I) Introduction to Microeconomics Flashcards
What is “economy”?
A (large) group of people making decisions.
What is “methodological individualism”?
Individuals behavior => group behavior (economy) Parts => totality
What is “holism”?
Totality => parts Used in sociology
What does mean “formal rigor” in economy?
It means that the models of behaviors are defined mathematically.
What is the function of economy?
f: input → decision/choice
What is the major hypothesis to define “f” (fonction of economy)?
Rationality. Agents are assumed rational.
What does a rational agent?
He always acts in his “best-interest” / according to his preferences.
What is “best-interest”?
Each agent has some well defined preferences (tastes, needs, whims, desires…)
What is “preference”? as a definition
Measure of attractiveness of goods, situations… It is individual tastes and as given.
What is “preference”? mathematically
Ranking all the options in the set of options S.
How do you model a preference?
It is a relation: x≻y. R={(x,y)⎪xRy} (R =relation) This agent prefers x to y. So, he will choose x.
What are the 3 assumptions on preference?
1) x⊁x
2) x≻y => y⊁x
3) transitivity: x≻y, y≻z => x≻z
When is the “choice function” well defined?
If the 3 assumptions are true (preferences are consistent) and if people is rational. The choice function is well defined.
How do you write the “choice function”?
c:S →2ˢ = {set of all subsets of S} X⟼c(X) = {x∈X⎥∄y≻x}
How do you write a “weak preference”?
x≿y x is preferred or equivalent to y.
How do you write an “indifference”?
x∼y
What are the conditions for indifference?
x∼y if and only if: 1) a≿b 2) b≿a Indifference is different from an indecision.
What is “completeness”?
∀ (x,y)∈S, x≿y ∨ y≿x The hard choice doesn’t really exists. It is the fact that the agent didn’t make up his mind.
How do you write a “bundle”?
{qx, qy…} q: quantity I want to buy.
How do you describe a bettering graph?
{(q’x, q’y)⎪(q’x, q’y) ≻ (1,1)}
What is monotonicity?
if: qx>q’x ∧ qy ≥ q’y => (qx, qy) ≻ (q’x, q’y) More is better.
What is convexity of preferences?
If (x,y)∈X, any point in the middle belongs to X.
How is written the “graph of preferences”?
{(qx, qy)⎪(qx, qy)≻(1, 1)}
How are written the “dominated bundles”?
{(qx, qy)⎪(1, 1) ≻ (qx, qy)}
How is written the indifference curve?
{(qx, qy)⎪(qx, qy) ∼ (1, 1)}
What is the “utility function”?
For any preference over S, you can find some function “u” such that ∀(x,y) ∈S, x>y < = > u(x) > u(y)
Why do people prefer bundles?
People prefer mixed bundles because they prefer diversity.
How is represented the bettering graph?
What is a “partial equilibrium”?
My consumption on a simple market.
What are the 3 characteristics to define a good or a commodity?
Physical characteristics
Location
Time
What is a “bundle of goods”?
List of everything I wanna buy with the quantities.
What is a “bundle of goods” mathematically?
It is a vector (q1, q2…qn)
What are the 3 axioms for épreferences”?
Preference relation is completed, a consiummer can always order 2 bundles
Transitivity
Monotonicity: I prefer when I have more.
Why is an indifference curve always decreasing?
Because of monotonicity.
What kind of bundles do you prefer?
Mixed bundles are prefered.
Can an indifference curve be crossed?
Why?
NO! It violates monotonicity and transitivity.
Why are the curve always bent in the same shape?
Because of convexity.
What is the decreasing marginal utility line?
Line on which the choice is equivalent for the consummer.
What are the 2 extreme indifference curves?
Straight lines: 2 groups are exact substitutes, the only matter is quantity.
“L”: perfect complements: both goods need to be consumed exactely in the same quantity.
What does tell us an increasing curve?
It tells us that a good is, in fact, a bad (you don’t want to buy it).
What is the equivalent of the “utility function”?
It is an alternative representation of a consumer preferences.
What does represent the “utility function”?
It reprensents the degree of satisfaction of an agent.
What is the interest of the values of this function?
You can compare values but they have no meaning by themselves.
What are the properties of the “utility function”?
Preferences are monotonic
Concavitiy
Quasi-concavity:
What does measure the “marginal utility”?
It measures how much the degree of satisfaction will increase / decrease when one more good is given.
What is the marginal rate of substitution?
And what is its formula?
It tells us the amount of good 2 a consumer is ready to give up in order to get one more good 1.
If it is low, I care a lot of good 2.
If it is high, I care a lot of good 1.
MRS12(q) = (MU1(q))/(MU2(q))
MRS12(q) = q2/q1
MRS12(q) = p1/p2
What is the equation for the linear budget constrain?
nΣi=1(piqi) ≤ x
I maximize the utility staying under the line given by this inequality.
What is the consumer optimization?
Studying together: budget sets and preferences
What is the best optimization of the budget set?
The point that crosses budget line and utility function: q’.
The slope of the busget set is the slope of the utility function.
At the tangent point, what is the slope value?
slope = p1/p2 = MRS
What is MRS ≠ p1/p2?
MRS > p1/p2
MRS < p1/p2
I go to the market to exchange.
> : I exchange good 2 for good 1
< : I exchange good 1 for good 2.
What are the 2 equations to find the “Marshallian demand function”?
MU1/MU2= p1/p2
p1q1+p2q2 = x
What is the Lagrangian function of utility?
L = u(q) + λ(x-pq)
λ: marginal utility of the income or wealth
Do we really observe preferences directly?
No, we observe choices.
Which parameters do give the choice?
Different levels of prices p1, p2.
Different income level x.
WHat is a revealed preference relation?
If at some budget set B, two bundles are affordable and the consumer chooses q over q’, q is said to be revealed preferred to q’.
How do you write a “revealed preference relation”?
qRPq’
What are the 2 axioms for the revealed preference?
Strong: the relation is asymmetric: qRPq’ so q’RPq is not possible. q is chosen under B and q’ is chosen under B’.
Weak: the relation is acyclic: q1RPq2, … qn-1RPqn, qnRPq1 is impossible.
What does mean that a a consumer chooses a bundle which maximzes his utility under his budget set?
At this bundle, the MRS between 2 good is equal to the price ratio.
WHen are choices rational?
When they satisfy the strong (or weak) axiom of revealted preferences.
