1.1 Part 1
Microeconomics – the study of the economic behaviour of individual economic decision makers.
Eg. Consumers and Firms
Macroeconomics – the study of how an entire national economy performs.
Economic Model – Simplified framework used to address a problem.
Exogenous Variable – a variable whose value is taken as given
Endogenous Variable – a variable whose value is determined by the model itself.
1. Constrained optimization – an analytical tool for making the optimal choice given the
limitations on the choice.
Eg. Maximize average grade, allocating hours studied between courses
Objective Function – what the decision maker seeks to maximize
Eg. The average grade
Constraints – the restrictions imposed on the decision maker
Eg. 24 hours in the day or income
2. Equilibrium – a state where things will stay the same as long as all exogenous variables
3. Comparative Statics – how a change in an exogenous variable affects an endogenous
Eg. Taxes and Labour Supply 1.3
Positive Analysis – What is/would be
Normative Analysis – What should be
3.1 (Part 2)
Basket/Bundle – A collection of goods and services.
A = (x,y)
3 types of goods:
1) “Good” good something the consumer “enjoys” consuming
2) “Bad” good something the consumer “dislikes” consuming
3) “Neutral” good something the consumer neither enjoys or dislikes consuming
Consumer Preferences - How a consumer would rank two bundles ignoring the cost
Two bundles A and B
Consumer prefers A to B A > B
Consumer prefers B to A B > A
Indifferent between A and B A = B
Eg. 3 bundles A, B, C
Preferences could be
A>C, B>C, B>A Properties
1) Completeness : Given any two bundles A and B. Either A>B, B>A, A=B
2) Transitivity: If A>B, B>C then A>C
3) More is better: Any bundle with at least as much off all goods, and strictly more of one good will
Ordinal Ranking – the order of ranking between bundles without specifying the intensity of preference
Cardinal Ranking – measure of the intensity of preferences
3.2 Utility Functions
Utility Function – A function that measures the level of satisfaction(utility) from consuming a bundle