICAL MODELS
ASK Where the TASTES OF the CONSUMERS COME FROM
THEY
:

> PREFERENCES ARE MEANS THROUGH WHICH ADVANTAGES

INDIVIDUALI ACHIEVE IMPORTANT MATERIAL OBJECT /VES >
applica BLE AND
TO
SIMPLE
STRATEGIC PREFERENCES
THEIR ÙSEFULNESS
DEPENDS ON THE SHARE
OF INDIVIDUALS IN THE
WHO HOLDTHEM
✓
POPULATION
PARABLE > USEFULNESS OF PREFERENCE for a
OF HAWKS CERTAIN BEHAVIOUR DEPENDS ON THE CO EXISTENCE
-

>
and DOVES
FREQUENCY WITH WHICH THE OTHERS OF PREFERENCES
IN THE
POPULATION ALSO PREFER THAT BEHAVIOUR

STRAITS ARE OFTEN FAVOURED FOR THEIR EFFECTS

ON THE SINGLE INDIVIDUAL
payoff NOT ON THOSE
OF
POPULATION AS A WHOLE
HAWK DOVE GAME
-

POPULATION
WHOCANBE
CONSISTSOFINDNIDUALS
:

• HAWK > STRONG

PREFERENCEFOR AGGRESSIVE
BEHAVIOUR

ALWAYS FIGHTS

• DOVE >
PREFERSTOAVOID AGGRESSIVE BEHAVIOUR
NEVER FIGHTS

IF THE TWO FOR EXAMPLE

COMPETE
SCARCE RESOURCES
:

PH -
hf 4) 1- G- 4) (1-2)=12 -
16h LARGER SHARE OF HAWKS
> "" "" PAYOFF Faraone,
INDIVIDUAL Y preti + (1-4×6)=6 -
6h

µ
> ADVANTAGE IS
HAWK DOVE
ASSOCIATED WITH
PROSPERITY
✗
HAWK -4 ✗ +12 ✗ ti -112 PH -12 ȧ -
4 )
§§
-
=

☒ Y
,
4 Y 50% HAWKES When PH ANPD
- -
-

6 -3¢ ¥
50% ""
pp = .
=3 THERE IS EQUILIBRIUM
AND
È BOTHWKLREPRODUCF
,

DOVE $ ✗ +6 X at the sane RATE

f- 415
+ 12
Y +6 Y
80% Hawkes
PH -_ 12
-16.4g 12-6,1=6%-64--4,
= e 0,8
>
<
" " ""

PD ✗ 016
6.4g 6- 2¥ -3%-24=6,1 1,2
=
=
6- = =

AVERAGE NET
•
PAYOFF
:

PH -
hfll) 1- (1-4)/121=12 -
16h

preti + (1-4×6)=6 -6h

SHARE
> DIMINISHES WHENTHE
OF HAWKES IN THE POPULATION
' ncreases

yqygyq ,

RELATIVE
ADVANTAGE FOR
DOVES
 EGOISTS
>
VS

NON EGODTS
-

THE CHEATING PROBLEM

"

JOINT BUSINESS
VENTURES
IN WHICH EACH
PERSONCAN >
COOPERATE
= HONEST
DEAL

DÉFECT "
= CHEAT THIS WOULD
✓
HAVE BEEN THE

DOMINANT BEST PAYOFF

NASH
EQUILIBRIUM
> IT IS A SOCIAL DEFECTORS ARE IN
r
DILEMMA 7 EQUILIBRIUM

DEFECTÒRS AND
COOPERATORS May
:

PD
-
c -6 +
f- c) -2=2 -4C
-

C 4 1- G- c) -0 4C
Pc - =
-

LOOK AUKE EXPECTED payoff DEPENDSON

-

>
THE UKELIHOOD OF PAIRING >
DEPENDS ON THE
WITH A COOPERATOR PROPORTION OF
THE POPULATION L

BOTH OF THEN
ARE WORSE Off

>
BEDISTINGUISHABLE COOPERATORI WILLONLYINTERACT
WITH OTHER
COOPERATORI ,

DEFECTORS CAN
ONLY INTERACT
WITH DEFECTORS

"""
ARE IN EQUILIBRIUM

= VIGILANCE
MORE REAUSTICALLY ✓
COST of DETECTING A DEFECTOR = 1-

> + costs =
4-1=3
COOPERATORI payoffs > NO COSTS = c. 4 + A- c) 0=40
'

c- 0,9 4-0,9=3,6 3,6 > 3 HE WILL not pay the cost

✓

f- 0,5 4-0,5=2,5 2,5<3 HE WILL

pay the COST WENEED TOFINDAN
EQUILIBRIUM BY
ADDING COSTS Of VIGILANCE

payoff =
Payoff
+ costs tre costs

EMOTIONS ARE
SIGNALS

IT IS OPTIMAL TO
PAY THE COST

>
POINT OF
EQUILIBRIUM
t ] =
4C
DCFECTORS ONLY
ftopg #
INTERA
( = =
0,75
CHAPTER 9
.

COGNITIVE LIMITATI0ns & CONSUMER BEHAVIOUR

L
IT DEVI ATES
SYSTEMATICALLY FROM
PERFECT RATIONAUTY BECAUSE HUMANS
IRRATIONAL
ARE
PREDICTABLY
< L
DIFFERENTFRAMINGS
B.RING TO MIND
<
DIFFERENT HEURISTICS
WE RELY ON
SWITCH FROM
WHICH CAN ALSO BE ABANDONED HEURISTICS
SYSTEM 1 once people REAUSE THEY can
(INSTINCTNE)
+0
DO peter
ARELATNELY
✓
GOOD Chace RATIONAL CHOKE ÌHEORY SAYSTHAT
IS FUNGIBLE
SYSTEM 2 IS MADE MOST OF THE TIME MONEY

[
(conscious
REASONING) G-ven THOUGH WEONDOIT NOT BUT ACTUALLY PEOPUE ORGANISE THEIR
Refvect a not ) SPENDING IN
"
MENTAL ACCOUNTS
"

AND CAN CHANCE THEIR MINDS

CONSUMERS
ALE
NOT t
PEOPLE TAKE DECISION DEPENDING 0N
IMMUNE TO MAKE BIG HOW THE CONTEXT IS FRAMED
an , µ , agape,
✓
are rare) SHOW A WILLINGNESS TO CHANGE
(buttrey >
peopve
IT IS OFTEN DIFFICULT TO THEIR DECISION WITHOUT any NEW INFORMATION

MAKE A CLEAR PREFERENCE BEING AVAILABLE

RANKING, about all
WHEN THE ALTERNATIVES
ARE
DIFFICULT TO compare

ADDINGAN IRRELEVÀNT ALTERNATIVE

,
ASYMMETRIC
VALUE FUNCTION
EACH EVENT IS EVAWATED
peopue EUAWATE ALTERNATIVES >
SEPARATELY not jointLy
WITH A VAWE FUNCTION
DEFINE D OVER CHANGES IN WEALTH

'RRELEVANT
> ALTERNATIVE

✓ v

THE PRESENCE OF ANOTHER ALTERNATIVE

THAT IS
CLEARLY WORSE CAN CHANCE ① PEOPLE TREAT GAINS AND LOSSES
ASYMMETRICALLY :

THE CONSUMER'S CHACE IOSSES ARE WEIGHTENED MORE

> HALO EFFECT

② PEOPLEEVAWATE EVENTS FIRST AND THEN ADD THE
SEPARATE VAWES TOGETHER

"

MENTAL ACCOUNTING
✓
DEMONSTRATE A GREATERTENDENCY TO CONTINUE AN ENDEVOUR
PEOPUE
ONCE AN INVESTMENT in ,
effort, ) HAS BEEN MADE
Morey ... CERTAINTY EFFECT
DISLIKE THE
>
PEOPLE PROBABIUTY OF WINNING A SMAU AMOUNT

WITHEY
[
INFLATE IT
ARE FRAMED as LOSSES
AND THEY
IF PAID FOR
,
AS FOREGONE GAIN
IF FREE
ARE RISKAVERSE OVER GAINS
>
PEOPLE USUALLY AND
RISK LOVERS OVER LOSSES

SUNK COSÌ FAUACY BUT

WITH SMALL PROBABIUTIES

ana, * www.ga#ngw,,a,

PARADOX >
PEOPLE OVERESTMATESMALL PROBABIUTIES
>
PEOPUE CAN BE RISKING LOVERS OVER UN LIKELY GAINS
AND RISKING AVERSE OVER
UNLIKELY
LOSSES

PROSPECT THEORY
KAHNEMAN and TVERSKY'S

> MENTAL ACCOUNTING

- ASYMMETRIC VAWE FUNCTION

>
CERTAINTY EFFECT
JUDGEMENTAL BIAS

> AVAILABILITY " "

TO RECALL EVENTS THAT ARE MORE AVAILABLE IN

IT IS
EASY MEMORY

> REPRESENTATIVENESS
IT
HAPPENS OFTEN TO MAKE SIMPLE JUDGEMENTS ON THE RELATIVE FREQUENCY
OF EVENTS

>
ANCHORING AND ADJUSTMENT
PEOPUE FIRSTCHOSE A PRELIMINARY E STIMATE AND THEN ADJUST IT
IN ACCORD ANCE WITH WHATEVER ADDITIONAL INFORMATION THEY
HAVE THAT APPEARS RELEVANT

WEBEYZ - FECHNER LAW

> THE
NOTICEABLE DIFFERENCE BETWEEN STIMULUS
IS PERCE NED IN PROPORTION TO THE UAWE
OF THE STIMULUS :

•
MORE INTENSE STIMULUS MORE INTENSE DIFFERENCE THE
MAJORITY
=

CHOOSES
s THIS ONE

> INTERTEMPORALE CHOKE

THE
CONSUMPTION OF GOODS THAN
WE ADAPT QUICKLY TO
MORE
TO THE CONSUMPTION OF EXPERIENCES
SATISFACTION OVER NEW GOODS
>
DECAY QUICKLY
WHILE SATISFACTION OVER EXPERIENCES May EVEN INCREASE
OVER TIME

> SELF-CONTROL PITFALL

PEOPUE OFTEN HAVE DI
TO BE IN THEIR OWN
Faculty CARRYING OUT
INTERESTS FORTHISREASON
PLANS THEY BEUEVE
" "

THEY USE COMMITMENT DEVICES

CHAPTER 10
PRODUCTION
IT IS a PYZOCESS THAT TRANSFORMS

IN
PUTS into
>
OUTPUTS

PRODUCTION FUNCTION
IT IS THE RELATIONSHIP THAT DESCRIBES HOW
IMPUTS ARE TRANSFORMED INTO CAPITALS

Q Fait -

<
→ LABOUR PRODUCTION FUNCTION
THE EXIST ING STATE
IMPUCITELY
TECHNOLOGY OF
EMBODES

CAPITAL INCREASE
> FOR A GWEN COMBINATION OF INPUTS
WE HAVE MORE OUT PUTS TO Day tnan ZOYEARS AGO
,
IN
TECHNOLOGY
IF the function 01--2KL

(
>
D:

21s the level of

teaenaooy

> LONG RUN

SHORTEST PERIOD OF TIME REQUIRED TO
ALTER THE AMOUNTS OF ALL
INPUTS
USED IN A PRODUCTION PROCESS
> SHORT RUN
THE LONGEST OF TIME DURING
PERIOD
WHICH AT LEAST ONE OF THE USED IMPUTS
IN A PRODUCTION PROCESS CANNOT BE UARIED

> VARIABLE INPUT

AN INPUT THAT CAN BEVARIED IN THE SHORT RUN

> FIXED INPUT

AN IM
PUT THAT CANNOT VARY IN THE SHORT RUN

QEGL

Q a
r
QELL
EXAMPLE 6 - - - - -

,
1
,
A- FA, D= 2kt '
i
,
> ① =
2L i
'

K -1×0=1 the short run

in ,
2
I
- -

Capital IS FIXED ,

IKO =

SLOPE
✓
Ì È 2
SLOPE

±
>
§ =

¥2,72 > Slope Qt

>
¥-00 G- = = 6 >

=
Slope Qz
ROTATION
INWARD
 SHORT RUN PRODUCTION FUNCTION
-

LAW OF
DIMINISHING
PROPERTIES
>
:
RETURN
>
5

1) IT PASSES THROUGH THE ORIGIN >

NO OUTPUT
A VARIABLE
IF the RE IS NOT
INPUT f- WORKERS )
g
>

1,4
75
2) INITIALLY THE ADDITION OF VARIABLE INPUTS AUGMENTS OUTPUT >

AN INCREASING RATE 16
>

13

3) BEYOND SONE ADDITIONAL UNITS OF THE VARIABLE

POINT INPUT QVE RISE 3
'

TO SMAWER and SMAUER INCREMENTS IN OUTPUTS

4) LAW OF DIMINDHING RETURNS

INCREASE IN OUTPUT FROM
IFOTHER IN
PUTS ARE FIXED , THE
AN INCREASE IN THE VARIABLE
INPUT MUST EVENTUALLY DECLINE

* MALTHUS ARGUMENT ON
CONSUMPTION and AGRICULTURE
L

TOTAL PRODUCT CURVE

A CURVE SHOWING THE Anant
OF OUT as a FUNCTION OF
put
THE AMOUNT OF VARIABLE INPUT

=/

MARGIN AL PRODUCT
AVERAGE PRODUCT CURVE
CURVE =/ ,

A CURVE SHOW ING A

A CURVESHOW ING THE TOTAL CHANGE IN TOTAL PRODUCT
OUTPUT DIVIDED BY THE QUANTITY DUE TO A 1 UNIT CHANGE
OF THE VARIABLE
OUTPUT IN THE VARIABLE INPUT
( ETERIS PARIBUS)
APEOYL
#
t
MPL = A Hater da

IT IS THE SÓL
OF THE LINE

JOINING THE ①
ORIGIN TO THE ✓
>

CORRESPONDING POINT + -

ON THE TOTAL PRODUCT

CURVE

THE AVERAGE

[
V
IS STEEPER
PRODUCT
> INCREASES UP TO
① A CERTAN POINT IN WHICH
POINT
THE CURVE CHANCES
AND FROM CONVEX
TO CONCAVE

MR > AP,
<
if THÉTWO
APL 9 <
COINCIDE
AT THE
"
"
HIGHEST POINT
if MPL APL
<
OF the TOTAL
CURVE
APL f ✓
IT IS THE Slope
OF THE TOTAL
CURVE at a
<
Gwen point

ape MPL
OFEN
Mpa) =

al

EXAMPl.ES THE GENERAL ROLE FOR ALLOCATING AN

IN SUCH CASES IS TO ALLOCATE THE NEXT UNIT OF THE INPUT
INPUT EFFICIENTLY
TO THE PRODUCTION WHERE ITS MARQNAL PRODUCT IS HIGHEST

BUT

if RESOURCES ARE PERFECTLY DNISIBLE,

THE ROLE IS TO avvocate THE RESOURCE
SO THAT THE
Mpl IS THE SANE IN EUERY ACTIVITY
nn> EQUILIBRIUM

MPLYS CONSTANT =/ MPLISÌECREASING

so, the PRODUCTION
* HIGHEST MARGINAL DECREASES following
PRODUCT FOR EACH BOAT
THE INCREASE IN THE
NUMBER OF BOAT
?⃝
LONG RUN -

PRODUCTION FUNCTION

PROPERTIES
:

1) ALL FACTORS OF
PRODUCTION CAN BEVARIED

2) IT IS REPRESENTED
BY AN ISOQUANT MAP
CDECAUSE K IS NOT FIXED )

ALL COMBINATIONS OF VARIABLE

INPUTSTHATYELD A GWEN LEVEL MRTS
OF output MARGINAL RATE OF TECHNICAL
> IT HAS TO BE INTERPRETED SUBSTITUTION
IN A CARDINAL WAY
RATE AT WHICH ONE
INPUT CAN BE
EXCHANGED FOR A Notter WITHOUT
ALTERING OUTPUT

MRTS = DI
AL
EXAMPLE
HIGHER
① =
Ffk D= IKL
,
level of
>
output
01=16 GIVEN LEVEL OF OUTPUT)

2kt-16 > K % Realty

ON THE
DEPENFIS
POSITION
=

ON THE ISOQUANT

I
^

MRTS =
=

3¥ =
0,5 dk AS THE CURVE GOES
✓

AL
DOWN ,
MRTSDECREASES
< >

THESMÌUER THE Capital,

- - -
•
THE GREATER THE LABOUR
dk I NEEDED TO compensate
- - - - -
°
"
, ,
dk -1
. . . - I - - -
•
-

'

;
'
steak
MRTS -1
!
dl di

si > AL
MARGINAL PRODUCT
OF CAPITAL THE output
DOESNOT CHANCE
M# =

jpgq =ppKa .

µ
[
>

MPKA.dk/-MptA.dL=0dL--MpiA- AL t
DK < 0

MPLA.DK MPKA.dk -

né I

| RETURN TO SCALE
MPLA
MPKA
=
-

°
IT DE SCRIBES THE RELATIONSHIP
BETWEEN Scale and Efficiency
> WHAT
WHEN
Happens to output
AI INPUTS are
=
MRTS
INCREASE D BYEXACTLY THE sane MPK
PROPORTION

CONSTANT
> OF
PROPORTIONAUTY

>
INCREASING Fftk th) TFCK L)
, ,

FLIGHT
>
AIRPLANES

>
CONSTANT Fftk th) TFCK L)
,
=
,

> CAR WASH

>
DECREASING Fftk th) TFCK L)
, ,

>
INDUSTRY FOR
ENERGY
PRODUCTION

IN THIS #SE WE
ARE FAIUNGTO
INCREASE sone OTHEQ
IMPORTANT INPUT
LIKE NEW manageriale AND
ORGANISATIONAL SKILLS
 FUNCTIONS
PRODUCTION m >o
✗ <0

13<1 >
IF ✗ +13=1 CONSTANT
> COBB-DOUGLAS a- MKT
' RETURN TO
scale

✓
% % IF ✗
+13>1 INCREASING
K= @ [ >
. RETURNTO
scale

K= Of A- % =p
L >
IF ✗
+13<1 DECREASING
RETURN TO
scale

mpt-xm.li?Kx-1Mpk- am.LB.k-H-N- am.LB.f-. aMRTS-

MI PK
MPK
AL
_

>
LEONTIEF Q-imnfak.tl)

:
Ì

MRts-MMPHOQ-mmp.KZ
)
CHAPTER 11
COSTS
SHORT RUN COSTS
-

ANALYSIS
> FIXED COST
WITH THE LEVEL OF
COST THAT DOES NOT VARY OUTPUT
→ COST OF ALL
FIXED FACTORS OF
PRODUCTION ]
THEY HAVE TO BE
TOTAL COST
SUSTAINED
Anyway >

Ffko L) → FC =
✓ KO TO START THE

rkotwLa
,

1
Activity
Tcq, Fctvcq,
= =

RENTAL PRICE
UNIT OF K
PER

> VARIABLE COST

COST THAT VARIES WITH THE LEVEL OF
output
→ COST OF ALL
VARIABLE FACTORS OF
PRODUCTION

Vcqèw La

WAGE < QÙANTITYOF

RATE LABOUR TO
PRODUCE 01

AVERAGE VARIABLE COST

AVERAGE FIXED COST

AFC = = AVE
# :&
=

MARGIN AL COST
CHANGE IN TOTAL COST THAT RESULTS
FROM a 1- UNIT CHANCE IN OUTPUT

GHE FIXED
MC = = DI cost DOES
NOT CHANCE
DQ PRODUCTION)
✓

ÒTC MC da -

AVERAGE TOTAL COST

- -

ATEAFCTAVC
MCÌJTCCO)
da
-
GEOMETRICAUy € A
ITIS THE
Slope OF V
THE TOTAL COST
CURVE AT THE
LEVEL OF OUTPUT

MC

MINIMUM
POINT OF
AVERAGE

AVC
qà
'
>
Qz Q

BECOMING "

!!!!::÷÷!!
ARE

÷ :*
THEY
CLOSER AND HOSER >
REPRESENTS ALSO THE Law
BECAUSE AFC 1s

÷." . .
> AT A CERTAIN POINT
WE WIll NEED MOREL

a UUTE MORE
= HIGHER prlces
III_ HIGHER MC
=

I
→
THE MORE
PRODUCETHE
MORE THE FC
ARE SPREAD
 yi-IEE.is?noma)dQ--4dl---
☐ CONCAVE

EXAMPLE

[ ] da -10
È
a- 1- [ ] da -13 ÉÉ
] DQ -16 v
-

] ISI
- - - - - - -
- - - -
-
- . _ . - -
-

] da -14 è
JAQ-9 È Q ~
] da -5 È >
✓
t
THE FUNCTION
B. CONVEX
=/ NCREASINGMPL

↳
<
Katz
f- 0,25€/machine
120×0,25 HOUR
-30
1- persona
W -10€
ZP /persone <
3P SHIFT MERE ITIS
UPWARD
)
& THE OPPOSITE
Eqvaitofc
top L
TNESAMEAMOUNT
GP

ÙÉ
OF LABOUR AFTER
7- P A FIXED POINT
8p PRODUCESMOREQ
IT IS
ON
INDEPENDENT - -
- - -
-

I
ITDOESNOT '
CTIANGE ,
1
,
✓ I
|
L CHANCE 1
ZERO PRODUCTION OFCONVEXITYI !
AFC-s.se#g---q517C--/bag =
FIXED COST
-

AVG.pe?-j&--q862E-/bag CONCAVE
FUNCTION

ATC-yf-7379E-lb.org

MC =

¥, -0,714€/bag

example
01--31--1
1<=4

LINEAR >
CONSTANT RETURN
> TO LOVER THE
FUNCTION
ENTRE RANGE V

at-c-favc-Y-2ko-4F-2f-fnw-24-ypers.ae MEZ

Q -72L k¥2

Fcóko -
F- 4×2=8 > TE 8+20

VCOIWL
-72/4.9*1=20
MARGINAL COST AND AVERAGE VARIABLE COST MARGINAL AND AVERAGE
vs
PRODUCT PRODUCT

PRODUCTION

•
ME
Anita
V

7 lfw IS FIXED
MEI
Mei
# MP
✓ ^

THEY ARE STRICTLY

RELATED
> =

Imp
^

"
AVE # Wtf =

✓
COSTS if W IS FIXED
•

Avete avete
^

>
=L
AP

COST MINIMISATION & ALLOCATING PRODUCTION

QT Qatar
-
> EQVIUBRWM :

Mcqèmcoz

example

{ §49%1432-0,9 { ¥384 { 1397384

MCA -1201A Qatar -32 ? 32 -
QB ¥32 -24 Qa
apre , > qa
' ,
MCB -40
-

☐q

QB-14
LONG RUN COSTS -

ANALYSIS
> ALL INPUTS ARE VARIABLE

totalis >
ISOCOSTLINE

rktwt-CK.li
KTWL
Miner .

cost
CONSTRAINT
→
E- f- f- il
-

FCK D= Q
,

t
DES/ RED
TECHNOLOGY
LEVEL OF
CDNSTRAINT
OUTPUT

EXAMPLE
"
f- 200 Nata
ISOQUANTS F- 0,25

0,25K -1-1-01=200

1<=2%-25%-25 '

1<=800 -40L
INTÈRCEPT ↳ Slope

✓
✓

{mrts-ffpf.fr
'

LONG RUN OUTPUT

-

EXPANSION PATH
SET OF Optimal
DITIONAL
FACTORS
DEMAND
"

<
]
frelatedtoa
=

Mufti M¥*
BUNDES Necessary
TO
product specific
CXFFERENT Output) =

QUANTITIES

EXTRAÓUTPUT
YOUGET FROM
the LASTE
SPENT ON L
EXTRA OÙTPUT
FROM
L YOUGET
THE LAST €

SPENT ON K

a GREVALIS PRODUCED
•
MECHANCALLY in GERMANY
•

BYHAND In NEPAL

tffattee}
' =
MORE LFIBOUR
bvtless
OUTPUT
)L

STEEPER
 LONG RUN TOTAL COST CURVE
-
LONG RUN MARGINAL COST
-

COST OF
TOTAL
PRODUCING A
CERTAIN LEVEL OF OUTPUT USING

OPTIMAL BUNDES LMC =

"
LTC ALWAYS PASSES LONG RUN AVERAGE
-
COST
THROUGH THE ORIGIN
BECAUSE IN THE LONG RUN
you CAN LIQUIDATE INPUT ¥
( AC =

CONSTANT RETURN = TOTAL COST ARE

L
to scale PROPORTIONAL TO
IN THE LONG RUN THE
output
TOTAL COST CURVE
AND CONSEQUENTLY THE
OTHERTWO CURVES )
LOOK DIFFERENT
May
BECAUSEK IS NOT
CONSTANT

INCREASES IN OUTPUT ARE

DECREASING RETURN =

TO SCALE SMAUER THAN THE PROPORTIONAL

ONE OF COSTS

HIGHLY CONCENTRATED INDUSTRIAL STRUCTURES

↳ INCREASING
FUNCTIONS

MINIMUM
POINT

INCREASING RETURN =
INCREASES IN OUTPUT are LAÉK _ . . . . _

,
[
LARGERTHAN THE PROPORTIONAL
TO scale I
ONE OF costs fact •
- - - - - - -
- -
- - - -

i i
01
01/2
I r
INCREASING
RETURN S TO scale FEW BIG FIRMS
SERVE THE MARKET
ONE FILM
DOMINATES & ELIMINATE SMAU FIRMS
THE MARKET

NATURAL MONOPOLY
MARKET OUTPUT PRODUCED
AT A LOWER COST WHEN
PRODUCTION IS CONCENTRATE☐
IN THE HANDS OF A
SINGLE
INDUSTRY

UNCONCENTRATED INDUSTRY STRUCTURE

>
UNIT COST DECREASES
WHEN MORE FIRMS
DECIDE TO PRODUCE
that OUTPUT

t
THE CURVE
IS FIAT AND
THE SANE IS
TRUE FOR COSTS

all FÌMS CAN

ENTER THE MARKET
RELATIONSHIP BETWEEN LONG RUN & SHORT RUN - -

COST CURVES
SHORT RUN -

TOTAL COST

È
LTC TC @ ,
k* (a)
,
*THE SHORT RUNTCMUSTBE AT
-

LEAST AS LARGE AS THE LONG RUN LTC

-

)
V

FIXED LEVEL
OF CAPITAL MAKES
US ARRIVE AT THE
LEVEL
TC > LTC
OPTIMAL A
SHORT RUN ATC CURVE
ISAIWAYSABOVE LONG RUN-

✓ LAC

THEY TOUCH
at ONE POINT

TC =
LTC ARE ONLY EQUAL AT THE LEVEL OF Òt BUT AVERAGE TOTAL COST AND
LONG RUN AVERAGE COSTS
L
-

HAVE THE SAMEPROPERTY

*
f- ANDK
COINCIDE

in

Kt
K2
kg
LONG RUN MARGINAL COST CURVE
AT any OUTPUT LEVEL Q

=
THE LONG RUN •

< •
SHORT RUN MARGNAL COST LAC CURVED •

ASSOCIATED WITH K TO PRODUCE IT LIKE A LOWER

•

ENVELOPE

AVERAGE SHORT RUN

-

TOTAL COST MARGINALCOST

atei
AVERAGE
TOT COST .

LONG RUN

" LONG RUN

-

' MARGINAL COST

SMC =/ MC
CHAPTER 12
PERFECT COMPETITION CRITICISM :

> FIRMS MAXIMISE THEIR CHANCES OF SURVIVAL

> FIRMS MAXIMISE TOTAL Sales

HIGHEST LEVEL

PROFIT MAX / MI SATION PROFIT POSSIBLE BUT

OF > OF :
THE MAIN DO NOT MAN MISE
OBJECTISWE FIRMS ANYTHING
> AT ALL
>
INDUSTRIES COST MINIMISATION
+

DEMAND

L V

ECONOMIC ACCOUNTING

PROFIT PROFIT
TOTAL TOTAL a.
- .
ma,
revenue aag, REVENUE COST

✓
>
EVOLUTIONARY >
PRESSURES FROM THE MARKET

WE ALSO TAKE ARGUMENT ENVIRONMENT TOWARDS

MAXIMISATION
INTO ACCOUNT PROFIT
-

OPPORTUNI] COSTS THOSE FIRMS WHICH falso RANDOMLY)

COME CLOSERTO A MAXIMISATION
PROFIT
-

BEHAVIOUR
WIll HAVE > HIGHER REVENUES AT
DISPOSAL
EXAMPLE > HIGHER POSSIBILITIES FOR GROWTH ✓

50000€/ FOR SURVIVAL FIRMS DO THEIR BEST

FIRSTJOB :
year > HIGHER POSSIBILITIES
GIVEN THE CIRCUMSTANCES
NEW 80 000€/year
'

JOB :

INVESTMENT FOR NEW JOB : 30000€

IR OF CASH SAVING : 5%

ACCOUNTING
p 80000-50000-30000=01
.
= ECONOMIC
> LOSS IN THE
"" " ✗ea"
Economic p .
= 80000 -50000-30000-(30000-0,05)=-1500
~
NORMAL p .
=
OPPORTUNITy COST OF =
30000-0,05=1500
RESOURCES OWNED BY
THE FIRM

CONDITIONS FOR
PERFECT COMPETITION
> 1
FIRMS SELLA STANDARDISED
PRODUCT

{
OFTEN THE
THE PRODUCT IS

PERFECT SUBSTITUTE OF ANOTHER

PRODUCT
f-MC
TAKERS
> 2 FIRMS ARE PRICE
MARKET PRICE
HEY TREAT THE
-

OF THE
PRODUCT AS GIVEN ✓

THE ALLOCATION OF
resources , suo
OF MARKET IS
> 3 FREE
ENTRY AND EXIT EFFICIENT
ARE
FACTORS OF
PRODUCTION
MOBILE
"
SOCIAL VAWE OF
"

PERFECTLY THE
=

AN EXTRA UNIT IS EQUAL

TO THE COST OF PRODUCING
THAT EXTRA UNIT
> q
FIRMS AND CONSUMERS HAVE PERFECT INFORMATION

✓
THESE CONDITIONS
ARE DIFFICULT TO
BE RESPECTED :

PERFECT COMPETITION
MARKET IS MORE
HYPOTHETICALTHAN
REAL

EX .
CLOUD STORAGE
 EXAMPLE
IT IS ALSO THE
THE FIRM, IN ORDERTO MAX / MISE
PROFIT , WIll CHOSE THAT LEVEL OF
IN WHICH
po -78€/Unit > MARGWAL REVENUE
OUTPUT
NUMBER OF
TR =
18 ✗ UNITS SOLD
=
18
t
TRQ Po Q
-
-
_

✓
TOTAL -
TOTAL
REVENUES COSTS

'
IS AT ITS target >

FIXED
✓ COSTS
MARGINAL ECONOMIC
MARGIN AL = • PROFIT
REVENUE COST
t

✓ ECONOMIC
✓ è LOSS

CHANCE IN TOTAL MR = MC plot

g.
REVENUE THAT
OCWRS ASA Resort
f- P)
OF A A- UNIT CHANCE [
OF
IN Sales REPRESENTATION
THE DISTANCE BTW
=
BENEFIT OF SELLING
TCANDTR
AN EXTRA UNIT

MARGINAL
Il ALWÀYSONTHE ON
RISING PORTI
-
.

REVENUE -
PRICE OF MC
←
THIS
BECAUSEFIRMS
✓
ARE PRICE
-

NO INCENTIVE
TAKERS
IN INCREASIN
REDUCE
✓ PRODUCTION
>
MC > MR INCENTIVE
AN
THE FIRM HAS
TO PRODUCE ONELESS
UNIT DECREASE
=

L production

THIS INTERCEPT
/ON
IS NOT ON THE SHUTDOWN CONDITION
ON
RISING PORTI IF PRICE FALLS BELOW THE MINIMUM OF AVERAGE
MR > MC VARIABLE COST
THE FIRM HASAN INCENTIVE
ONE EXTRA
TO PRODUCE then
unit -
INCREASE PRODUCTION >
THE FIRMSHOULD SHUTDOWN
IN THE SHORT RUN

if >
then
✓
TC (a)
pcavc posava .
a
MAXPQ -

>
FIRST ORDER-

f- = MC
CONDITION v

IT IS BEITERTO PRODUCE
NO OUTPUT THANTO
> SECOND -
ORDER JMCCQ) > o
LOSE PROFIT
CONDITION
JQ
(WE HAVE TO BE ON
THE RISING PART
OF MC CURVE)

* Supply curve
HOW MUCHA
* FIRM ISWIULNG
SHORT RUN
TO
PRODUCE FOR
-

Supply CURVE AGNEN piace

OF
PERFECTLY COMPETITIVE
FIRM IS :

IN THIS PORTION
THE FIRMSHOULD RISING MC CURVE
1 PORTION OF

PRODUCE ftp.UTS
.

✓ 2 .
ABOVE THE MINIMUM LEVEL OF
THE AVERAGE COST CURVE

THE FIRM in
THIS PORTION
SHOULD
NO
PRODUCE
OUTPUT
* AT POINT 14 THE
FIRM IS WILLING TO
PRODUCE 7,8
IF WE MAKE THE HORIZONTAL SUMMATION
OF INDIVIDUAL FIRMS CURVES
'
WE
Supply
Obtaln THE

SHORT - RUN f- ctdot you NEEDTODOA

SUMMATION OF
INDUSTRY Supply CURVE 01 = -

G- f. P
+ > All QUANT'Ties
TO CET
Supply
④ Ei
ÈÈ
§
=
i WE ARE
SUPPOSINGTHAT
> all FIRMS IN THIS MARKET
^
MC MC
MQ ; -
ARE THE sane
Q =

7- - - - - - -
- -

;
i
> hai = -

¥-1 :-P
'
3

p*q*) ftp.QY
- - - - -

,
-

2- - -
'
i r IT -

i
,

i f- ct # a
'

Ì 7
>
q 4 % s

¢+401:-& # a
' ^

un
TOTAL
Supply CURVE ①1- % Q
f)
= -

§, µ,
È
> PROFITS
-
-

IEEnues-tcot.FI -

3-
- - -

1600-960=640€
- -
i
- - - -

,
=

a-
; i
-

; t
>
2 3 7 AREA OF
Q =

RECTANQE
THE

31=4

INDIVIDUAL SUPPLY
CURVE

COMPETITIVE EQUILIBRIUM

•
INTERCEPTION OF THE
-

IS THE
- - - - -

IT
-

↳
ÈÉÈÉÈV[
INDIVIDUAL DEMAND AND
Supply CURVE BÈ
MARKET
< PRICE •
•

FIRMS IN A
PERFECTLY
COMPETITIVE MARKET

✓
( AFFECTTÉMATRKETRKE
HAVE NO JOWERTO
INDIVIDUAL
r

f- MINAVC
SET DEMAND
If THE PRICE
tnan the CURVE
ISHIGHER
ONEINEQUIUBRIUM :

]
FIRM WON't SELL
L
ANYTHING
from AVC WE
CAN DERIVE TC

ATE f-MC
12 = E
80

TC -12.80 -960€ TR =P @. = 20.80=1600 €

BREAKEVEN POINT

f- MMATC
>

IT IS THE LOWEST AT WHICH

THE FIRM WIll NOT SUFFER
PRICE
NEGATIVE PROFITS IN THE SHORT RUN

>
THE
PRICE
ISHIGHER
TNANMINAVC
> NI SHUTDOWN
CONDITION

THE FIRM IS HAVING A LOSS

ACCOUNTING PROFIT <
BUT CAN STILLBEEARNED
>
IT'S MORE CONVENIENTTOKEEP PRODUCING
PATHERTHAN TO chose THE
ACTIVITY

EXAMPLE
MICROECONOMICS
OFFOODDEIUERYAPPS
FOOD DELNERI COMPANIES ARE
PRODUCING WITH
> FEES FOR RESTAURANT ARE HIGH
A LOSSBECAUSE
FOR CONSUMERS MGHT
MARGINS ARE
VERY LOW (pelose -10M¢ > INCREASINGFEES
RESULT IN LOSS OF MARKET SHARE

1
'
>
NO CUT IN RIDERS Wages

IT IS
NECESSARY TO
> INCREASE Q
+ TOWNER ATC
INCREASE
BEITER VOLUMES
ORGANISATION ^

TO REDUCE
MISTAKES IN
DELIVERIES
'
%
loss P
Bokassa:
I
- - -

;
- - - -

>
' "
a Q Q
 COMPETITIVE MARKETS RESULT IN :

>
ALLOCATNE EFFICIENCY FROM EXCHANGE ARE REAUSED
=
All POSSIBLE GAINS

> PARETO EFFICIENCY IS BELTER OFF

=
THERE IS ALWAYS A PERSONWHO
AT THE ANOTHER
EXPENSEOF

✓
mcep
MARKET DEMAND
IS
FULLY SATISFIED

NO CONSUMER WIll
pay
me

IN THIS MARKET THERE

ARE NO FURTHER BENEFICIAL
TRADE

A COMPETITIVE
WHEN
MARKET IS EFFKIENT
MAXIMISES THE
IT NET
BENEFITS OF HIS PARTICI PANTS

PRODUCER SURPLUS WHICH A FIRM

MONETARY AMOUNT
BY
BENEFITS FROM SELLING ITS OUTPUT

PETR VC
-

• INDIVIDUAL LEVEL

ama
I
ÌURPWftp.VC-p?Q*-MC1-MCz-...-MCq*
WE DO NOT CONSIDER
THIS AREA because
FIXED
IT RE PRESENTS costs
]
v un
" * *
surplus TR VC =P @
=
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.
.
- -

>

EXAMPLE f- 1- OTQ
Metta Q =P-10

* MARKET LEVEL f- 50 0,001 AGGREGATE D

-

DEMAND ) L
Ne FIRMS =
1000 SUM OF INDIVIDUAL
Supply CURVES

① ✗1000 =

todo
AGGREGATE
Supply Aaaop
-

AGGREGATE D DEMAND
un

"
piede aaaa
+
Ecoi '
50-0,001-9=1-0+1%0 10+9
f- 1000
50-10=1%0+0,001 Q
AGGREGATE
Supply)
☒ =
20000

p
# a-
%%È
¥ -30

n
ACS = 20000 .

(50-30)=200000
2

-10000 Go -

aps
-

=
zaòaao
2
LONG RUN
-

PROFIT MAXIMISATION
UNSTABLE SITUATION
IT > 0

>
FIRMS CAN CHANCE FIXED INPUTS

>
FIRMS CAN ENTER EXIT INDUSTRIES /

POSITIVE ECONOMIC PROFFOR

CREATES AN INCENTIVE
OUTSIDERS TO ENTER THE INDUSTRY

AS ADDITIONAL FIRMS ②
ENTER THE INDUSTRY
Supply
①
THE CURVE
<
SHIFTS TO THE RIGHT ✓
1T > O
INCENTIVE FOR FIRMS HAVE CHOSEN
BUNDLE
NEW FIRMS TO
THE
OPTIMAL
ENTER THE MARKET
< , SMC LMC =

THIS ADJUSTMENT WIll

CONTINUE UNTIL
Supply
INCREASES
Lac ATC -
-

②
ALLFIRMSHAVEMOVEÓ
THEIR CAPITAL STOCK SIZE
UPUNTIL THE POINT
AT WHICH L

ATC TANGENT -10 ✓ NEW

MMLAC PEACHES È
PRICE PRICE /S
THE MINIMUM POINT
ON THE LAC CURVE
DECREASING (
, • THE CAPITAL STOCK NON IS
> TOO HIGH

ATC # Lac

I.
Snc =/ LMC

✓
PROFIT
IS
LOWER ①
* < OUTPUTS
DECREASE

IN THIS POSITION EVERYFIRM

MAKES ZERO ECONOMIC PROFIT
( but can STIKMAKE
ACCOUNTING PROFIT)
POSITIVE ✓
FIRMS WILL
DIMINISH IT
SMCA > smcz
ATCI >
atcz

v
NEW
OPTIMAL
PRICE v
NEW#
yq
•
,

FEIÉIÉ-7

①*

II > ÌT
'

BECAUSEFIRMSHAD
COMPETITIVE MARKETS ARE ATRACTNE THE TIME TO
THEIR
ADJUST
THE
FOR SOCIETY as a WHOLE BECAUSE :
CAPITAL Stock
•
f- MC > LAST UNIT OF ① CONSUMED IS NORTH EXACTLY THE sane
IT
TO THE BUYER AS THE RESOURCE REQUIRED TO
PRODUCE
LAC
•
P -
- min > NO LESS
Costly way OF
PRODUCING THE GOOD

• NORMAL RATE > THE

PUBLIC Pays THE LOWEST PRICE POSSIBLE
OF
PROFIT
EARNED BY
PRODUCERS
 LONG RUN
-

COMPETITIVE
INDUSTRY Supply CURVE

>
CONSTANT COST INDUSTRIES
CURVED
= LONG RUN
Supply
-

A HORIZONTAL LINE AT THE MINIMUM

VALVE OF LAC CURVE

U -

SHAPED LAC CURVES

>
t NO CHANCES in FACTOR PRKES

>
•

LONG RUN Supply

-

CURVE IS an < • è
HORIZONTAL LINE
✓
at SAME PRICE
f- MMLAC But MORE
PRODUCTS
> > >

^
=
INCREASE IN OUTPUT
DUE TO AN INCREASE
IN THE NUMBER OF
FIRMS IN THE INDUSTRY

>
FLAT LAC CURVES
= LONG RUN INDUSTRY
-

Supply WIUBEA HORIZONTAL LINE But

THEREIS
INDETERMINACY
THERE LOUD
BE MANY
SMAU FIRMS, FEW LARGE FIRMS
OR A MIXTURE

>
DOWNWARD StopING LAC CURVES
DEC LINING WITH OUTPUTS ,
=
AVERAGE COSTS ARE ALWAYS
THERE IS A TENDENCY FOR ONE FIRMTO DOMINATE THE MARKET

TEN DENEY FOR

Monopoly

> UPWARD SUOPING LAC CURVES

=
AVERAGE COSTS ARE ALWAYS INCREASING WITH OUTPUTS ,

THERE IS AN ADVANTAGE IN BEING SMAIL

"

LARGE NUMBER OF
SMAIL FIRMS

DECREASING COST INDUSTRIES

LONG RUN CURVE is
=
Supply
-

DOWNWARD stopING

INCREASING COST INDUSTRIES

LONG RUN CURVE IS
=
Supply
-

UPWARD doping

> U -

SHAPED LAC CURVES

UPWARD Shaping
LONG RUN Supply
CURVE

•
T IT IS MORE
EXPENSNETO
• PRODUCE THE
SAMEQUANTITY

PECUNIARY DISECONOMY
ELASTI CITY OF SUPPLY
VOLUME OF INPUTS PURCHASED BY AN
is A SIGNIFICANT
PART OF THE Total
INDUSTRY
INPUT DEMAND
THE
PERCENTAGE CHANCE
TO A 1- %
IN QUANTITY
CHANGE IN
SUPPUEDTHATOCCNRS >
HIGHER
OUTPUT
=
INCREASE IN =
INPUT PR, ces
INCREASE IN
PRODUCTION
IN RESPONSE PRODUCTION PRICE COSTS

E
=/
EE
# p¥ = -
= 1-
Slope
OF
.

%
P PRODUCTION PECUNIARY ECONOMY
FUNCTION VOLUME OF INPUTS PURCHASED BY AN INDUSTRY
IS IOTA SIGNIFICANT
PART OF THE TOTAL
INPUT DEMAND
DECREASE IN INCREASE IN
HIGHER
PRODUCTION
= =
>
OUTPUT INPUT PRICES COSTS
CHAPTER 13
MONOPOLY
MARKET STRUCTURE
IN WHICH A SINGLE
SELLER OF A PRODUCT WITH NO CUOSE THE MAIN OF
SUBSTITUTES SERIES THE ENTRE MARKET >
INDUSTRIES
OBJECTISWE

u
PROFIT MAXIMISATION
MONOPOLY HAS
SIGNIFICANT
A
HIGHEST LEVEL
CONTROL > OF
PROFIT POSSIBLE
OVER THE PRICE CHARGES
✓
= ITS DEMAND CURVE IS THE DOWNWARD SUOPING
MR MC-
-

DEMAND CURVE OF THE ENTRE MARKET

PRICE
-
MAKER

<
DIFFERENT
TO CALCOLATE
Nay
TOTAL land MARGINALI
REVENUE

v <
✓
SOURCES OF MONOPOLY : PERFECT
COMPETITION MONOPOLY
⑦ EXCLUSIVE CONTROL OVER
IMPORTANT ISSUES > TR =P Q
IN ORDER TO SELL MORE OUTPUT
THE MONOPOUSTMUST at ITS
PRICE
-

(NOT ONY FOR THE MARGINAL UNITY

② ECONOMIESOF SCALE > MR=p
*
BUT ALSO FOR all OTHER UNITS )
LAC DOWNWARD BELTER TO HAVE
ONE DOMINANT
=

SLOPING FIRM

③ PATENT MID POINT OF

CURVE
=
CONFERS THE RIGHT TO EXCLUSIVE BENEFIT FROM / DEMAND
all EXCHANGES INVOLVING THE INVENTION TO WHICH ITAPPUES LINEAR MAXIMUM
=
POINT OF SUPPLY
CURVE OF Monopolles

⑨ NETWORK ECONOMIES
= A
PRODUCT BECOMES MORE UAWABLE AS GREATER
NUMBERS OF CONSUMERS USE IT

⑤ GOVERNMENT UCENCESOR FRANCHISES NOT

LINEAR

THIS JIOESNOT
RE
PRESENT THE
PROFIT

PROFIT MAXIMISATION
:
MR MC-

yggffffffHHMBMPRKEAS.IN
ITISNOTTHE
<

PERFECT
COMPETITIVE MARKET This is
BECAUSE WHEN MONOPOUST
THE PROFIT
DECIDE TO SELL MORE OUTPUT GOD
Theft ARE TWO EFFECTS MAXIMUM
ON REVENUE S : >
PROFIT LEVEL

① LOWERTHE
OUTPUTS
PRICE
SOLD
FOR ALL UNITS OF =
LOSS IN
REVENUE
q .

ap
Apso

⑤ SELLING OF MORE OUTPUT GAIN =

IN REVENUE

P da
-

Afta

È:È!ÈÈ
{
→
area a- aosp
① = 100.10
= 1000

È
:*;
§
E
o
AREA 13=50 DQ
= 50 50
.

c
= 2500
§
da -50
-
MARGINAL REVENUE
CHANCE IN TOTAL REVENUE THAT OCCVRS as a RESULT
=
OF

a 1- UNIT CHANCE IN SALES

Qo >
Qotso da >0
MR=¥§-=Q°%¥P#_
TRqoi-aq-fpotdpkqoi-AO DTR-Y-Qodptpodqtsps.io -1¥
TRAE poi Qo >

extra
MR Qo
# +
po
- .

REVENUE
.

-
tpaotaq DTREIQOAPTPODQ
LOWÉÉED
STR QODPTPODQTDPDQ
-
-

PRICE
LOSS IN
> this is realeysmall =

and can be ignored REVENUE

LOSS < GAIN

Kt > 1 THETWOAREAS
ELASTICITÀ
COINCIDE
> EXACTLY

# f- %)
LOSS -_ GAIN
+
ma •

/ Eta
%
=

G- %)
'

i MEP .
+ ^

loss > GAIN sen

=P F- È)
,
aka MR -

, >
/ Efa
" perfect
Market
competitive >

,
I

MONOPÓUES IN
MUST OPERATE ✓
THIS AREATO MAXIMISE
PROFIT
MR <
IN ORDERTOSELLAN
P
EXRAUNITMONOPOUSTMUST
DECREASETHE FOR
PRICE
ALL OTHER UNITS

Ina Linear
demand curve

f- a- BQ ✓

< > >

MR MC _-

tr-p.Q-fq.ba) Q ME 9- ZBQ

lei
-
=

TR = QQ BQZ
-

MC
[ ¥1
= .

THE MARGINAL REVENUE curve

IS ALSO LINEAR , WITH THE game
INTERCEPT BUTTWICEASSTEEP

ma
p >

v 7

MID point
DEMANDCURUE
1%1-1-1>1 INEFFICIENCY
,

q IT IS A
AREWILUNGTO
I
MARKUP
=
peopleMORE FOR AGOOD
pay
I OVER MARGINAL THAN ITS COST OF
I COSTS CHARGED PRODUCTION
THE MONOPOL'ST
1
BY
↳

MR-O7SMC-_MC-_qtx@vIT-pt.Q
#
-
ATC .
D­
 NOT
SHUTDOWN CONDITION FOR THE MONOPOLIST HAS A
SUPPLY CURVE

MONOPOUST
SHOULD CEASE WHENEVER
IT HAS
ONLY A
SUPPLY RUE
PRODUCTION
AVERAGE REVENUE IS LESSTHAN
AVERAGE VARIABLE COST AT EUERY
LEVEL OF OUTPUT

AVC CURVE
> DEMAND CURVE BELOW
ABOVE
AVCISALWAYS
>
THE DEMAND CURVE :
ITIS BEITERTO PRODUCE
AT ALL
NO OUTPUT
<

EXAMPLE

⑦ f- 100
-

Q MRA -700 -
ZQ

MRI = MC → 1-00-20=20

}
>
QI - 40

s >
PI -60
THIS IS
A LOCAL

OPTIMUM ⑦ f- 100 -29 MRE 1-00-40

Mrz =
MC > 1-00-40=213
=/
AOBAL >
qq.IO
OPTIMUM
① THIS CASE
60
>
PI
=
☐ zero
)

"

THERE IS NO UNIQUE
MR MC IS A Necessary CONDITION CORRESPONDENCE BETWEEN
ONY
=

THE
PRICE A MONOPOUST

Xy
Not a SUFFKIENTONE AMOUNT THE
CHARGES AND THE
" " """"""°"
F" " "°" "" """ " P"""

MR= MC
>

>
MR HAS TO CUT MC FROM ABOVE

> THE RESUVTING QUANTITY MUST BE

A GLOBAL OPTIMUM
L
IT IS USEFUL TO USE
SHUTDOWN CONDITION

LONG RUN
PRODUCER & CONSUMER SURPWS
-

MONOPOLY

È
✓

MONOPOLI ST HAVE THE TIME

CONSUMER
TO ADAPT THEIR CAPITAL >
STOCK SIZE SVRPWS

ATE Lac
MR-5M¥ LMC
aaaaa Bo
> OPTIMAL
→ " "
POINT

MARKETS
§ §È
• ma I
PRODUCER
surplus
•

CONSUMER
>
SURPWS
"

}
IT
THE TENDENCY INTOTHE IN
TO DISAPPEAR LONG -
RUN OPTIMAL POINT
ST MARKET
MAYOR May NOT BE THERE
>
MONOPOLI

LÉSS
÷
<
PRESSURE GO
CONDITIONS FROM NEW POTENTIAL
THAT CREATE FIRMSENTRYING Sa tsz
MONOPOUES THE MARKET > DEADWEIGHT
MAY CHANCE (MORE BARRIERS LOSS ,

✓ >
⇐ apra,
ONE EXTRA UNIT
Sg IS A
SURPLUS OF OUTPUT
WHICH HAS BEEN
By THE
"
"
EXTRACTED
MONOPOUSTS

PRÒDUCER
SURPWS

THERE IS A DEADWEIGHT LOSS

=
LOSS OF Efficiency THAI
RESULTS FROM THE DISCRIMINATION
L
OF PRICE
ITMEASURES THE
VAWE OF THE
*
LOST output (Qc ① ) -

VAWING EACH EXTRA UNIT

AT THE PRICE AT WHICH > § ,
-
①
*
) _
AREA BELOW
MC CURVE
CONSUMERS ARE WILLING
FOR IT NET OF THE
TO pay
COST OF PROVIDINGIT
DYNAMIC EFFICIENCY OF MONOPOLY
OR NOT FOR
IT IS NOT CLEAR IF MONOPOUES ARE GOOD

SOCIETY
# INEFFICIENCY 1€
P
THE =

HAS TO BE JUDGED
CAUTIOUSLY

pt -91€
} MPOPÉÉFIT
-

QT
V
SHORT TERM GAIN
-

MAY RESULT
IN A LONG TERM
- WELFARE LOSS DUE TO
>
LACK OF NEW
PRODUCTS
CÓSTSAVING
✓ PRODUCTION
RESEARCH AND TECHNIQUES

DEVELOPMENT
IS A COSTLY ACTIVITY
AND ECONOMIC
PROFITSA OF MONOPOLIES
ARE Key SOURCE
OF FUNDS

NATURAL MONOPOLY
DECUNINGLAC
> IT
HAS HIGH FIXED COSTS >
= DEADWEIGHT
AND SMALL MARGINAL COSTS 1 DOMINANT FIRM LOS
ATC DECUNING

[
IS BELTER
=
LACDECUNING

THERE WOULD NOT BE

→
PRODUCTION WITHOUT
A
MONOPOLY
g.
'
✓
i
PUBLIC POUCIES TOWARDS
#*

NATURAL MONOPOLIES
p
:
+ >
STATE COULDSET f- MC AND ABSORB ECONOMIC LOSSES

µ STATE OWNERSHIP & MANAGEMENT

-
> Neff / cient MANAGEMENT DUE TO MISAUGNED INCENTNES

+ State CMD
>
put CAP ON PRKES SO THAT FIRMSNEEDSTOBE Efficienti
-0

µ STATE Regulation STAY IN BUSINESS

-
> RIGHT PRICE LEVEL ? ✓

INA PERFECT COMPETITION

MARKET THIS OUTCOME
t ON WHOGETS THE CONTRACT SHOULDKEEP COSTS DOWN WOULD NEUER DE ReactED
>
COMPETITION
AND REDUCE NE # 'l'EN
EXCLUSIVE CONTRACTING
µ
> LOWESTBIITER =
QUALITY LOSS
me isauvaysbelow
Lac
-

MIN

+ > the ARM WOULD

> LIMIT ABUSE OF DOMINANT POSITIONS MAKE UOSSES
In ENFORCEMENT OF ANTITRUST LAWS

> CONSOUDATIONS WHICH MAY LEAD TO SUBSTANTIA

-

PREVENT
REDUCTION IN COSTS DUE TO AN INCREASING
RETURN TO
scale

in LAISSEZ-FAIRE
Policy
PRICE DISCRIMINATION DIFFERENT
- Buyers
THE
=
PRACTICE WHERE MONOPOUST CHARGES DIFFERENT PRICESTO
> DIFFERENT
UNITS

① POSSIBLE TO DISTINGUISH
OF CONSUMERS
CATEGORIES
>

CONDITIONS IN
ORDERTO DO
>

THIRD DEGREE CHARGINGDIFFERENT PRKESTODIFFERENT BUYERS

THIS ② IN FOR BUYERS TO
PRACTICAL
TRADE AMONG THEMSELVES
-

>
>

PRICE DISCRIMINATION

THE
MONOPOLIÈWILL CHARGE
A HIGHER PRICE IN THE MARKET
WHERE DEMAND IS LESS ELASTIC WITH
RESPECT TO EXAMPLE Qttotal =
9+4=13
PRICE 6 10-20=2
pa 10 Qt Pt =

f-

}MR=
= -
'

☒=L
,
pero-02 Prete MC
Mpièmrz TC = 5+2 (91+012)--51-20
2.20-29--2
'

01=9
ME 2

B-
(1-1%-1)=132/1 -
HORIZONTAL SUMMATION

pt < P2
/ EH / Ez/
>

Tanith 3rad) = PTTÉÉTPÒZ ÉTÉ) - =

92€

IT (without D) = 8,5 1-3-2.1-3=79, 5€

.

q -10-13+20-13=30-22
t
f- 15 -

%Q
ME 15 Q -

MREMC
1-5-0=2 PÈ8,5
SECOND DEGREE 0¥13
PRKES FOR DIFFERENT
-

CHARGING D)FFERENT UNITS OF A GOOD

> >

PRICE DISCRIMINATION THEY ARE USED

BETWEEN CATEGORIE S
WHEN
OF
Monopoli ST CANNOT
CONSUMERS
DISTINGUISH

MA Fee pt
=
HOURLY
FOR STUDENT

surplus
>
of the
PROFESSOR s
" =
my Noury feep
=
# EXAMPLE
Ma
HE Choose FOR
PROFESSOR
OR
MI + Mz AREA EFG =
8%10-27--32
2

area FJI =
(18-8)-(12-2)=50
WITH EXECUTIVE 2
> PACKAGE FJI SURPLUS
THE
M2 ISEXTRACTED by
MONOPOUST
MI
11=-2-(8+18) 5-2-(81-18) 1-321-501-32
-

né Te TE
F- 109€

EXECUTIVE
package
= HIGHER MEMBERSHIP
✓ FEE BUT UNLIMITED Q

BUDGET PACKAGE
WHICH AUOWSTO
Q1
play
> AREA EFG area ÉFGTFJ
FOR STUD FOR PROFESSOR

THE TWÓCATEGORIES THIS PRICE

D'STINGUSHED the product AT
ARE INDIRECTLY is non available TO THOSE
CONSUMER WHO CANNOT
✓ affopnd it in the FIRST
PLACE

÷
DEADWEIGHT LOSS IS LOWER IN TWO PRICE MONOPOUES
-

MORE OVERALL CONSUMER

BVTTHEYEXTRACT surplus
 ✓
FIRST DEGREE SELLING OF DIFFERENT UNITS OF OUTPUT FOR DIFFERENT PRICES WHICH ALSO TWO PART
-

>
-

>

PRICE DISCRIMINATION D'FFERFROM perso" to

Peason TARIFF

IT IS TO OBTAIN
POSSIBLE
ONLY IF :

< TO DISTINGUISH DIFFERENT GROUPS

1 .

POSSIBILITY
surplus
'

F- MC
IO Lost 2 .

PERFECTKNOWLEDGE
TO FOR EACH
OF CONSUMERS WILUNGNESS
=
N-O DEADWEIGHT
PAY UNIT OF GODD

LOSS

EXAMPLE

> 10-0=2
13=10-0
}
Pp -10 a
pena 015-8
-

MAXIMUM FEE
MEMBERSHIP
MAXIMUM )
ME 2 TE 5+29 v
membership FEE Mp I -1%0-2
-
_

>
20-0=2
Mef 84-0-2) = 162€
Qp-18
-

>
= 32€

F- 2. (8+18)-5-2 .

(8+18)+321-162=1 89€ MUCH HIGHER WITH

RESPECT TO 3rd DEGREE
-

DISCRIMINATION
PRICE
 CHAPTER 14
IMPERFECT COMPETITION ,
OUGOPOLY
HOTDOG VENDOR LOCATION PROBLEM
THE TWOVENDORS
GET EACH HALFOF
> THE
MARKET
EQUILIBRIUM POINT
OPTIMAL FROM
> VENDOR'S PERSPECTIVE
=

% OF the MARKET FÈ
MARKET A MARKET B

✓ <
HE WIll REASON
AS VENDOR A
THIS LOCATION MINIMISES VENDOR a WIll FIND IT
THE AVERAGE ONE WAY
OPTIMAL TO MOUE AS
-

DISTANCE ccose as POSSIBLE TO

In ORDER
1/8 KM THE CENTRE
SEGMENT CB
✓ TO STEAL THE

OPTIMAL
LOCATION
FROM THE MARKET ✓

NOTSOCIALLY
SOCIALLY OPTIMAL
:

SPEAKING HIGHER AVERAGE

TRAVEL DISTANCE,
114km

COURNOT MODEL
OLIGOPOLY MODEL IN WHICH EACH FIRM ASSUMES THAT RNAIS
THEIR CURRENT OUTPUT LEVELS
WILL CONTINUE PRODUCING

ASSÌMPTION :
> OPTIMAL
BUNDLE
EACH
DUOPOUST TREATS EXAMPLE
THE Otters QUANTITY Go
b (011+012)
AS A FIXED NUMBER,
f- 9 -

IT WILL NOT RESPOND

pt @ BQZ) boy
TO ITS OWN
PRODUCTION > = -
-

DECISIONS
IT IS A RESIDUAL DEMAND CURVE
v =
What is left for FIRM 1 after
WEAK FORM OF subtracting Qz Umts from Market demand
INTERDEPENDENCE

THE Optimal
QUANTITYOF both
FIRMA and 2

MRE-G.biz) 21001 -

a- BQZ
DEPENDSON 012
L
> q# =

Zb
THIS MODEL DESCRIBE BEITER MRI = MC MEO
SITUATIONS IN WHICH FIRMS
INDEPENDENTLY DECIDE HOW multi
TO PRODUCE and then Sell THEIR GOODS THE TWOFIRMS HAVE TO
HAVE AN EQUAL OUTCOME

# =Qz*
NO INCENTIVE IN L
UNDERCUTIING
RNALS > 0*1=0 BQE -

✓
210
REACTION FUNCTION
Q! -
-

§ =p?
,
CURVE THAT SHOWS
OF OUTPUT FOR ONE
THE
OLIGOPOLIST
PROFIT MAXIM'SING LEVEL
FOR EACH AMOUNT

SUPPLIED BYANOTHER

9-LYQE.kz
01*1 = Ra =

IEI a) =

EQUILIBRIUM PRICE
Pea -
b
G-è %) G- -
-

NASH
PROFITS >

EQUILIBRIUM
TETE § [ =gÌ
-
 rien
EXAMPLE
>
FIRMA
f- (56-202)-201
F- 56-20 f- 56-2611+02) MR -

(56-2012)-4011
> 56-292-4011=20
MC-10 MR =
MC 4011=36-2012
Q# 9- DI > ☒¥-9 E -

2 2

QÀ -6
. . .
SYMMETRKALLY
TOTAL MARKET OUTPUT

¥
>
Qz 9-
-

> ☒È = 6 ① =
61-6=12

f- 56 -29
f- 56-2-12--32

BERTRAND MODEL

}
THIS MODEL DESCRIBE BELTER SITUATIONS IN
WHICH FIRMS ARE
OUGOPOLY MODEL" IN WHICH"EACH FIRM ASSUMES THAT RNAIS COMPETING OVER PRICE
"" "" "" """" """ "" "
" "" " "" "" " "" " " "" " ""
" DEMANDED

INCENTIVE IN
UNDERCUITING
RNALS

IF FIRMI CHARGES PÌ ,

FIRM 2 CAN :

1) CHARGE MORE that PI AND SELL NOTHING

2) CHARGE EXACTLY PE AND SPUT THE MARKET WITH FIRM 1

3) CHARGE A PRICE MARGIN Ally LOWER than PE AND CAPTURE THE WHOLE MARKET

TAKING ÈISMC THE THIRD

>

FOR
THE BEST
OPTION
BOTH FIRMS

"
SELLERS WILL SHARE
EQUAILY THE MARKET
BECAUSE f- MC

Assumption :

EACH
DUOPOUST TREATS
THE Otters QUANTITY
AS A FIXED NUMBER,
1T WILL NOT RESPOND
TO ITS OWN
PRODUCTION
DECISIONS

"

WEAK FORM OF
INTERDEPENDENCE

STACKELBERG MODEL LEADER Demand

FIRM 2 PRODUCTION :
CURVE
OUGOPOLY MODEL IN WHICH : 9- bit

FIRM 1
Qz
=

Rzfq,) =

Zb
STACKELBERG > ASSUMES ITS RIVAL WILL
LEADER PRODUCE ON ITS COURNOT WETHAN FIND
REACTION FUNCTION Q? EQUAUSING
vs FIRM 1 DEMAND CURVE :
> MRI to MC

MRI G- boia
#
= -

FIRM 2
STACKELBERG TAKES OF ITS
f- a- that Ra =
E ¥91
-

> OUTPUT
FIXED
FOLLOWER RIVAL AS
Qz È NOT MRA MC
= MEO
FIXED, ITDEPENDS
Q1
:-&
on
a
'

BOTHFIRMS WOULD WANT

EQUILIBRIUM PRICE
TO BE LEADER AND THEY
✓

PE a- b(G) + (9-4)=7
WOULD END UP WE SUBSTITUTE
>
THEY HAVE TO FIND THIS ONEINTHE
ÈERTRAND away TO COMMIT REACTION FUNCTION
✓ EQUILIBRIUM TO A LEVEL OF OUTPUT

È
ubriumfqqj
"" BEFORE ITS COMPETITOR
COMPETITION CANDOTHESAME
☒È ¥

{
an,
,
PROFITS
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•
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THIS IS
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EVEN THOUGH HE COULD
WILL REACH MAKE MORE OUTPUTS,
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>
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> PROFITS
f-(56-2011)-2012 f- 56-2 [01+(9-12011)] Te -29.9--261

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L
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SEQUENTIAL GAME
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player

NASH
EQUILIBRIUM

ITISCONVENIENT
FOR TELEFONICA
✗ NOT TO BUILD
| BIGGER

J
NASH THIS capacity THE LEADER PRODUCES MORE
EQUILIBRIUM CHANGESTHE THAN WHAT WOULD BE PROFITABLE
> OF
FXPECTATION GIVEN THE AMOVNT PRODUCED
profit IS
DIMINISHED
THE RIVAL
STRATEGIC ENTER
BY THE FOLLOWER
=
IN ORDER TO AVOLD ENDING up
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L
" EXTRA
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BEITER tnan STACKELBERG
-50 LEADERSHIP
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THE LEADER CANNOT

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IN MOSTJURISDICTION
THIS PRACTICE IS F WOULD BE THE
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@

IN ANOUGOPOLY IT IS OFTEN
THE FIRMSWILL BE THE CASE THAT WHAT MAKES
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"

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LIVE ÀNDLET LIVE ,

SIMILARTO THE

STRATEGY LEADS PRISONER'S DILEMMA

TO AN OPTIMAL
EQUILIBRIUM
WHICH IS NOT THE BEST
EXAMPLE
THÈ CAN BE RESVMED
f- 20 -
Q MEO MR-
MC F- PQ = 100
IN THIS payoff MATRIX
]
20-201--0 0¥10 IF
IT
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p -10-1=9 ,
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BESÌOUTCOME DOMIÙANT
THEY START WHICH
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NASH EQUILIBRIUM
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IS WORSE :

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f- ma ✓
↳ ZERO PROFIT IF FINANCIAL INCENTIVES
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-

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RESULT IN
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>
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>
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NTLY
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② CONSUMERS ALREADY USING THAT PRODUCT
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EQUILIBRIUM
>
AL DILEMMA,
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TNONASH EQUILIBRIUM
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L ✓
'
FINANCIAL REAL / PHYSICAL

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t INTEREST
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e
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:
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/
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/

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:
day

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DIFFERENCES IN TIME PREFERENCES

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> ENVIRONMENTAL FACTORS

>
INDIVIDUAL TRANS

>
CIRCUMSTANCES > type of Choices :
pbeasurable or

painful consequences

USÌAILYPEOPLE
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BUT ALSO
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more impattante when
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-

alternatives concerne
immediate Outcomes
tnanwhen they concerne
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CHAPTER 16
PREFERENCES
LABOUR AND
OVER
LEISURE ARE
AN
SUMMARISED IN

LABOUR n INDIFFERENCE Map

BY WORKING I EARN

=/ MONEY
MAXIMUM
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CAN aw ORK

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play SLEEP
, ,
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OTHER ACTIVITY BESIDES
ANY
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MAXIMUM OF
>
HOURS I CAN DO
LEISURE ACTIVITY
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IFWAGEYNCREASES , M
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>
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(NORMAL)

LABOUR Supply
CURVE FOR A WORKER
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LEVEL OF INCOME

BÙT
AN INCREASE IN INCOME
MAY HAVE DIFFERENT
EFFECT IN PREFERENCES
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>
WHY ?
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MORE LEISURE SUBSTITUTION
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IS 4 INCOME
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BIT
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INCENTIVES TO WORK

> BECAUSE IT CHANGES THE

BUDGET CONSTRAINT OF THE
WORKER
CHAPTER 18
EXTERNAL/TIES , PROPERTY RIGHTS AND COASE THEOREM

COST BENEFIT
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ANALYSIS
DOX if BG) Ccx)
>
B--975€
c- 1€ } →
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the SINGLE
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> the SINGLE PERSON PAYSSOMETHING

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>
NEGATIVE EXTERNAUTIES

EXAMPLE
A DOCTOR' S ABIUTY TO VISIT PATENTS IS
DISRUPTED BY THE NOISE COMING FROM THE
MACHINERY USED BY A CONFECTIONER NEXT DOOR

>
THE NOISE DAMAGES THE DOCTOR BUT NOT PRODUCING DAMAGES THE CONFECTIONER

>
LEGAL QUESTION :
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.

>
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>
THE CONFECTIONER REMAINS
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}
THE DISTRIBUTION OF BENEFITS n
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>
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ÈÈ
} §È
INSTALUNG A DEVICE THAT EUMINATES NOISE

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come aver
^
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:

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C DEVICE FOR NO NOISE 20 < :

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Not
60-(25+18)=17 AVOID NOISE =
OFFICE → ( =

CONFECTIONER RE ARRANGEMENT

NEGOTIATING AN AGREEMENT → C-25

40 -18

EFFICIENTIAWS PLACE BURDEN

OF ADJUSTMENT TO EXTERNAUTIES
ON THOSE WHO CAN ACCOMPUSH IT
AT THE LEAST COST

>
POSITIVE EXTERNAUTIES

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WILL RESULT IN SUB -

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 > NEGOTIATION IS COSTLESS

MARKET EFFICIENCY WILL RESULT IF

THERE ARE
>
CLEARLY DEFINED
PROPERTY RIGHTS

7
LAWS THAT GOVERN THE
USE OF
PRIVATE PROPERTY
:

TRAGEDY OF COMMONS • HOW TO

BOUNDS ON
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HOW
ACQURE PROPERTY
CAN BE USED
•
PROPERTY
EXAMPLE • WHO IS RESPONSIBLE FOR DAMAGE

M 100
= min REVENUE :

→
.

1-00+1290=112
GOVERNMENT = 12 %
BOND FOR fishing

< VILLAGE INCOME

> PRIUATELY
OPTIMAL (14×3)+(12×3)=78
>

DECISION

µ But
VILLAGE INCOME
they with NOT
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fish in another
Lake OPTIMAL a
(18×2)+(12×4)=84
SOCIAL TR } boats
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(3×114)-(2×118)=106
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ITISSMAUER
tnan 112 tre social RETURN
,
of THE 2nd boat

THE INVISIBLE HANÌJ FAILS TO

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RESULT BECAUSE INDIVIDUAL
VILLAGERS DO NOT TAKE INTO
ACCOUNT THE NEGATIVE EXTERNAUTY
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> private
number
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^
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IT IS NOT A STABLE
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about NEGATIVE EXTERNAUTIES

TAXING EXTERNAUTIES
THANKS TO TAXES THE INDIVIDUAL WILL
May CONSIDER
>

THE EXTERNAUTIES IN HIS PRODUCTION DECISIONS

60 -18

THE TAX HAS TO

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THE
PARTY WHO CAN
• MORE Easily DEAL B of Mating noise : 40
Ò WITH THE problem
> SELLERS ARE FORCED Cofmaking noise : 60
TO TAKE INTO CONSIDERATION
EXTERNAUTIES
ELIMINATE NOISE 18 :

NEGOTIATION Tao Costly

:

TAX ON CONFECTIONER 60 :