Intermediate microeconomics
Lecture 1
A market is the collection of buyers and sellers that, through their actual or potential
interaction, determine the price of a product or set of products. The market is different than
an industry
The buyers could be students’ households of business firms.
The extent of a market are the boundaries of a market, both geographical and in terms of
range of products produced and sold within it.
Geographic boundaries: Highly localized market versus global market
• Chicago housing market: Most people who work in downtown Chicago will look for
housing within commuting distance
• Global gold market: Gold is bought and sold in a world market. The cost of transporting
gold is small relative to its value
Product range: are products used for the same or a different purpose?
A market basket (or bundle) is a list with specific quantities of one or more goods
Although selections may occasionally be arbitrary, consumers usually select market baskets
that make them as well off as possible.
Table 3.1 shows several market baskets consisting of various amounts of food and clothing
purchased on a monthly basis.
To explain the theory of consumer behavior, we will ask whether consumers prefer one
market basket to another. Note that the theory assumes that consumers’ preferences are
consistent and make sense.
In the consumer theory, the consumer choose the best market (or bundle) they can afford.
What they can afford is the budget constraint and what is best is the consumer preferences.
The combination of “can afford” and “best” is the choices
The budget constraint is the constraints that consumers face as a result of limited incomes.
Budget line is all combinations of goods for which the total amount of money spent is equal
to income.
,PFF + PCC = I
I = Income
F = amount of food
C = amount of clothing
PF = price of food
PC = price of clothing
How much of C must be given up to consume more of F. It has a vertical intercept of I/PC
and a slope of -(PF/PC) . The slope of the budget line, -(PF/PC), is the negative of the ratio
of the prices of the two goods. The magnitude of the slope tells us the rate at which the
two goods can be substituted for each other without changing the total amount of money
spent. The vertical intercept (I/PC) represents the maximum amount of C that can be
purchased with income I. Finally, the horizontal intercept (I/P F) tells us how many units of
F can be purchased if all income were spent on F.
C = (I/PC) - (PF/PC)F
,Income Changes
We can see that a change in income alters the vertical intercept of the budget line but
does not change the slope. Figure 3.11 shows that if income is doubled (from $80 to
$160), the budget line shifts outward, from budget line L1 to budget line L2. Note,
however, that L2 remains parallel to L1. If she desires, our consumer can now double her
purchases of both food and clothing. Likewise, if her income is cut in half (from $80 to
$40), the budget line shifts inward, from L1 to L3.
Price Changes
A change in the price of one good (with income unchanged) causes the budget line to rotate about
one intercept. When the price of food falls from $1.00 to $0.50, the budget line rotates outward
from L1 to L2. However, when the price increases from $1.00 to $2.00, the line rotates inward from
L1 to L3.
, 1. Change in income
Income falls by half
Prices unchanged
2. Change in both prices (good 1 & 2)
• Both prices double (the ratio of the two prices is unchanged)
• Income unchanged
A change in income can have the same effect as a change in prices.
-> In both examples the consumer’s purchasing power falls by half, either because the
income falls by half or because the prices of both goods double.
3. Inflationary economy
Example: “Everything doubles”
The consumer’s income (I) doubles
The prices of both food (p1) and clothing (p2) double
Doubling I, p1, p2 -> No effect!
Inflationary conditions in which all prices and income levels rise proportionately will not
affect the consumer’s budget line or purchasing power.
Third-degree price discrimination: Practice of dividing consumers into two or more groups
with separate demand curves and charging different prices to each group
MICROECONOMICS: branch of economics that deals with the behaviour of individual
economic units as well as the markets that these units comprise
CONSUMERS
• Trade-offs in the purchase of more of some goods for less of others
• Trade-off between current consumption and future consumption
FIRMS
• Trade-offs in what to produce
• Trade-offs in the resources to use in production
SUPPLY CURVE: Relationship between the quantity of a good that producers are willing
to sell and the price of the good
DEMAND CURVE: Relationship between the quantity of a good that consumers are willing
to buy and the price of the good
EQUILIBRIUM PRICE: Price that equates the quantity supplied to the quantity demanded
MARKET MECHANISM: Tendency in a free market for price to change until the market clears
Lecture 1
A market is the collection of buyers and sellers that, through their actual or potential
interaction, determine the price of a product or set of products. The market is different than
an industry
The buyers could be students’ households of business firms.
The extent of a market are the boundaries of a market, both geographical and in terms of
range of products produced and sold within it.
Geographic boundaries: Highly localized market versus global market
• Chicago housing market: Most people who work in downtown Chicago will look for
housing within commuting distance
• Global gold market: Gold is bought and sold in a world market. The cost of transporting
gold is small relative to its value
Product range: are products used for the same or a different purpose?
A market basket (or bundle) is a list with specific quantities of one or more goods
Although selections may occasionally be arbitrary, consumers usually select market baskets
that make them as well off as possible.
Table 3.1 shows several market baskets consisting of various amounts of food and clothing
purchased on a monthly basis.
To explain the theory of consumer behavior, we will ask whether consumers prefer one
market basket to another. Note that the theory assumes that consumers’ preferences are
consistent and make sense.
In the consumer theory, the consumer choose the best market (or bundle) they can afford.
What they can afford is the budget constraint and what is best is the consumer preferences.
The combination of “can afford” and “best” is the choices
The budget constraint is the constraints that consumers face as a result of limited incomes.
Budget line is all combinations of goods for which the total amount of money spent is equal
to income.
,PFF + PCC = I
I = Income
F = amount of food
C = amount of clothing
PF = price of food
PC = price of clothing
How much of C must be given up to consume more of F. It has a vertical intercept of I/PC
and a slope of -(PF/PC) . The slope of the budget line, -(PF/PC), is the negative of the ratio
of the prices of the two goods. The magnitude of the slope tells us the rate at which the
two goods can be substituted for each other without changing the total amount of money
spent. The vertical intercept (I/PC) represents the maximum amount of C that can be
purchased with income I. Finally, the horizontal intercept (I/P F) tells us how many units of
F can be purchased if all income were spent on F.
C = (I/PC) - (PF/PC)F
,Income Changes
We can see that a change in income alters the vertical intercept of the budget line but
does not change the slope. Figure 3.11 shows that if income is doubled (from $80 to
$160), the budget line shifts outward, from budget line L1 to budget line L2. Note,
however, that L2 remains parallel to L1. If she desires, our consumer can now double her
purchases of both food and clothing. Likewise, if her income is cut in half (from $80 to
$40), the budget line shifts inward, from L1 to L3.
Price Changes
A change in the price of one good (with income unchanged) causes the budget line to rotate about
one intercept. When the price of food falls from $1.00 to $0.50, the budget line rotates outward
from L1 to L2. However, when the price increases from $1.00 to $2.00, the line rotates inward from
L1 to L3.
, 1. Change in income
Income falls by half
Prices unchanged
2. Change in both prices (good 1 & 2)
• Both prices double (the ratio of the two prices is unchanged)
• Income unchanged
A change in income can have the same effect as a change in prices.
-> In both examples the consumer’s purchasing power falls by half, either because the
income falls by half or because the prices of both goods double.
3. Inflationary economy
Example: “Everything doubles”
The consumer’s income (I) doubles
The prices of both food (p1) and clothing (p2) double
Doubling I, p1, p2 -> No effect!
Inflationary conditions in which all prices and income levels rise proportionately will not
affect the consumer’s budget line or purchasing power.
Third-degree price discrimination: Practice of dividing consumers into two or more groups
with separate demand curves and charging different prices to each group
MICROECONOMICS: branch of economics that deals with the behaviour of individual
economic units as well as the markets that these units comprise
CONSUMERS
• Trade-offs in the purchase of more of some goods for less of others
• Trade-off between current consumption and future consumption
FIRMS
• Trade-offs in what to produce
• Trade-offs in the resources to use in production
SUPPLY CURVE: Relationship between the quantity of a good that producers are willing
to sell and the price of the good
DEMAND CURVE: Relationship between the quantity of a good that consumers are willing
to buy and the price of the good
EQUILIBRIUM PRICE: Price that equates the quantity supplied to the quantity demanded
MARKET MECHANISM: Tendency in a free market for price to change until the market clears
