Notes of Principles of Microeconomics MIT 14-01c

Lesson1.md

Title: Introduction to Microeconomics

• Microeconomics is all about scarcity. It is about how individuals and companies make decisions, given that we live in a world of scarcity.
• Two actors in the economy: Consumers and Producers
• Consumers have limited(are constrained by) wealth. So, they maximize utility subject to a budget constraint.
• Producers maximize profits(pi) subject to consumer demand and input costs.
• 3 fundamental questions of microeconomics:
  • What goods and services should be produced?
  • How to produce them?
  • Who gets them?
• All the three questions can be solved through one key state variable: Prices
• Theoretical vs Imperial Economics
  • Theoretical Economics: It is the process of building models that has some testable predictions.
  • Empirical Economics: It is the process of testing those models.
• Positive vs Normative Economics
  • Positive Economics: The way things are.
  • Normative Economics: The way things should be.
• Ebay is an example of Perfectly Competitive Market
  • Producers in this group offer the good to a wide range of consumers.
  • Consumer who bids the highest gets the good.
• Supply and Demand
  • More demand, higher prices. Less supply, higher prices.
  • Example: Water-Diamond paradox.
• Quiz:
  • What is a model?
    • Any description of the relationship between two or more economic variables.

Lesson2.md

Title: Applying supply and demand

• Demand: Willingness of the consumers to pay.

• Supply: Amount of good being produced.

• Equilibrium Point in the Supply-Demand curve: It is where both the consumers and the producers are happy.

• The price in one market affects the price in another market (when they are direct substitutes). Thus, shifting the equilibrium point.

• To and fro shifts in demand curves due to changes in each other is called the feedback effect, and is determined by the general equilibrium (out of scope of the course).

• Demand shift and supply shift: both changes can lead to the same outcome in prices

• For example, when the demand increases, the price increases as a result. As a result of increased price, the demand falls to somewhere in the between the initial and the increased value, where both the consumers and producers are happy with the price. (thus reaching the equilibrium point.)

• When the supply decreases: The consumers charge more prices to keep up with the unchanged demand, which decreases the demand to a small extent. So, this is solved by a price somewhere in the middle just like above, thus reaching the equilibrium point again.

• In the labour market: the suppliers are the people, and the consumers are the firms.

• The labour market supply curve is higher sloping, which means the higher the wages, the more the people would be willing to work, and a downward sloping demand curve; because the higher the wage, the fewer the firm wants to employ.

• So, when the minimum wage raises, the supply also increases. However, the company’s demand decreases as they need to pay more. So, there is a surplus of supply, which basically is unemployment. Thus, ending in disequilibrium.

• So, markets are very robust. So, if they can undo the Govt.’s intervention, they will.

• Costs and benefits of Govt. intervention:

  • Efficiency Loss (Cost): In economics, whenever there is a trade that can be made which makes both parties better off, and it is not made; than that is inefficiency. Example: The case in unemployment example.
  • Allocation Inefficiency (Cost): Cost of determining allocation for goods that are highly demanded.