Microeconomics Revision Flashcards
What is the objective of consumer choice?
Maximise Utility between two goods, X and Y given the budget constraint M (= Px.x + Py.y)
What are the assumptions of the indifference curve?
- Non-satiation: more is better than less
- Transitivity: ranking of goods (if x > y and y > z, then x > z)
- MRS between X and Y declines
Slope of Indifference Curve
MUx/MUy = dy/dx = MRS of XY
If indifference curve cuts another, it violates
Transitivity assumption
Budget Line formula (M)
M = Px . x + Py . y
When is utility maximisation conditon reached?
When indifference curve is tangent to budget line at X0 and Y0 units
Basically when MUx/Px = MUy/Py
What are the types of goods?
- Perfect complements (can’t consume one good without the other, they rely on each other and must be consumed in FIXED PROPORTION)
- Perfect substitutes (either good brings same utility)
Indifference curve of perfect complements
L-shaped IC
Indifference curve of perfect substitutes
Either steeper (consume more X), flatter (more Y), or same slope as budget line (placed precisely on budget line)
Nature of goods
- Normal Good
- Inferior Good
- Giffen Good
Difference with inferior good and giffen good
Yes both are inferior and yes income effect is negative (< 0), but inferior good has |SE| > |IE| and giffen good has |IE| > |SE|
Shape of demand curve for types of goods
- Normal good: downward sloping
- Inferior good: downward sloping (but steeper than normal good)
- Giffen good: upward sloping
Substitution effect
Measures effect of change in price on income (feel relatively richer/poorer than before) and change in quantities bought
e.g. if Px falls, feel richer bc same income can buy more X, hence will buy more X
Income effect
Measures effect when we give back additional income to consumer
Income effect sign in different types of goods
- Normal Good: positive (> 0)
- Inferior Good: negative (< 0)
- Giffen Good: negative (< 0)
Substitution effect sign in different types of goods
- Normal Good: negative (< 0)
- Inferior Good:
- Giffen Good:
What type of good has no substitution effect?
Perfect complements (only has income effect)
bc must consume both goods in FIXED PROPOTION, therefore CAN’T SUBSTITUTE X for Y even if Px changes => budget line shifts PARALLEL to former budget line, which is tangent to original indifference curve, and overall BL has the SAME TANGENCY with previous IC
Labour Supply objective
Maximise Utility of Consumption (amount of goods we can buy) and Leisure (24 - Hours worked) -> graphically represented by indifference curve
subject to budget constraint = w x H + V (where w: wage and V: non-labor income)
Assumption of leisure in labour supply
Nature of leisure is normal good
Labour supply slope given values of income effect and substitution effect
Upward sloping: when income effect > substitution effect
Backward bending: when substitution effect > income effect
Hours worked formula
H = 24 - leisure time
Why can’t two goods be inferior?
Violates non-satiation
Relation: if income rises and P, X and Y are unchanged -> will consume less of both goods (bc both inferior la) -> can’t really increase X and Y consumption bc nature of goods are inferior -> excess budget (contradicts with the assumption that more is always better)
Inverse function
Price = function of(Quantity)
P = f(Q)
Quantity Demanded formula
a - b x P
Quantity Supplied formula
c + d x P
Market equilibrium
QD = QS
a - bP = c + dP
a - c = (b+d)P
P* = a - c / b + d
Substitute P* into QD or QS
Q* = a - b[a-c/b+d]
Q* = (a x d + b x c) / b + d
Who reaps the burden of tax when demand is perfectly inelastic? What shape is the demand curve?
Fully on consumers
Vertically shaped ( | )
Who reaps the burden of tax when demand is perfectly elastic? What shape is the demand curve?
Fully on sellers
Horizontally shaped (——–)
What are the shapes of perfectly elastic and inelastic demand curves? Why are they like that?
- Perfectly elastic: horizontal because buyers are not willing to pay for any price above P bar
- Perfectly inelastic: vertical because buyers are willing to pay for any price on the P-axis (Y-axis)
Market equilibrium when tax is imposed
Price of supply = Price of demand - tax
QD = a - b x Pd
QS = c + d(Pd - t)
a - bPd = c + d x (Pd - t)
Equilibrium price of demand (Pd)
= (a-c/b+d) + (d x t/b+d)
= (P+dt) / (b+d)
Equilibrium quantity of demand (Q*d)
= ((ad+bc)/(b+d)) - (b.d.t/b+d)
Price of Supply
= Pd - t
= (a-c/b+d) - (b.t/b+d)
What market equilibriums graphically represent
Equilibrium price of demand: gap between supply curves shows TAX
Equilibrium quantity of demand: idk
Price of supply: burden of sellers
