Intermediate Microeconomic Theory I
ECON 2300 – Summer 2011 – Mark Melatos
Topic 1 – Demand, Supply and Economic Welfare – May 9
What is Micro?
- The study of how economic agents behave individually or in groups.
o How much to produce? At what price?
o How will my competitor react?
o What, when and how much should I consume?
o What policies should we implement?
- Arise when groups of buyers and sellers interact.
o Price, quantity, quality.
o Welfare outcomes for firms and consumers.
- How do markets work?
- What happens if they don’t work?
o Market failure (pollution, insurance, GFC).
o Is there a role for government?
Is Microeconomics Useful? Umm... YES!
- It helps us understand many things…
- Consumer and firm behaviour
o Marketing, finance, corporate finance.
- Social policy
o Health, taxation, education, environment.
- How the Canadian economy works and its role in the world.
o Macroeconomics and international trade.
- How do people and firms interact day by day?
o Contracts and auctions.
- Theories and models.
- Role of simplifying assumptions.
- Testing theories – statistics, data.
The Demand and Supply Model
o Price-taking (i.e. many firms, consumers).
o Homogeneous products.
o Full information. o Low transaction costs.
- Assume perfect competition.
- What determines demand?
o Own price of the good.
o Price of other goods.
o Consumer tastes (advertising?)
o Government policy.
The Demand Curve
- The demand curve:
o Shows the quantity demanded at each possible price given tastes,
income, other pric