MicroeconomicsCorso E

John Hey

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.

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.

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

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

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

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

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.

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.

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 ....?

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.

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....

Chapter 4

• Goodbye!