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microeconomics notes

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University of Toronto St. George
Gordon Cleveland

Microeconomics Gordon Cleveland Office – MW 364 [Monday, Wednesday 1-2] Phone – (416) 287-7317 E-mail – [email protected] Lectures will be posted for download on the Intranet every Sunday. Print them and add extra notes in class TA – Zoe Zhang Office hours: Tuesday 4PM – 6PM, Thursday 10AM – 11AM, 4PM – 5PM Email – [email protected] Room – MW 396 Tests • Multiple choices (mostly 10 per question) • Problem based (not memorization) • Theory based • First test = 25%, Second test = 25%, Final exam = 50% Course Based on: Knowledge of basic economic theory Ability to do problems using theory and math (graphic, calculus, algebraic) Note • Lecture notes for each week by Sunday night • Download handbook for tutorial questions and weekly problem sets • TA offices (MW 369) • Microeconomics is the study of individual market in the economy (demand and supply, determining price and quantity) Lecture #1 Economics – the study of the use of scarce resources to satisfy unlimited human wants. Resources (or inputs/factors of production) – land(air), capital (equipment, factories, etc.), labour. Alternative uses – choices to be made because resources are scarce Basic economic decisions • What? Services/goods • How? Best method of production • For whom? How does a market economy make a decision? Buyers and sellers interact in output markets. Opportunity costs – the opportunity costs of taking an action is measured by the value of the next best alternative action. Value of the alternative foregone. Made of explicit (ex. Cost), and implicit cost (value of your time/resources). Ex. Opportunity costs to go to university? (sacrifices) • $6000 tuition • $1000 for books ^ explicit • Could potentially make about $20 000 on a paying job if did not attend university (implicit) Thus, the value of going to university must exceed for equal to $20 000. Read p. 1-22, 23-46 Lecture #2 What is the opportunity cost of getting married? • Giving up time with friends • Giving up one person for another • Any changes as a result of getting married • Expensive (explicit) cost of meal, dress, cake…etc. • What you could have done if you didn’t get married? Use of time (implicit) What is the opportunity cost of getting a month long vacation? Does it depend on when you take it? • Value of your time (implicit) cost of not working • Cost of vacation (explicit) • What you could have done in replace of the vacation • In terms of opportunity cost, people usually go on vacations in the summer Does opportunity cost really matter? Do we make decisions according to opportunity cost? Opportunity cost of older people getting a university degree is higher than younger people. These are important factors in making decisions: reason why young people are in university is because it can increase income in the future. Plus, we have more time to invest. Adults take evening courses because they have to work in the morning, they only have to sacrifice small things to learn in the evening. Companies charge interest in loaning money because there are many alternative ways they can use that money. Opportunity cost comes into play as they make a decision as to how to use that money. Instead of lending money for free, companies can charge interest which better benefits them. When recourses are scarce, choices must be made about how those resources will be used. The rest cost of using the resources in one way will be that you give up the output you might have gotten by using them in an alternative way. Economics focuses on how choices are made, and what the consequences of those choices are, in a market economy, individuals make choices and then markets bring those individuals together. There are tradeoffs everywhere. “There are no free lunches.” Economists think in models. They are reflections of real life situations. They are tools for thinking about a problem. Production possibilities frontier – will help us think about issues like choices, opportunity costs, and economic efficiency. It shows a set of output possibilities possible with a fixed amount of resources (ex. Factor inputs). PPF shows set of output possibilities such that the production of each good is the maximum possible, given the efficient production of other good. (Refer to page 7, figure 1-2 for diagram) In the diagram it shows: • Allocation of resources • Choices • Economically efficient use of resources (anything along the line) • All points within the line are attainable, outside if unattainable • Economically inefficient are anything within the line, resources are wasted • Opportunity cost • Shape of the curve, its always bowed outwards (concave function) in some problems the PP line is straight. Resources are not perfect substitutes of one another. (Refer to page 9, figure 1-3 for diagram) Opportunity cost (of X) = OCx = -dY/dX OR – 1/(dY/dX) (the amount of Y need to give up for attain more of X) Opportunity cost (of Y) = OCy = -dX/dY (inverse of opportunity cost of X) Reason that the derivative formula (opportunity cost) is negative is because the slope of graph is negative. Neg x neg = pos. Opportunity cost may be constant along the PPF. • -dY/dX is a constant • The PPF is linear • The second derivative is 0. It shows how the slope is changing. Opportunity cost maybe be increasing along the PPF • -dY/dX is increasing • The PPF is convex or bowed outwards • The second derivative is < 0 (negative) • d(dY/dX)/dX < 0 (called a mnemonic) • when the second derivative is positive, it is bowed in • when the second derivative is negative, it is bowed out Economic resources are scarce. The PPF shows there are limits to how much can be produced. The cost of more X is the amount of Y given up. Ex. The value function V = 3X + 6Y Each unit of good Y is worth twic
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