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Economics 2150A/B
Hugh Cassidy

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. 1.2 Economic Model – Simplified framework used to address a problem. Eg. Roadmap Exogenous Variable – a variable whose value is taken as given Eg. Taxes Endogenous Variable – a variable whose value is determined by the model itself. Eg. Consumption Three Tools 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 remind constant. 3. Comparative Statics – how a change in an exogenous variable affects an endogenous variable. 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 Notation: 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 be preferred. 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
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