ECON2101 Intermediate Microeconomics
Introduction
Aleksandra Balyanova
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What is microeconomics?
Microeconomics is the study of interactions between consumers and firms in the
context of the market.
What is a market, anyway? A market is an allocative mechanism for scarce resources:
in other words, a system or set of rules that determines who gets what
• You face decisions about how to allocate scarce resources every day, including:
what to buy, what to study in university (and how much to study), which job to
take, etc.
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What is microeconomics?
Microeconomics is the study of interactions between consumers and firms in the
context of the market.
What is a market, anyway? A market is an allocative mechanism for scarce resources:
in other words, a system or set of rules that determines who gets what
• You face decisions about how to allocate scarce resources every day, including:
what to buy, what to study in university (and how much to study), which job to
take, etc.
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Allocative mechanisms
• Queuing (as in
Venezuela, or for
organ transplants)
or “first come, first
served”
• Lottery or draft –
to serve in wars
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Allocative mechanisms
• Preferential
treatment – to
friends, family, etc.
• Contests - to assign
positions in
university programs
or internships, or to
award scholarships
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Allocative mechanisms
• Coercion or central
planning – as in the
Soviet Union.
• Markets – where
buyers and sellers
exchange goods
willingly
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Competitive markets
Competitive markets
Markets and prices
The price in a competitive market arises as the result of the aggregation of
information about the needs, desires, and capabilities of many diverse agents
Markets respect voluntary participation =⇒ no unrealised gains from trade. Markets
achieve a Pareto efficient allocation
Example 1:
• Seller with cost 0 < c < 1
• Buyer with valuation 0 < v < 1
• If v < c, there is no voluntary trade
• If v > c, at least one party will be better off (and none worse off) if they agree
to trade for any price p such that c ≤ p ≤ v .
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Market failures
Markets do not exist in a vacuum: stringent conditions are required to make markets
behave competitively
Types of market failures
• Barriers to entry =⇒ monopoly and oligopoly
• Informational asymmetries =⇒ nonlinear prices, incentive contracts
• Transaction costs
• Externalities and public goods
We begin our analysis with competitive markets before relaxing these strigent
assumptions and studying some market failures
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Dual purpose of this course
GOAL 1: Learn about the workings of markets and related institutions
• Consumer constraints (week 1) and preferences (week 2) =⇒ demand (week 3)
• A related detour: uncertainty, preferences and the demand for insurance
(week 4)
• Firm technology (week 4) and input prices =⇒ supply (week 5)
• Monopoly and oligopoly (week 7), non linear pricing schemes (week 8)
• But first, some tools: static and dynamic game theory (week 6)
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Dual purpose of this course
GOAL 2: Learn how to think like modern-day economists
• Constrained optimisation: the outcomes of an agent maximising an objective
function subject to constraints
• Equilibrium: the outcome of many rational agents interacting in a given
environment
• Comparative statics: how the above outcomes change with changes in
exogenous variables
• Throughout this course, we will be building models: mathematical
representations of reality that distill a situation down to its most fundamental
ingredients
• Models are built on assumptions, which then interact within the model to
drive results
• If built well, models allow us to analyse what is causing what
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