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2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Understanding the Microeconomy and the
Role of Government
Part Two Part Three
Chapter 5 Chapters 7-8 Chapters 12-15
Household Behavior Equilibrium
in Competitive
Demand in output Output Markets Market Imperfections
markets and the Role of
Short run Government
Supply in input
markets Long run Chapter 11 Imperfect market
structures
The Competitive
Market System Externalities, public
goods, imperfect
General information, social
equilibrium and choice
Chapters 6-7 Chapters 9-10
efficiency
Income distribution
Firm Behavior Competitive and poverty
Input Markets
Choice of
technology Labor/land
Demand in input
markets
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Firms and Household Decisions
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Perfect Competition
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Perfect Knowledge
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Household Choice in Output Markets
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of Household Demand (review)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Constraint
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Constraint
A budget constraint
separates those
combinations of goods and
services that are available,
given limited income, from
those that are not. The
available combinations
make up the opportunity
set.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Choice Set or Opportunity Set
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Constraint
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
Point E is
unattainable, and
point D does not
exhaust the entire
income available.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
A decrease in the
price of Thai meals
shifts the budget line
outward along the
horizontal axis.
The decrease in the
price of one good
expands the
consumers
opportunity set.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Basis of Choice: Utility
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Marginal Utility
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Marginal Utility
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Utility-Maximizing Rule
(5)
(1) (2) (3) (4) MARGINAL
TRIPS TO CLUB PER TOTAL MARGINAL PRICE UTILITY PER
WEEK UTILITY UTILITY (MU) (P) DOLLAR (MU/P)
1 12 12 $ 3.00 4.0
2 22 10 3.00 3.3
3 28 6 3.00 2.0
4 32 4 3.00 1.3
5 34 2 3.00 0.7
6 34 0 3.00 0
(1) (2)
BASKETBALL TOTAL (3) (4) (5)
GAMES PER WEEK UTILITY (MU) (P) (MU/P)
1 21 21 $ 6.00 3.5
2 33 12 6.00 2.0
3 42 9 6.00 1.5
4 48 6 6.00 1.0
5 51 3 6.00 .5
6 51 0 6.00 0
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Marginal Utility and Downward-
Sloping Demand
Diminishing marginal
utility helps to explain
why demand slopes
down.
Marginal utility falls
with each additional
unit consumed, so
people are not willing
to pay as much.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution Effects
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Substitution Effect of a Price Change
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution Effects of a Price
Change
Price of a good
or service
Household is Income Household buys
better off effect more
FALLS
Opportunity
Substitution Household buys
cost of the
effect more
good falls
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Consumer Surplus
Consumer surplus
is the difference
between the
maximum amount a
person is willing to
pay for a good and its
current market price.
Consumer surplus
measurement is a key
element in cost-
benefit analysis.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Diamond/Water Paradox
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Household Choice in Input Markets
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Labor Supply Curve
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution
Effects of a Wage Change
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution
Effects of a Wage Change
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Saving and Borrowing: Present Versus
Future Consumption
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Saving and Borrowing: Present Versus
Future Consumption
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair