Microeconomics

Lecture 1
Tetsuro Mizoguchi
2023. 10.10
The Theory of Economics does not
furnish a body of settled conclusions
immediately applicable to policy. It is
a method rather than a doctrine, an
apparatus of the mind, a technique of
thinking which helps its possessor to
draw correct conclusions

--- John Maynard Keynes

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 Lecture 1 Outline
• Course style
• About Course Evaluation
• Nortification
• Course Objectives
• Lecture one: Introduction
- What is microeconomics?
- Using Economic Models: Apartment market
- Mathematical appendix

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 About Class Style
• 2nd terms (10:40 – 12:20)
→ Lecture Only

• 3rd terms (13:10 – 14: 50)

→ Mostly Exercises based on the lecture,
sometimes lectures. Students must solve the
question sets which I assigned.

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 Course Evaluation
Default version
• Midterm exam: 40%
• Exercises in the class: 20% (it is fixed)
• Final exam: 40%
→ This is default option.

• I will adjust the evaluation weight when you

are not good at mid-term exam. Last year, it
will be 80% final if you screwed up.
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 Course Evaluation
• So my evaluation will be based on the
following formula.

0.4𝑀 + 0.4𝐹 + 0.2𝐸

𝑚𝑎𝑥 ቊ
0.2𝐸 + 0.8𝐹

where M: Midterm Score, F: Final Score, E:

Exercices.

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 Course Objectives
Microeconomics (Fall Term)
• Consumer Behavior
• Producer Behavior
• Uncertainty
• General Equilibrium

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 Microeconomics
Microeconomics: the branch of economics
that studies specific choices made by
consumers and producers.
• In contrast to Macroeconomics, which looks at
the markets through a wider lens in an attempt
to describe larger, complex systems in which
consumers and firms operate
 What we learn? 1.2
Consumers’ and Producers’ Decisions
• After investigating consumer behavior in detail,
we shift focus to the supply side of the market by
examining producers’ decisions.
• Turns out that certain firms’ decisions are similar
in many ways to the decisions made by
consumers.
 What we learn?
Questions regarding producers we set out to
answer include:
1. How do producers decide which goods to produce?
2. How do firms decide which combination of inputs to
use, such as machinery (capital) and workers (labor),
in production?
3. How do different input mixes influence the cost of
production? Output levels?
‒ Special emphasis on cost curves
4. Finally, how is the total market supply curve
obtained from focusing on cost movements as a
firm’s output changes?
 What we learn? 1.2
Market Supply
After we examine individual supplier behavior, we then examine the main configurations
through which firms supply output to markets.

• Begin by examining perfect competition, where all firms take the market price as given
and decide how much they want to produce.
• Next, we examine the opposite end of the spectrum by examining monopolies, when
only one firm supplies a good to the market.
‒ Key difference is that the firm now has the ability to set the price at which it is
going to sell its products.
‒ We will examine how monopolists can (and do) use this pricing power, and
what impact it has on production compared to perfect competition.
• Oligopolies, where multiple firms interact strategically in the same market, is the final
market form examined.
‒ Firms have some ability to choose their prices, but their fortunes rely on the
cooperation of the other firms in the market.
‒ Much more common than perfectly competitive price takers or monopolies.
 What we learn? 1.2
Beyond the Basics
After closely looking at the basics of markets’ supply and demand side, we
will conclude with several, more specific, subjects that are present in many
markets:
First, the role risk, uncertainty, and time play in economic decision making
is examined.
• Especially applicable in investment decisions
Next, general equilibrium, or how markets are interconnected, is
explored.
• Study how actions or disruptions in one market might indirectly
influence several other markets.
• Help tie markets together, and allow for analyzing conditions that must
hold for an economy to operate efficiently.
 Today’s Outline
• Introducing the various fundamental
assumptions of microeconomics

• Some important mathematical concepts in

microeconomics

• Examples: Demand and Supply in the

apartment market
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 Course Textbook and Reference
• Cowell, Microeconomics, 2nd edition (Oxford
Univ Press) Textbook
• Varian, Intermediate Microeconomics ninth
edition (WW Norton) subTextbook
• Varian, Microeconomics Analysis 3rd edition
(WW Norton)
• Goolsbee, Levitt, Syverson, Microeconomics
3rd edition, Macmillan.
• Free website： CORE https://www.core-
econ.org/
 Course Textbook and Reference
• Since Cowell’s textbook is bit mathematical
description, I will switch textbook to Varian if
students have difficulties.

• Lecture will be based on the lecture slide.

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 Interesting Results about Economics
The Benefits of Studying Economics
Economics courses provide a set of tools that help better equip individuals to
make all sorts of decisions, not just economic ones.

Black, Sanders, and Taylor analyzed the earnings of college graduates based on
choice of major:
• Used data from the National Survey of College Graduates and the U.S. Census.
• Found: Economics majors earn almost 20% more than graduates with degrees in any
other social science.
‒ Accounting, Finance, and Marketing similar returns

Later controlled for “selection bias” into majors

• Found: Economics majors who went to law school and studied economics in
undergrad earned more than students with other majors—35% more.
‒ Results similar for those who got their MBA
 Economic Modeling
• What causes what in economic systems?
• At what level of detail shall we model an
economic phenomenon?
• Which variables are determined outside the
model (exogenous) and which are to be
determined by the model (endogenous)?
• What Is a market?

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Markets and Models
What is a market?

A market is characterized by a specific:

1. Product or service being bought and sold
2. Location
3. Point in time

Markets facilitate exchange, including economic

resources and final goods and services.
Modeling the Apartment Market
• How are apartment rents determined?
• Suppose
– apartments are close or distant, but otherwise
identical
– distant apartments rents are exogenous and
known
– many potential renters and landlords

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 Modeling the Apartment Market
• Who will rent close apartments?
• At what price?
• Will the allocation of apartments be desirable
in any sense?

• How can we construct an insightful model to

answer these questions?

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 Economic Modeling Assumptions
• Two basic postulates:
–Rational Choice: Each person tries to
choose the best alternative available to
him or her.
–Equilibrium: Market price adjusts until
quantity demanded equals quantity
supplied.

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 Modeling Apartment Demand
• Demand: Suppose the most any one person
is willing to pay to rent a close apartment is
$500/month. Then p = $500  QD = 1.

• Suppose the price has to drop to $490

before a 2nd person would rent.
Then p = $490  QD = 2.

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 Modeling Apartment Demand
• The lower is the rental rate p, the larger is the
quantity of close apartments demanded
p   QD .
• The quantity demanded vs. price graph is the
market demand curve for close apartments.

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Market Demand Curve for Apartments
p

QD

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 Modeling Apartment Supply
• Supply: It takes time to build more close
apartments so in this short-run the quantity
available is fixed (at say 100).

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Market Supply Curve for Apartments
p

100 QS

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 Competitive Market Equilibrium
• “low” rental price  quantity demanded of
close apartments exceeds quantity available
 price will rise.
• “high” rental price  quantity demanded less
than quantity available  price will fall.

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 Competitive Market Equilibrium
• Quantity demanded = quantity available
 price will neither rise nor fall
• so the market is at a competitive equilibrium.

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Competitive Market Equilibrium
p

100 QD,QS

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Competitive Market Equilibrium
p

pe

100 QD,QS

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Competitive Market Equilibrium
p

People willing to pay pe for

close apartments get close
apartments.

pe

100 QD,QS

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Competitive Market Equilibrium
p

People willing to pay pe for

close apartments get close
apartments.
People not willing to pay
pe for close apartments
get distant apartments.
pe

100 QD,QS

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 Competitive Market Equilibrium
• Q: Who rents the close apartments?
• A: Those most willing to pay.
• Q: Who rents the distant apartments?
• A: Those least willing to pay.
• So the competitive market allocation is by
“willingness-to-pay”.

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 Comparative Statics
• What is exogenous in the model?
– price of distant apartments
– quantity of close apartments
– incomes of potential renters.
• What happens if these exogenous variables
change?

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 Comparative Statics
• Suppose the price of distant apartment rises.
• Demand for close apartments increases
(rightward shift), causing
• a higher price for close apartments.

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 Market Equilibrium
p

pe

100 QD,QS

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 Market Equilibrium
p
Higher demand

pe

100 QD,QS

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 Market Equilibrium
p
Higher demand causes higher
market price; same quantity
traded.

pe

100 QD,QS

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 Comparative Statics
• Suppose there were more close apartments.
• Supply is greater, so
• the price for close apartments falls.

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 Market Equilibrium
p

pe

100 QD,QS

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 Market Equilibrium
p
Higher supply

pe

100 QD,QS

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 Market Equilibrium
p
Higher supply causes a
lower market price and a
larger quantity traded.

pe

100 QD,QS

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 Comparative Statics
• Suppose potential renters’ incomes rise,
increasing their willingness-to-pay for close
apartments.
• Demand rises (upward shift), causing
• higher price for close apartments.

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 Market Equilibrium
p

pe

100 QD,QS

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 Market Equilibrium
p
Higher incomes cause
higher willingness-to-pay

pe

100 QD,QS

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 Market Equilibrium
p
Higher incomes cause
higher willingness-to-pay,
higher market price, and
the same quantity traded.

pe

100 QD,QS

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 Taxation Policy Analysis
• Local government taxes apartment owners.
• What happens to
– price
– quantity of close apartments rented?
• Is any of the tax “passed” to renters?

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 Taxation Policy Analysis
• Market supply is unaffected.
• Market demand is unaffected.
• So the competitive market equilibrium is
unaffected by the tax.
• Price and the quantity of close apartments
rented are not changed.
• Landlords pay all of the tax.

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 Imperfectly Competitive Markets
• Amongst many possibilities are:
– a monopolistic landlord
– a perfectly discriminatory monopolistic landlord
– a competitive market subject to rent control.

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 A Monopolistic Landlord
• When the landlord sets a rental price p he
rents D(p) apartments.
• Revenue = pD(p).
• Revenue is low if p  0
• Revenue is low if p is so high that D(p)  0.
• An intermediate value for p maximizes
revenue.

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 Monopolistic Market Equilibrium
p Low price, high quantity
demanded, low revenue.

Low
price
QD

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 Monopolistic Market Equilibrium
p High price, low quantity
demanded, low revenue.
High
price

QD

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 Monopolistic Market Equilibrium
p
Middle price, medium quantity
demanded, larger revenue.

Middle
price

QD

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 Monopolistic Market Equilibrium
p
Middle price, medium quantity
demanded, larger revenue.
Monopolist does not rent all the
close apartments.

Middle
price

100 QD,QS

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 Monopolistic Market Equilibrium
p
Middle price, medium quantity
demanded, larger revenue.
Monopolist does not rent all the
close apartments.

Middle Vacant close apartments.

price

100 QD,QS

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Perfectly Discriminatory Monopolistic
Landlord
• Imagine the monopolist knew everyone’s
willingness-to-pay.
• Charge $500 to the most willing-to-pay,
• charge $490 to the 2nd most willing-to-pay,
etc.

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 Discriminatory Monopolistic Market
Equilibrium
p
p1 =$500

1 100 QD,QS

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 Discriminatory Monopolistic Market
Equilibrium
p
p1 =$500
p2 =$490

12 100 QD,QS

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 Discriminatory Monopolistic Market
Equilibrium
p
p1 =$500
p2 =$490
p3 =$475

12 3 100 QD,QS

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 Discriminatory Monopolistic Market
Equilibrium
p
p1 =$500
p2 =$490
p3 =$475

12 3 100 QD,QS

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 Discriminatory Monopolistic Market
Equilibrium
p Discriminatory monopolist
p1 =$500 charges the competitive market
price to the last renter, and
p2 =$490 rents the competitive quantity
p3 =$475 of close apartments.

pe

12 3 100 QD,QS

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 Rent Control
• Local government imposes a maximum legal
price, pmax < pe, the competitive price.

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 Market Equilibrium
p

pe

100 QD,QS

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 Market Equilibrium
p

pe
pmax

100 QD,QS

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 Market Equilibrium
p

pe Excess demand
pmax

100 QD,QS

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 Market Equilibrium
p The 100 close apartments are
no longer allocated by
willingness-to-pay (lottery, lines,
large families first?).

pe Excess demand
pmax

100 QD,QS

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 Which Market Outcomes Are
Desirable?
• Which is better?
– Rent control
– Perfect competition
– Monopoly
– Discriminatory monopoly

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 Pareto Efficiency
• Vilfredo Pareto; 1848-1923.
• A Pareto outcome allows no “wasted welfare”;
• i.e. the only way one person’s welfare can be
improved is to lower another person’s welfare.

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 Pareto Efficiency
• Jill has an apartment; Jack does not.
• Jill values the apartment at $200; Jack would
pay $400 for it.
• Jill could sublet the apartment to Jack for
$300.
• Both gain, so it was Pareto inefficient for Jill
to have the apartment.

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 Pareto Efficiency
• A Pareto inefficient outcome means there
remain unrealized mutual gains-to-trade.
• Any market outcome that achieves all possible
gains-to-trade must be Pareto efficient.

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 Pareto Efficiency
• Competitive equilibrium:
– all close apartment renters value them at the
market price pe or more
– all others value close apartments at less than
pe
– so no mutually beneficial trades remain
– so the outcome is Pareto efficient.

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 Pareto Efficiency
• Discriminatory Monopoly:
– assignment of apartments is the same as with the
perfectly competitive market
– so the discriminatory monopoly outcome is also
Pareto efficient.

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 Pareto Efficiency
• Monopoly:
– not all apartments are occupied
– so a distant apartment renter could be assigned a
close apartment and have higher welfare without
lowering anybody else’s welfare.
– so the monopoly outcome is Pareto inefficient.

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 Pareto Efficiency
• Rent Control:
– some close apartments are assigned to renters
valuing them at below the competitive price pe
– some renters valuing a close apartment above pe
don’t get close apartments
– Pareto inefficient outcome.

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