ECON2101 Intermediate Microeconomics
Introduction
Aleksandra Balyanova
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What is microeconomics
Microeconomics is the study of interactions between consumers and firms in the
context of the market.
What is a market, anyway A market is an allocative mechanism for scarce resources:
in other words, a system or set of rules that determines who gets what
You face decisions about how to allocate scarce resources every day, including:
what to buy, what to study in university (and how much to study), which job to
take, etc.
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What is microeconomics
Microeconomics is the study of interactions between consumers and firms in the
context of the market.
What is a market, anyway A market is an allocative mechanism for scarce resources:
in other words, a system or set of rules that determines who gets what
You face decisions about how to allocate scarce resources every day, including:
what to buy, what to study in university (and how much to study), which job to
take, etc.
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Allocative mechanisms
Queuing (as in
Venezuela, or for
organ transplants)
or “first come, first
served”
Lottery or draft –
to serve in wars
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Allocative mechanisms
Preferential
treatment – to
friends, family, etc.
Contests – to assign
positions in
university programs
or internships, or to
award scholarships
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Allocative mechanisms
Coercion or central
planning – as in the
Soviet Union.
Markets – where
buyers and sellers
exchange goods
willingly
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Competitive markets
Competitive markets
Markets and prices
The price in a competitive market arises as the result of the aggregation of
information about the needs, desires, and capabilities of many diverse agents
Markets respect voluntary participation = no unrealised gains from trade. Markets
achieve a Pareto efficient allocation
Example 1:
Sel
ler with cost 0 < c < 1
Buyer with valuation 0 < v < 1
If v < c, there is no voluntary trade
If v > c, at least one party will be better off (and none worse off) if they agree
to trade for any price p such that c ≤ p ≤ v .
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Market failures
Markets do not exist in a vacuum: stringent conditions are required to make markets
behave competitively
Types of market failures
Barriers to entry = monopoly and oligopoly
Informational asymmetries = nonlinear prices, incentive contracts
Transaction costs
Externalities and public goods
We begin our analysis with competitive markets before relaxing these strigent
assumptions and studying some market failures
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Dual purpose of this course
GOAL 1: Learn about the workings of markets and related institutions
Consumer constraints (week 1) and preferences (week 2) = demand (week 3)
A related detour: uncertainty, preferences and the demand for insurance
(week 4)
Firm technology (week 4) and input prices = supply (week 5)
Monopoly and oligopoly (week 7), non linear pricing schemes (week 8)
But first, some tools: static and dynamic game theory (week 6)
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Dual purpose of this course
GOAL 2: Learn how to think like modern-day economists
Constrained optimisation: the outcomes of an agent maximising an objective
function subject to constraints
Equilibrium: the outcome of many rational agents interacting in a given
environment
Comparative statics: how the above outcomes change with changes in
exogenous variables
Throughout this course, we will be building models: mathematical
representations of reality that distill a situation down to its most fundamental
ingredients
Models are built on assumptions, which then interact within the model to
drive results
If built well, models allow us to analyse what is causing what
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