Summary
Microeconomics, Institutions
and Welfare
Midterm, Year 1, period 2
by Manal Talhi
, Midterm Microeconomics, Institutions and Welfare
Manal Talhi
Table of Contents
Table of Contents...................................................................................................................1
Week 1: Chapter 2, 3.1- 3.5....................................................................................................3
Unit 2: Technology, population and growth.........................................................................3
2.3 Basic concepts: Prices, costs, and innovation rents..................................................3
2.4 Modelling a dynamic economy: Technology and costs..............................................3
Unit 3: Scarcity, work and choice........................................................................................5
3.0 Introduction...................................................................................................................5
3.1 labour .......................................................................................................................... 5
3.2 Preferences...................................................................................................................6
3.3 Opportunity costs..........................................................................................................7
3.4 The feasible set............................................................................................................. 8
3.5 Decision making and scarcity........................................................................................8
Week 2: Remainder of Unit 3..............................................................................................9
3.6 Hours of work and economic growth.........................................................................9
3.7 Income and substitution effects on hours of work and free time..................................10
3.8 Is this a good model?..................................................................................................13
3.9 Explaining our working hours: Changes over time......................................................13
3.10 Explaining our working hours: Differences between countries..................................14
3.11 Conclusion a.k.a. Summary of summary...................................................................14
Week 3: Unit 4 and 5 (exc;. 5.12-5.13).................................................................................16
Unit 4: Social Interactions.................................................................................................16
Introduction....................................................................................................................... 16
4.1 Social Interactions: Game theory...............................................................................16
4.2 Equilibrium in the invisible hand game........................................................................18
4.3 The prisoners’ dilemma...............................................................................................19
4.4 Social preferences: Altruism.......................................................................................20
4.5 Altruistic preferences in the prisoners’ dilemma Free ride: Benefiting from the
contributions of others to some cooperative project without contributing oneself..............20
4.6 Public goods, free riding, and repeated interaction.....................................................21
4.7 Public good contributions and peer punishment..........................................................22
4.8 Behavioural experiments in the lab and in the field.....................................................22
4.9 Cooperation, negotiation, conflicts of interest, and social norms.................................23
4.10 Dividing a pie (or leaving it on the table)...................................................................23
EINSTEIN:........................................................................................................................ 24
[1]
, Midterm Microeconomics, Institutions and Welfare
Manal Talhi
4.11 Fair farmers, self-interested students?......................................................................24
4.12 Competition in the ultimatum game...........................................................................24
4.13 Social interactions: Conflicts in the choice among Nash equilibria............................25
Unit 5: Property and power: mutual gains and conflict......................................................26
5.1 Institutions and power.................................................................................................26
5.2 Evaluating institutions and outcomes: The Pareto criterion.........................................26
5.3 Evaluating institutions and outcomes: Fairness..........................................................27
5.4 A model of choice and conflict.....................................................................................29
5.5 Technically feasible allocations...................................................................................29
5.6 Allocations imposed by force.......................................................................................30
5.7 Economically feasible allocations and the surplus.......................................................31
5.8 The Pareto efficiency curve and the distribution of the surplus...................................33
5.9 Politics: Sharing the surplus........................................................................................34
5.10 Bargaining to a Pareto-efficient sharing of the surplus..............................................34
5.11 Angela and Bruno: The moral of the story.................................................................35
Week 4: Unit 6...................................................................................................................... 36
Unit 6: The firm: owners, managers, and employers.........................................................36
Introduction....................................................................................................................... 36
6.1 Firms, markets, and the division of labour...................................................................36
6.2 Other people’s money: The separation of ownership and control................................37
6.3 Other people’s labour..................................................................................................37
6.4 Employment rents.......................................................................................................38
6.5 Determinants of the employment rent.........................................................................39
6.6 Work and wages: The labour discipline model............................................................40
6.7 Wages, effort and profits in the labour discipline model..............................................41
6.8 Putting the model to work: Owners, employees and the economy..............................43
6.9 Another kind of business organization........................................................................44
6.10 Principals and agents: Interactions under incomplete contracts................................44
[2]
, Midterm Microeconomics, Institutions and Welfare
Manal Talhi
Week 1: Chapter 2, 3.1- 3.5
This summary only consists the relevant paragraphs of chapter 2 with consideration of what
the teachers said was important.
Unit 2: Technology, population and growth
2.3 Basic concepts: Prices, costs, and innovation rents
First some key ideas of economic modelling:
Ceteris paribus: In an economic model it means an analysis ‘holds other things
constant’.
o It can clarify the picture without distorting the key facts.
Incentives: Economic reward or punishment, which influences the benefits and costs
of alternative courses of action.
Relative price: The price of one good or service compared to another (usually
expressed as a ratio). Economics focuses attention on alternatives and choices.
Economic rent: A payment or other benefit received above and beyond what the
individual would have received in his or her next best alternative (or reservation
option).
o An economic rent is something you would like to get, not something you have
to pay.
o The alternative action with the next greatest net benefit (action B), is often
called the ‘next best alternative’, your ‘reservation position’,
Reservation option: A person’s next best alternative among all
options in a particular transaction. Also known as: fallback option.
2.4 Modelling a dynamic economy: Technology and costs
Dominated: We describe an outcome in this way if more of something that is positively
valued can be attained without less of anything else that is positively valued. In short: an
outcome is dominated if there is a win-win alternative.
The firm can calculate the cost of any combination of inputs that it might use by multiplying
the number of workers by the wage and the tonnes of coal by the price of coal. We use the
symbol w for the wage, L for the number of workers, p for the price of coal and R for the
tonnes of coal:
Cost = (wage×workers)+(price of a tonne of coal×number of tonnes)
= (𝑤×𝐿)+(𝑝×𝑅)
[3]
Microeconomics, Institutions
and Welfare
Midterm, Year 1, period 2
by Manal Talhi
, Midterm Microeconomics, Institutions and Welfare
Manal Talhi
Table of Contents
Table of Contents...................................................................................................................1
Week 1: Chapter 2, 3.1- 3.5....................................................................................................3
Unit 2: Technology, population and growth.........................................................................3
2.3 Basic concepts: Prices, costs, and innovation rents..................................................3
2.4 Modelling a dynamic economy: Technology and costs..............................................3
Unit 3: Scarcity, work and choice........................................................................................5
3.0 Introduction...................................................................................................................5
3.1 labour .......................................................................................................................... 5
3.2 Preferences...................................................................................................................6
3.3 Opportunity costs..........................................................................................................7
3.4 The feasible set............................................................................................................. 8
3.5 Decision making and scarcity........................................................................................8
Week 2: Remainder of Unit 3..............................................................................................9
3.6 Hours of work and economic growth.........................................................................9
3.7 Income and substitution effects on hours of work and free time..................................10
3.8 Is this a good model?..................................................................................................13
3.9 Explaining our working hours: Changes over time......................................................13
3.10 Explaining our working hours: Differences between countries..................................14
3.11 Conclusion a.k.a. Summary of summary...................................................................14
Week 3: Unit 4 and 5 (exc;. 5.12-5.13).................................................................................16
Unit 4: Social Interactions.................................................................................................16
Introduction....................................................................................................................... 16
4.1 Social Interactions: Game theory...............................................................................16
4.2 Equilibrium in the invisible hand game........................................................................18
4.3 The prisoners’ dilemma...............................................................................................19
4.4 Social preferences: Altruism.......................................................................................20
4.5 Altruistic preferences in the prisoners’ dilemma Free ride: Benefiting from the
contributions of others to some cooperative project without contributing oneself..............20
4.6 Public goods, free riding, and repeated interaction.....................................................21
4.7 Public good contributions and peer punishment..........................................................22
4.8 Behavioural experiments in the lab and in the field.....................................................22
4.9 Cooperation, negotiation, conflicts of interest, and social norms.................................23
4.10 Dividing a pie (or leaving it on the table)...................................................................23
EINSTEIN:........................................................................................................................ 24
[1]
, Midterm Microeconomics, Institutions and Welfare
Manal Talhi
4.11 Fair farmers, self-interested students?......................................................................24
4.12 Competition in the ultimatum game...........................................................................24
4.13 Social interactions: Conflicts in the choice among Nash equilibria............................25
Unit 5: Property and power: mutual gains and conflict......................................................26
5.1 Institutions and power.................................................................................................26
5.2 Evaluating institutions and outcomes: The Pareto criterion.........................................26
5.3 Evaluating institutions and outcomes: Fairness..........................................................27
5.4 A model of choice and conflict.....................................................................................29
5.5 Technically feasible allocations...................................................................................29
5.6 Allocations imposed by force.......................................................................................30
5.7 Economically feasible allocations and the surplus.......................................................31
5.8 The Pareto efficiency curve and the distribution of the surplus...................................33
5.9 Politics: Sharing the surplus........................................................................................34
5.10 Bargaining to a Pareto-efficient sharing of the surplus..............................................34
5.11 Angela and Bruno: The moral of the story.................................................................35
Week 4: Unit 6...................................................................................................................... 36
Unit 6: The firm: owners, managers, and employers.........................................................36
Introduction....................................................................................................................... 36
6.1 Firms, markets, and the division of labour...................................................................36
6.2 Other people’s money: The separation of ownership and control................................37
6.3 Other people’s labour..................................................................................................37
6.4 Employment rents.......................................................................................................38
6.5 Determinants of the employment rent.........................................................................39
6.6 Work and wages: The labour discipline model............................................................40
6.7 Wages, effort and profits in the labour discipline model..............................................41
6.8 Putting the model to work: Owners, employees and the economy..............................43
6.9 Another kind of business organization........................................................................44
6.10 Principals and agents: Interactions under incomplete contracts................................44
[2]
, Midterm Microeconomics, Institutions and Welfare
Manal Talhi
Week 1: Chapter 2, 3.1- 3.5
This summary only consists the relevant paragraphs of chapter 2 with consideration of what
the teachers said was important.
Unit 2: Technology, population and growth
2.3 Basic concepts: Prices, costs, and innovation rents
First some key ideas of economic modelling:
Ceteris paribus: In an economic model it means an analysis ‘holds other things
constant’.
o It can clarify the picture without distorting the key facts.
Incentives: Economic reward or punishment, which influences the benefits and costs
of alternative courses of action.
Relative price: The price of one good or service compared to another (usually
expressed as a ratio). Economics focuses attention on alternatives and choices.
Economic rent: A payment or other benefit received above and beyond what the
individual would have received in his or her next best alternative (or reservation
option).
o An economic rent is something you would like to get, not something you have
to pay.
o The alternative action with the next greatest net benefit (action B), is often
called the ‘next best alternative’, your ‘reservation position’,
Reservation option: A person’s next best alternative among all
options in a particular transaction. Also known as: fallback option.
2.4 Modelling a dynamic economy: Technology and costs
Dominated: We describe an outcome in this way if more of something that is positively
valued can be attained without less of anything else that is positively valued. In short: an
outcome is dominated if there is a win-win alternative.
The firm can calculate the cost of any combination of inputs that it might use by multiplying
the number of workers by the wage and the tonnes of coal by the price of coal. We use the
symbol w for the wage, L for the number of workers, p for the price of coal and R for the
tonnes of coal:
Cost = (wage×workers)+(price of a tonne of coal×number of tonnes)
= (𝑤×𝐿)+(𝑝×𝑅)
[3]
