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Summary: book "Intermediate
Microeconomics ", Hal R.
Varian, complete
Microeconomics? (Wageningen University & Research)
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, lOMoARcPSD|2716712
Summary Intermediate
Microeconomics Hal R. Varian, ninth
edition
Chapter 1
Optimization principle: People try to choose the best patterns of consumption that they can afford
The equilibrium principle: Prices adjust until the amount that people demand of something is equal
to the amount that is supplied
Competetive market: Demand curve & Supply curve Market equilibrium P*
Monopoly Normal monopolist: Picks prices with biggest revenue box (fig 1.7 p13) (Discriminating
monopolist: different prices)
Excess demand (Pmax )e.g. : rent control.
Pareto improvement: A way in which someone gets better off without any other party worse.
If an allocation calls for a Pareto improvement: Pareto inefficient. If the allocation cannot be
improved: Pareto efficient.
Chapter 2
Budget constraint Consumption bundle (x1 , x2) = The set of goods a consumer can choose to
consume from where p1, p2 are the prices. M = the money the consumer has to spend.
The budget constraint is: 𝑃1𝑥1 + 𝑃2𝑥2 ≤ m.
X2 = can be used as composite good (everything else the consumer buys)
Budget set = All bundles ≤ 𝑚. (area left of the line)
𝑝1
Budget line slope = −
𝑝2
Budged line = Set of bundles that cost exactly m (the line):
𝑃1𝑥1 + 𝑃2𝑥2 = m
The budged
𝑚 𝑝1line can be rewritten as:
𝑥 = − if x = 0 everything of m is used for x .
𝑥
2 1 1 2
𝑝2 𝑝2
Two formulas given:
Budget line before change: 𝑃1𝑥1 + 𝑃2𝑥2 = m
Change of consumption: 𝑝1(𝑥1 + ∆𝑥1) + 𝑃2(𝑥2 + ∆𝑥2) = 𝑚 gives:
𝑝 ∆𝑥 + 𝑝 ∆𝑥2 𝑝1
∆𝑥 =0→ =−
1 1 2 2
∆𝑥1 𝑝2
Slope measures opportunity cost. (of consuming good 1)
Income increase Budget Line shifts outwards parallel
Price increase Budget line becomes steeper
Numaire price Relative price to which we are measuring the other price and income: e.g:
𝑃𝑥 p1
+𝑃 𝑥 =m→ + = 𝑚 → 𝐻e𝑟e i𝑠 e𝑞𝑢𝑎𝑙 𝑡o 1
𝑥 𝑝
𝑥
1 1 2 2 1 2 2
𝑝1 + 2 𝑝 𝑝2 𝑝2
𝑥 = 1 𝐻e𝑟e 𝑚 i𝑠 e𝑞𝑢𝑎𝑙 𝑡o 1
𝑥
1 2
𝑚 𝑚
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Quantity tax: 𝑃1 + 𝑡 Value tax (%): (1 + 𝑟)𝑝1
Quantity Subsidy: 𝑃1 − 𝑠 Ad valorem Subsidy (%):(1 + 𝜎)𝑝1
Lumpsum tax/subsidy: Budget line shifts in- or outwards.
Rationing (see figure): Limit the amount of goods that can be consumed :
Tax, subsidy, rationing can be combined (e.g.: higher tax when a
certain point is reached.
Chapter 3
Consumption bundle Complete list of goods and services (𝑥1, 𝑥2) (𝑥1,
𝑥2) > (𝑦1, 𝑦2): 𝐵𝑢𝑛𝑑𝑙e 𝑥1, 𝑥2 i𝑠 𝑠𝑡𝑟i𝑐𝑡𝑙𝑦 𝑝𝑟efe𝑟𝑟e𝑑 o𝑣e𝑟 𝑦1, 𝑦2
(𝑥1, 𝑥2) ~ (𝑦1, 𝑦2): 𝐼𝑛𝑑iffe𝑟e𝑛𝑡. (𝑥1, 𝑥2) ≥ (𝑦1, 𝑦2): we𝑎𝑘𝑙𝑦 𝑝𝑟efe𝑟𝑟e𝑑
Assumptions about consumer preference:
Complete: Any two bundles can be compared: (𝑥1, 𝑥2) ≥ (𝑦1, 𝑦2)
Reflexive: Any bundle is at least as good as itself: (𝑥1, 𝑥2) ≥ (𝑥1, 𝑥2)
Transitive: If (𝑥1, 𝑥2) ≥ (𝑦1, 𝑦2) and (𝑦1, 𝑦2) ≥ (𝑧1, 𝑧2) then (𝑥1, 𝑥2) ≥ (𝑧1, 𝑧2)
Bad: commodity that the consumer doesn’t like:
Indifferent curves with a negative slope
Neutrals: if the consumer is indifferent:
Indifferent curves vertical lines
Satiation point: (x̄1, x̄2)
Well-behaved indifference curves features:
- Monotonicity: More is better; negative slope
- Averages preferred to extremes
- Convex
Weighted average:
𝐼f (𝑥1, 𝑥2)~(𝑦1. 𝑦2) 𝑡ℎe𝑛
(𝑡1 + (1 − 𝑡)𝑦1, 𝑡𝑥2 + (1 − 𝑡)𝑦2) ≥ (x1, 𝑥2)
∆𝑥2
Marginal Rate of Substitution (MRS): slope of indifference curve;
∆𝑥1
With perfect substitutes: -1 perfect complements: 0 or infinity
With ‘neutrals’: MRS is infinity
Chapter 4
Utility function: a way to assign a number to every possible consumption bundle such that more-
preferred bundles get assigned larger numbers than less-preferred bundles.
Cardinal utility: Ranking of utility’s and adding a significance to the difference between them
Monotonic transformation: Transforming numbers in one way to another preserving the order:
The rate of change in f(u) can be measured by looking at the change in f between two values of u,
divided by the change in u:
∆ (f(𝑢2) − f(𝑢1))
=
f 𝑢 −𝑢
2 1
∆
𝑢
Distributing prohibited | Downloaded by Yu li
Summary: book "Intermediate
Microeconomics ", Hal R.
Varian, complete
Microeconomics? (Wageningen University & Research)
Distributing prohibited | Downloaded by Yu li
, lOMoARcPSD|2716712
Summary Intermediate
Microeconomics Hal R. Varian, ninth
edition
Chapter 1
Optimization principle: People try to choose the best patterns of consumption that they can afford
The equilibrium principle: Prices adjust until the amount that people demand of something is equal
to the amount that is supplied
Competetive market: Demand curve & Supply curve Market equilibrium P*
Monopoly Normal monopolist: Picks prices with biggest revenue box (fig 1.7 p13) (Discriminating
monopolist: different prices)
Excess demand (Pmax )e.g. : rent control.
Pareto improvement: A way in which someone gets better off without any other party worse.
If an allocation calls for a Pareto improvement: Pareto inefficient. If the allocation cannot be
improved: Pareto efficient.
Chapter 2
Budget constraint Consumption bundle (x1 , x2) = The set of goods a consumer can choose to
consume from where p1, p2 are the prices. M = the money the consumer has to spend.
The budget constraint is: 𝑃1𝑥1 + 𝑃2𝑥2 ≤ m.
X2 = can be used as composite good (everything else the consumer buys)
Budget set = All bundles ≤ 𝑚. (area left of the line)
𝑝1
Budget line slope = −
𝑝2
Budged line = Set of bundles that cost exactly m (the line):
𝑃1𝑥1 + 𝑃2𝑥2 = m
The budged
𝑚 𝑝1line can be rewritten as:
𝑥 = − if x = 0 everything of m is used for x .
𝑥
2 1 1 2
𝑝2 𝑝2
Two formulas given:
Budget line before change: 𝑃1𝑥1 + 𝑃2𝑥2 = m
Change of consumption: 𝑝1(𝑥1 + ∆𝑥1) + 𝑃2(𝑥2 + ∆𝑥2) = 𝑚 gives:
𝑝 ∆𝑥 + 𝑝 ∆𝑥2 𝑝1
∆𝑥 =0→ =−
1 1 2 2
∆𝑥1 𝑝2
Slope measures opportunity cost. (of consuming good 1)
Income increase Budget Line shifts outwards parallel
Price increase Budget line becomes steeper
Numaire price Relative price to which we are measuring the other price and income: e.g:
𝑃𝑥 p1
+𝑃 𝑥 =m→ + = 𝑚 → 𝐻e𝑟e i𝑠 e𝑞𝑢𝑎𝑙 𝑡o 1
𝑥 𝑝
𝑥
1 1 2 2 1 2 2
𝑝1 + 2 𝑝 𝑝2 𝑝2
𝑥 = 1 𝐻e𝑟e 𝑚 i𝑠 e𝑞𝑢𝑎𝑙 𝑡o 1
𝑥
1 2
𝑚 𝑚
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Quantity tax: 𝑃1 + 𝑡 Value tax (%): (1 + 𝑟)𝑝1
Quantity Subsidy: 𝑃1 − 𝑠 Ad valorem Subsidy (%):(1 + 𝜎)𝑝1
Lumpsum tax/subsidy: Budget line shifts in- or outwards.
Rationing (see figure): Limit the amount of goods that can be consumed :
Tax, subsidy, rationing can be combined (e.g.: higher tax when a
certain point is reached.
Chapter 3
Consumption bundle Complete list of goods and services (𝑥1, 𝑥2) (𝑥1,
𝑥2) > (𝑦1, 𝑦2): 𝐵𝑢𝑛𝑑𝑙e 𝑥1, 𝑥2 i𝑠 𝑠𝑡𝑟i𝑐𝑡𝑙𝑦 𝑝𝑟efe𝑟𝑟e𝑑 o𝑣e𝑟 𝑦1, 𝑦2
(𝑥1, 𝑥2) ~ (𝑦1, 𝑦2): 𝐼𝑛𝑑iffe𝑟e𝑛𝑡. (𝑥1, 𝑥2) ≥ (𝑦1, 𝑦2): we𝑎𝑘𝑙𝑦 𝑝𝑟efe𝑟𝑟e𝑑
Assumptions about consumer preference:
Complete: Any two bundles can be compared: (𝑥1, 𝑥2) ≥ (𝑦1, 𝑦2)
Reflexive: Any bundle is at least as good as itself: (𝑥1, 𝑥2) ≥ (𝑥1, 𝑥2)
Transitive: If (𝑥1, 𝑥2) ≥ (𝑦1, 𝑦2) and (𝑦1, 𝑦2) ≥ (𝑧1, 𝑧2) then (𝑥1, 𝑥2) ≥ (𝑧1, 𝑧2)
Bad: commodity that the consumer doesn’t like:
Indifferent curves with a negative slope
Neutrals: if the consumer is indifferent:
Indifferent curves vertical lines
Satiation point: (x̄1, x̄2)
Well-behaved indifference curves features:
- Monotonicity: More is better; negative slope
- Averages preferred to extremes
- Convex
Weighted average:
𝐼f (𝑥1, 𝑥2)~(𝑦1. 𝑦2) 𝑡ℎe𝑛
(𝑡1 + (1 − 𝑡)𝑦1, 𝑡𝑥2 + (1 − 𝑡)𝑦2) ≥ (x1, 𝑥2)
∆𝑥2
Marginal Rate of Substitution (MRS): slope of indifference curve;
∆𝑥1
With perfect substitutes: -1 perfect complements: 0 or infinity
With ‘neutrals’: MRS is infinity
Chapter 4
Utility function: a way to assign a number to every possible consumption bundle such that more-
preferred bundles get assigned larger numbers than less-preferred bundles.
Cardinal utility: Ranking of utility’s and adding a significance to the difference between them
Monotonic transformation: Transforming numbers in one way to another preserving the order:
The rate of change in f(u) can be measured by looking at the change in f between two values of u,
divided by the change in u:
∆ (f(𝑢2) − f(𝑢1))
=
f 𝑢 −𝑢
2 1
∆
𝑢
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