Intermediate Microeconomics takes the lessons from earlier classes and takes them further by applying numbers to further explain the concepts.
Demand and supply Edit
Effects of taxes on demand and supply Edit
Theory of the consumer Edit
Choices are made because of preferences and budget constraints.
Two-goods: Good X, and good Y
Prices: P of X, and P of Y
Budget line: PX * X + PY * Y = I
Slope: PX / PY
If a point is on the budget line then it is the combination of the two goods that uses up all the money in the budget. If it is below the line then there is money left over. If it is above the line that person does not have enough money to get that much of both goods. If the price of one good goes up, the budget line goes down because the consumer's budget now buys less of that good. If the price of one good goes down, the budget line goes up because the consumer's budget can now buy more of that good. If both prices change but the ratio of the two prices is the same then the budget line moves up or down but it will be parallel to the old budget line.
The cardinal rules for determining preferences are:
- Completeness: People know exactly what they want in terms of how much of one good and how much of another good.
- Transitivity: This means that if a consumer likes A more than B and B more than C then they like A more than C.
- Satiation (more is better than less): If a basket of goods has more of both goods than another basket, it is inherently better. This is done mainly for simplicity.
Preferences are shown on a graph through Indifference Curves. Every point in the curve gives the consumer the same amount of utility or happiness. Because of the Marginal Rate of Substitution, as a person has less of one good, it takes more of the other good for them to trade one unit of the good they have less of. This means a regular Indifference Curve will be convex towards the origin. There are also four special types of Indifference Curves.
1. Perfect Substitutes (need graph)
2. Perfect Compliments (need graph) With Perfect Compliments, no matter how much you have of one, you need more of the other to get any more utility. One example is right shoes and left shoes or milk and coffee.
3. Neutral (need graph)
4. Bad goods (need graph)