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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Understanding the Microeconomy and the
Role of Government
Part Two Part Three
Chapter 5 Chapters 7-8 Chapters 12-15
Household Behavior Equilibrium
in Competitive
• Demand in output Output Markets Market Imperfections
markets and the Role of
• Short run Government
• Supply in input
markets • Long run Chapter 11 • Imperfect market
structures
The Competitive
Market System • Externalities, public
• General goods, imperfect
information, social
equilibrium and
Chapters 6-7 Chapters 9-10 choice
efficiency
Firm Behavior Competitive • Income distribution
Input Markets and poverty
• Choice of
technology • Labor/land
• Demand in input
markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Firms and Household Decisions
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Perfect Competition
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Perfect Knowledge
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Household Choice in Output Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of Household Demand (review)
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Constraint
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Constraint
• A budget constraint
separates those
combinations of goods and
services that are available,
given limited income, from
those that are not. The
available combinations
make up the opportunity
set.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Choice Set or Opportunity Set
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Constraint
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
• Point E is
unattainable, and
point D does not
exhaust the entire
income available.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Budget Line
• A decrease in the
price of Thai meals
shifts the budget line
outward along the
horizontal axis.
• The decrease in the
price of one good
expands the
consumer’s
opportunity set.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Basis of Choice: Utility
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Marginal Utility
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Marginal Utility
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Utility-Maximizing Rule
(5)
(1) (2) (3) (4) MARGINAL
TRIPS TO CLUB PER TOTAL MARGINAL PRICE UTILITY PER
WEEK UTILITY UTILITY (MU) (P) DOLLAR (MU/P)
1 12 12 $ 3.00 4.0
2 22 10 3.00 3.3
3 28 6 3.00 2.0
4 32 4 3.00 1.3
5 34 2 3.00 0.7
6 34 0 3.00 0
(1) (2)
BASKETBALL TOTAL (3) (4) (5)
GAMES PER WEEK UTILITY (MU) (P) (MU/P)
1 21 21 $ 6.00 3.5
2 33 12 6.00 2.0
3 42 9 6.00 1.5
4 48 6 6.00 1.0
5 51 3 6.00 .5
6 51 0 6.00 0
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Marginal Utility and Downward-
Sloping Demand
• Diminishing marginal
utility helps to explain
why demand slopes
down.
• Marginal utility falls
with each additional
unit consumed, so
people are not willing
to pay as much.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution Effects
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Substitution Effect of a Price Change
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution Effects of a Price
Change
Price of a good
or service
Household is Income Household buys
better off effect more
FALLS
Opportunity
Substitution Household buys
cost of the
effect more
good falls
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Consumer Surplus
• Consumer surplus
is the difference
between the
maximum amount a
person is willing to
pay for a good and its
current market price.
• Consumer surplus
measurement is a key
element in cost-
benefit analysis.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Diamond/Water Paradox
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Household Choice in Input Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Labor Supply Curve
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution
Effects of a Wage Change
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Substitution
Effects of a Wage Change
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Saving and Borrowing: Present Versus
Future Consumption
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Saving and Borrowing: Present Versus
Future Consumption
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair