Ecological EconomicsWeek 3

Tiago DomingosAssistant Professor

Environment and Energy SectionDepartment of Mechanical Engineering

Doctoral Program and Advanced Degree in Sustainable Energy Systems

Doctoral Program in Mechanical Engineering

Assignments

• Preferences (exercise 4) – Convex definition: try to represent the indifference curves

and understand the relationship between the extreme and average bundles.

– Monotony definition: note that we assume that more is better, that is, that we are talking about goods, not bads. More precisely, if is a bundle of goods and is a bundle of goods with at least as much of both goods and more of one, then

The second good is neutral…

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Assignments

• Preferences (extra exercise)– Be aware that, Joana’s parents allow her to leave aside

everything she dislikes eating!!

• Choice (exercise 2)– You should explain the math...

– They are not complements. Y increases with px, there is a substitution. None of them is a bad….

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my

ox

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x

y

x

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mx

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Demand

Effect on demand of a good

Change in income Quantity demanded increases with income– normal goods. For some normal goods, the quantity demanded increases more than proportionally with income – luxury goods. For other normal goods, the quantity demanded increases less than proportionally with income – necessary goods. Quantity demanded decreases with an increase in income – inferior good (example: low quality food)

Change in own price The quantity demanded for good 1 increases when its price decreases – ordinary goodThe quantity demanded for good 1 decreases with its price – Giffen good

Change in the price of the other good

The demand for good 1 increases when the price of good 2 increases – good 1 is a substitute for good 2 The demand for good 1 decreases when the price of good 2 increases – good 1 is a complement to good 2

Demand

• Market demand – Individual demand

– Market demand

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Note: we sum the quantities, NOT the prices!

Demand

• Elasticity of demand– The price elasticity of demand, ɛ, is defined to be the percent

change in quantity divided by the percent change in price. Elasticity is unit-free.

– Elasticity as the responsiveness of the quantity demanded to price.

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demandinelastic

demandelastic

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Demand

• Income elasticity of demand– Is used to describe how the quantity demanded responds to a

change in income.

– Normal good: income elasticity of demand is positive

– Inferior good: income elasticity of demand is negative

– Luxury good: income elasticity of demand greater than 1

– Necessary good: income elasticity of demand smaler than 1

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quantityinchangeelasticityincome

%

%

Demand

• Revenue– Revenue (R): the price of a good times the quantity sold of

that good.

• Marginal Revenue

– When |ɛ|=1, the marginal revenue curve is constant at zero. Point of maximum revenue.

pqR

dq

dRMR

See Chapter 15 – Market demand: APPENDIX

Technology

• Production set– Combinations of inputs and output that are feasible patterns

of production

• Production function– Upper boundary of production set

Technology

• Returns to scale

– Constant:

– Increasing:

– Decreasing:

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Profit maximization

• Profits (π)– Revenues minus cost

• Maximization of profits

• In the long-run both factors are free to vary while in short-run some factors are fixed

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See Chapter 18 –Profit maximization: APPENDIX

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Cost minimization

• Cost minimization problem– Minimize cost to produce some given level of output

• Integrating cost minimization and profit maximization

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See Chapter 19 –Cost minimization: APPENDIX

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