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MicroeconomicsCorso E
John Hey
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What do we know?
• The reservation price of a buyer is...
• ...the maximum price he or she would pay.
• The reservation price of a seller is ...
• ...the minimum price he or she would accept.
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What do we know?
• The surplus of a buyer is ... • ... the area between the price paid and the
demand curve.• The surplus of a seller is ...• ... the area between the price received and the
supply curve.• An indifference curve is ... • ... a set of points about which the individual
is indifferent.
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An indifference curve and reservation prices
• Beginning at the point (0,9)
• Buyer• For the first unit 4• For the second 3• For the third 2
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Reservation prices and the demand curve
• [Beginning at the point (0,9)]
• Buyer• For the first unit 4• For the second 3• For the third 2
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An indifference curve and reservation prices
• Starting at the point (3,0)
• Seller• For the first unit
2• For the second 3• For the third 4
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Reservation prices and the supply curve
• [Starting at the point (3,3)]
• Seller• For the first unit
2• For the second 3• For the third 4
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Deduction and inference
• If we know the preferences of the individual (the indifference curves or the reservation prices) and the endowment of the individual...
• ...we can deduce the demand curve or the supply curve of the individual...
• If instead we observe the demand and supply of the individual...
• ...we can infer the preferences of the individual.
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Deduction and inference
The preferences of the individual (the indifference curves or the reservationprices) and the endowment
Whether the individual is a buyer or a seller
and either the demand or supply curve of the individual.
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A Quiz
• I do not like Japanese beer...
• ...hence I never buy Japanese beer.
• Hence my indifference curves (between money and Japanese beer) are ...?
• .....
• My reservation prices (as a buyer) for Japanese beer are ....?
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Chapter 4
• In Chapter 3 we have worked with a discrete good – that is, a good that can be traded in integer units.
• In Chapter 4 we work with a perfectly divisible good .... which can be traded in any quantities, not only integer units.
• We continue to work with a particular kind of preferences – quasi-linear ...
• ... which imply indifference curves parallel in a vertical direction.
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If you like mathematics...• m – 60/q = costant is the equation of an indifference curve – the
larger the constant, the higher the indifference curve.• pq + m = 3p + 30 is the equation of the budget line. Here 3 is the
endowment of the good and 30 that of money, p is the price of the good, q the quantity consumed and m the amount of money left to spend on other goods.
• If we maximise the constant given the budget constraint we obtain the gross demand for the good:
• q = √(60/p)• The individual begins with 3 units of the good; hence the net
demand is:• q = √(60/p) – 3• Note: this is positive if p < 60/9 = 6.66666...• is negative if p > 60/9 = 6.6666...• is zero if p = 60/9 = 6.6666....
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Chapter 4
• Goodbye!
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