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"Valuing Cultural Diversity in Cities: Challenges to Cultural Economics", Procida (Naples, Italy), 5th of September 200. Foundations of Microeconomic Theory Laura Onofri Department of Economics University of Venice Cà Foscari and FEEM. Introducing the Subject: Some Challenging Questions.

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"Valuing Cultural Diversity in Cities: Challenges to Cultural Economics", Procida (Naples, Italy), 5th of September 200

Foundations of Microeconomic Theory

Laura Onofri

Department of Economics University of Venice Cà Foscari and FEEM


Introducing the subject some challenging questions
Introducing the Subject: Some Challenging Questions Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • Why do people study different languages?

  • How do individuals choose the foreign language they want to learn?

  • Why should minority languages be protected?

  • What is the value that individuals attach to the preservation of a minority language?

  • Can we define the price/value of a (minority) language?

    …….


Lecture motivation and content
Lecture Motivation and Content Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • The present lesson aims at providing the basic, non-technical notions about economics reasoning, applied to standard, neoclassical consumer’s theory.

  • From preferences to utility functions to demand functions to reservation price


Economics and microeconomics
Economics and Microeconomics Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • Economics is the science that studies the choices of rational agents (economic agents, homo oeconomicus), in a world of scarce resources.

  • Microeconomics studies the choices of three main economic agents: consumers, firms and policy-makers.

  • We want to explain,predict and evaluate behavior and phenomena--not judge


The two dimensions of a choice 1
The Two Dimensions of a Choice (1) Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • Consumers choose the optimal consumption bundle by solving a constrained maximization problem.

  • The optimal choice is characterised by both a psychological and a monetary dimension.


The two dimensions of a choice 2
The Two Dimensions of a Choice (2) Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • The psychological dimension is represented by the notion of preferences and utility functions, which map the consumers tastes and desires.

  • The monetary dimension is represented by budget constraint (the income available for purchasing goods).


Preferences
Preferences Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • Individuals’ tastes (preferences) determine

    pleasure people derive from the consumption of goods

  • Economists usually take tastes as given and do not judge taste

  • Assumptions about consumer preferences

    1. completeness

    2. transitivity

    3. more is better


Three main axioms
Three main “axioms” Cultural Economics", Procida (Naples, Italy), 5th of September 200

Completeness. Consumer can compare any two bundles of goods and services and decide which one is preferred or whether he (she) is indifferent between them.

Transitivity (“rationality”). If a consumer prefers bundle x over y and y over z, then x is preferred over z.

More is better(aka non-satiation). A bundle with more of one good and no less of others is preferred.


Indifference curves
Indifference Curves Cultural Economics", Procida (Naples, Italy), 5th of September 200

we summarize information about an individual’s preferences using a graph and we can rank some bundles using more is better assumption

Indifference curve properties

1. bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin

2. there is an indifference curve through every possible bundle

3. indifference curves cannot cross

4. indifference curves are “thin”

5. indifference curves slope down


Indifference curves normal goods
Indifference Curves: Normal Goods Cultural Economics", Procida (Naples, Italy), 5th of September 200


Marginal rate of substitution 1
Marginal Rate of Substitution (1) Cultural Economics", Procida (Naples, Italy), 5th of September 200

Willingness to substitute;

downward-sloping indifference curve:

consumer is willing to substitute one good

for the other

marginal rate of substitution (MRS) of x for y is slope of indifference curve:

MRS = δx/δy


Marginal rate of substitution 2
Marginal Rate of Substitution (2) Cultural Economics", Procida (Naples, Italy), 5th of September 200

  • MRS varies along the indifference curve

  • When convex UF diminish marginal rates of substitution (MRS)



Indifference curves perfect substitutes and perfect complements1
Indifference Curves: Perfect Substitutes and Perfect Complements

  • Perfect substitutes

    straight line indifference curves

    if slope is –1, MRS = 1 (Coke-Pepsi)

  • Perfect complements

    right-angle indifference curves

    MRS = 0 (Coffee-Cream)


Marginal rate of substitution
Marginal Rate of Substitution Complements

Willingness to substitute;

downward-sloping indifference curve:

consumer is willing to substitute one good

for the other

marginal rate of substitution (MRS) of y for x is slope of indifference curve:

MRS = δy/δx


Marginal rate of substitution1
Marginal Rate of Substitution Complements

  • MRS varies along the indifference curve

  • When convex UF diminish marginal rates of substitution (MRS)


Utility functions
Utility Functions Complements

Numerical values that reflect relative rankings of various bundles of goods

Relationship between utility measure and every possible bundle of good

Succinct summary of information in indifference map


Utility functions1
Utility Functions Complements


Utility and marginal utility
Utility and Marginal Utility Complements

  • Marginal utility of x: change in utility from a small increase in x, holding y fixed.

    MU = δU/δx


Budget constraint
Budget Constraint Complements

  • Suppose an individual spends all her income for purchasing goods y and x. Her budget constraint is:

    M = pxx + pyy

    Rewrite as:

    x = (M – pyy)/px



Marginal rate of transformation
Marginal Rate of Transformation Complements

  • Slope of the Budget Constraint line:

    py/px

  • Opportunity set

    all bundles a consumer can buy includes bundles on and inside the budget constraint


Consumers constrained choice 1
Consumers’Constrained Choice (1) Complements

Consumers maximise the objective function (utility function) subject to the budget constraint

Max U(x,y)

s.t. M = pxx + pyy

The result of the maximization problem provides the optimal bundle of goods x and y that the consumer can purchase within its possibility set.


Consumers constrained choice 2
Consumers’Constrained Choice (2) Complements

  • Optimal bundle, two possibilities

  • Interior solution: buy some units of all goods (consumer buys some units of all goods optimum bundle, e, where highest

    indifference curve touches the budget line)

    2. Corner solution: buy only one good



Consumers constrained choice property of the equilibrium solution
Consumers’Constrained Choice: Property of the Equilibrium Solution

At interior optimum, indifference curve is

tangent to budget line:

MRS = MRT

δy/δx = - py/px

  • last Euro spent on x gives as much extra utility as that spent on y


Individual demand curves
Individual Demand Curves Solution

  • The equilibrium solution indicates the optimal amount of y and x that the consumer can purchase within her possibility set. It indicates a relationship between quantity and (market) price of a good:

    Qx = f(px)

    Qy = f(py)

    Individual Demand Curves


Demand functions
Demand Functions Solution

  • p


  • Demand Elasticity Solution

  • Reservation Price

  • Willingness to Pay

  • Utility measured in monetary terms

  • Market Price

  • Market Values


References
References Solution

  • Varian, Hal., R. 1992. Microeconomic Analysis 3rd Edition. W.W. Norton, New York


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