1
Microeconomic Theory
The Course:
•This is the first rigorous course in microeconomic
theory
•This is a course on economic methodology.
•The main goal is to teach analytical tools that will
be useful in other economic and business courses
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Microeconomic Theory: Maximizing Behavior and Optimization, Study Guides, Projects, Research of Microeconomics
An introduction to microeconomic theory, focusing on the concepts of maximizing behavior and optimization. the basics of consumer and firm decision-making, the use of economic models, and the mathematics of optimization. It also discusses the importance of understanding the first and second order conditions for maximization.
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2021/2022
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Microeconomic Theory
The Course:
- This is the first rigorous course in microeconomic theory
- This is a course on economic methodology.
- The main goal is to teach analytical tools that will be useful in other economic and business courses
Microeconomic Theory
Microeconomics analyses the behavior of individual decision makers such as consumers and firms.
Three key elements:
- Household choices (consumption, labor supply)
- Firm choices (production)
- Market interaction determines prices/quantities
Example: Your trip to class
How do you get here?
- Car - cost of car, gas, parking.
- Bus – cost of fare, time cost.
What if gas prices rise?
- I don’t care about prices: full tank
- Take bus instead.
Economics:
- Income effect.
- Substitution effect.
Example: How do you finance college?
How raise money?
- Job – graduate without debt.
- Borrow – higher wages later, perform better. What if fees rise?
- Start job – have to borrow less
- Quit job – take econ classes instead of art Economics:
- Labor supply decision.
- Engel curves
Microeconomic Models
A model is a simplification of the real world.
- Highlights key aspects of problem
- Use different simplifications for different problems.
Example: consumer’s choose between
- Two consumption goods
- Consumption and leisure
- Consumption in two time periods.
Aspects of Models
Qualitative vs. Quantitative
- Qualitative – isolates key effects
- Quantitative – estimate size of effects
Positive vs. Normative
- Positive – make predictions
- Normative – evaluate outcomes, make predictions.
How to evaluate a model?
- Test assumptions – are premises reasonable?
- Test predictions – is model accurate?
Chapter 2
THE MATHEMATICS OF
OPTIMIZATION
The Mathematics of Optimization
- Why do we need to know the mathematics
of optimization?
- Consumers attempt to maximize their
welfare/utility when making decisions.
- Firms attempt to maximizing their profit
when choosing inputs and outputs.
Maximization of a Function of
One Variable
= f(q)
Quantity
*****
q*
1
q 1
q
- If the manager produces less than q*, profits
can be increased by increasing q:
- A change from q 1 to q* leads to a rise in
Maximization of a Function of
One Variable
- If output is increased beyond q*, profit will
decline
- an increase from q * to q 3 leads to a drop in
= f(q)
Quantity
*****
q*
q
3
q 3
Value of a Derivative at a Point
- The evaluation of the derivative at the
point q = q 1 can be denoted
dq q q 1
d
- In our previous example,
1
dq q q
d
3
dq q q
d
dq q q *
d
First Order Condition
- For a function of one variable to attain
its maximum value at some point, the
derivative at that point must be zero
dq q q *
df
19
Second Order Condition
- The second order condition to represent
a maximum is
2
2
q q q q
f q
dq
d
- The second order condition to represent
a minimum is
2
2
q q q q
f q
dq
d
Functions of Several Variables
- Most goals of economic agents depend
on several variables
- In this case we need to find the