MICROECONOMICS 1:
SUMMARY
@ECOsummaries
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1
,Chapter 1
Economics: Allocation of limited (scarce) resources to satisfy unlimited human wants
Objective function: what the agent cares about
Constraint: limits
Alternatives: what an agent could do
Consequences: what happens after you choose an alternative
Opportunity cost: Value of that resource in its best alternative use
Constrained optimization: optimizing an objective function in the presence of constraints.
Marginal analysis: The marginal impact of the last unit of the exogenous variable on the
endogenous variable
Positive economics: facts, no disapproval, will be / has been.
Normative economics: Subjective, value judgement, should be, what’s the ‘’best’’.
Equilibrium analysis: no agent has a desire to switch from the equilibrium.
Comparative statics: compares the equilibrium state of a system before a change in the
exogenous variables to the equilibrium state after the change.
(how many more hours would you study micro in case your grade becomes twice as
important)
Chapter 2
Competitive markets: sellers and buyers who take the market price as given.
The law of demand: the quantity of a good demanded decreases when the price goes up
(downward sloping!)
Violation: Giffen goods, luxury goods
Giffen good: low income, non-luxury product. Bread, rice and wheat. Very rare
The law of supply: the quantity of a good offered increases when the price goes up.
(upward sloping!)
Excess supply: if sellers cannot sell as much as they would like at the current price.
Excess demand: if buyers cannot buy as much as they would like at the current price
2
, Consumer surplus: difference between the max. amount a consumer is willing to pay and
the amount he must actually pay.
Producer surplus: difference between the min. amount for which a producer is willing to
product and the amount he actually receives.
Choke price: where the demand is 0
Price elasticity of demand: measures the sensitivity of the demanded quantity to price
changes. (always negative or zero!)
Or
Elastic: value < -1 (horizontal line!)
Unitary elastic: value = -1
Inelastic: -1 < value < 0 (vertical line!)
Arc elasticity: “step level” changes in Q and P
Point elasticity: infinitely small changes in Q and P
first part is just the derivative of the demand function
Linear demand curve elasticity
Q = a – bP
Q = 400 – 10P
3
SUMMARY
@ECOsummaries
→ 20% discount
1
,Chapter 1
Economics: Allocation of limited (scarce) resources to satisfy unlimited human wants
Objective function: what the agent cares about
Constraint: limits
Alternatives: what an agent could do
Consequences: what happens after you choose an alternative
Opportunity cost: Value of that resource in its best alternative use
Constrained optimization: optimizing an objective function in the presence of constraints.
Marginal analysis: The marginal impact of the last unit of the exogenous variable on the
endogenous variable
Positive economics: facts, no disapproval, will be / has been.
Normative economics: Subjective, value judgement, should be, what’s the ‘’best’’.
Equilibrium analysis: no agent has a desire to switch from the equilibrium.
Comparative statics: compares the equilibrium state of a system before a change in the
exogenous variables to the equilibrium state after the change.
(how many more hours would you study micro in case your grade becomes twice as
important)
Chapter 2
Competitive markets: sellers and buyers who take the market price as given.
The law of demand: the quantity of a good demanded decreases when the price goes up
(downward sloping!)
Violation: Giffen goods, luxury goods
Giffen good: low income, non-luxury product. Bread, rice and wheat. Very rare
The law of supply: the quantity of a good offered increases when the price goes up.
(upward sloping!)
Excess supply: if sellers cannot sell as much as they would like at the current price.
Excess demand: if buyers cannot buy as much as they would like at the current price
2
, Consumer surplus: difference between the max. amount a consumer is willing to pay and
the amount he must actually pay.
Producer surplus: difference between the min. amount for which a producer is willing to
product and the amount he actually receives.
Choke price: where the demand is 0
Price elasticity of demand: measures the sensitivity of the demanded quantity to price
changes. (always negative or zero!)
Or
Elastic: value < -1 (horizontal line!)
Unitary elastic: value = -1
Inelastic: -1 < value < 0 (vertical line!)
Arc elasticity: “step level” changes in Q and P
Point elasticity: infinitely small changes in Q and P
first part is just the derivative of the demand function
Linear demand curve elasticity
Q = a – bP
Q = 400 – 10P
3
