Microeconomics - 2G03Chapter 1A Working Methodolgy

common property

a situation where the individual or groupof resource owners do not have the rightto exclude others from using the resource

water

oil underneath

trees

fish in water

This creates a problem from over explotingingof the resource.

rule of capture

the legal doctrine whereby ownership is establishedby the first person who captures or otherwise occupiesa resource

unitization

the practice of manaing a pool of oilthat may span accross many privatetracts of land as a single unit

perfectly competive markets

markets characterized by

many firms

many consumers

free exit and entry of firms

and an equilibrium where the quantitydemanded equals the quantity supplied

market demand

the horizantal summation of individual demands

it gives the total quantity demanded for a given price

market supply

the horizantal summation of the individualfirm supply curves.

it gives the total quantity supplied for a givenprice

competitive equilibrium price

an allocation where the quantitydemanded equals teh quantity supplied

goods

short of goods and services

resources

inputs used in the production of goods

economics

the study of human behaviour using theprinciples of economics

commonly held to be the study of allocatingscarce goods among competing ends

economy

a metaphor for the place in which all exchangeand the production takes place

resource endowment

the list of inputs an individual, firm, or economyhas to begin with

technology

the tools used to convert inputs into outputs

preferences

individual tastes that influence the choices of goods chosen

preferences are represented by a utility function

preference ordering

a ranking of all possible bundles

theory of self-interest

The fundamental assumption in economics

the idea that all behaviour is motivated to improvethe welfare of the decision maker

institutions

a broad category of rules, laws, customs, andorginizations that either substitute or complementexchange and production

social state

the outcome in a given economy

method of equilibirum

The Specific method used by an economist to predictthe social state that will arise from the choices of the individual economic participants

equilibrium

a set of choices for the individual and acorresponding special state such that noindividual can make himself better off bymaking some other choices

Positive Economics

the objective study of economic issues.

attempts to predict or explain social states

Normative economics

the subjective study of economic issues

normative economics attempts to judgebetween social states

Pareto criterion

if one person is better off in social state A comparedto social state B, and no one is worse off, then by thePareto criterion, we would say state A is better

pareto optimalty efficiency

an allocation where no rearrangementcan make someone better off without makingsomeone else worse off

cost-benefit criterion

an allocation that incorporates tradeoffs betweenmaking some individual worse off and making otherindividuals better off

gross social benefit

the total of the measure of all individuals'benefit in a cost-benefit analysis

gross social cost

the total of measure of all individuals' costsin a cost-benefit analysis

net social benefit

the result of subtracting the gross social costfrom the gross social benefit in a cost-benefitanalysis

pure-market economy

a theoretical model in which the onlyrelulatory insitutions of economic activityare institutions of private property

Common Property Problems

Competive Equilibrium Price and Quantity

Price Supports

A Resource Endowment

A Technology

Preferences of Individuals

Self-Interest and Making Choices

Institutions

The Pareto Criterion

Cost - Benefit Analysis

Circular Flow of Economic Activity

1.1

Attainable water-use profiles

under the non metered scheme, the house holdercan atain any water-use prifile on line DCU, andhe or she choose the unbalanced water profile.

hense the equilibrium for the representive housholderunder the non-metered schem is the unbalanced water-use profile at U.

The balanced water-use profile at B (which uses the sameamount of water) is unattainable under the non metered waterscheme

1.2

Demand and Supply

the market demand curve D specifies the quantityof butter demanded at any given price, and the marketsupply curve SS specifies the quantity of butter suppliedat any given price

1.3

Competitive equilibrium

In a competitive equilibrium, price is such thatquantity demanded equals quantity supplied

1.4

Price Support Programs

1.5

The circular-flow diagram of an economy

individuals

supply resources to firms

demand goods from firms

firms

Demand resources from individuals

supply goods to individuals

they meet in goods markets and resource markets

Four building blocks of an economy

resource endownment

technology

preferences of individuals

its institutions

economies are studied in segments through models by use of METHOD OF EQUILIBRIUM

equilibrium is a social state whereno one can make themselves better

only instituions are changeable in an economy not the the other three blocks

assumption of chaning institutions is based on

pure-maket (free enterprise) economy

preferences play a crucial role in economy theory

play a role in positive economics

shows how it will be

based on the theory of self interest choice making

play a role in normative economics

introduces concepts of

worse then

better then

in well being

two normative criteria to compare social states

Pareto criterion

pereto preferred if you can make one person better off without making anyone worse off

also known as superior

pereto optimal if you can make no one better off

also known as efficiency

cost-benefit criterion

ask wether net social cost is positive or negative