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Economic behavior > I) Introduction to Microeconomics > Flashcards

I) Introduction to Microeconomics Flashcards

1
Q

What is “economy”?

A

A (large) group of people making decisions.

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2
Q

What is “methodological individualism”?

A

Individuals behavior => group behavior (economy) Parts => totality

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3
Q

What is “holism”?

A

Totality => parts Used in sociology

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4
Q

What does mean “formal rigor” in economy?

A

It means that the models of behaviors are defined mathematically.

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5
Q

What is the function of economy?

A

f: input → decision/choice

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6
Q

What is the major hypothesis to define “f” (fonction of economy)?

A

Rationality. Agents are assumed rational.

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7
Q

What does a rational agent?

A

He always acts in his “best-interest” / according to his preferences.

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8
Q

What is “best-interest”?

A

Each agent has some well defined preferences (tastes, needs, whims, desires…)

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9
Q

What is “preference”? as a definition

A

Measure of attractiveness of goods, situations… It is individual tastes and as given.

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10
Q

What is “preference”? mathematically

A

Ranking all the options in the set of options S.

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11
Q

How do you model a preference?

A

It is a relation: x≻y. R={(x,y)⎪xRy} (R =relation) This agent prefers x to y. So, he will choose x.

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12
Q

What are the 3 assumptions on preference?

A

1) x⊁x
2) x≻y => y⊁x
3) transitivity: x≻y, y≻z => x≻z

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13
Q

When is the “choice function” well defined?

A

If the 3 assumptions are true (preferences are consistent) and if people is rational. The choice function is well defined.

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14
Q

How do you write the “choice function”?

A

c:S →2ˢ = {set of all subsets of S} X⟼c(X) = {x∈X⎥∄y≻x}

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15
Q

How do you write a “weak preference”?

A

x≿y x is preferred or equivalent to y.

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16
Q

How do you write an “indifference”?

A

x∼y

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17
Q

What are the conditions for indifference?

A

x∼y if and only if: 1) a≿b 2) b≿a Indifference is different from an indecision.

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18
Q

What is “completeness”?

A

∀ (x,y)∈S, x≿y ∨ y≿x The hard choice doesn’t really exists. It is the fact that the agent didn’t make up his mind.

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19
Q

How do you write a “bundle”?

A

{qx, qy…} q: quantity I want to buy.

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20
Q

How do you describe a bettering graph?

A

{(q’x, q’y)⎪(q’x, q’y) ≻ (1,1)}

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21
Q

What is monotonicity?

A

if: qx>q’x ∧ qy ≥ q’y => (qx, qy) ≻ (q’x, q’y) More is better.

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22
Q

What is convexity of preferences?

A

If (x,y)∈X, any point in the middle belongs to X.

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23
Q

How is written the “graph of preferences”?

A

{(qx, qy)⎪(qx, qy)≻(1, 1)}

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24
Q

How are written the “dominated bundles”?

A

{(qx, qy)⎪(1, 1) ≻ (qx, qy)}

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25
Q

How is written the indifference curve?

A

{(qx, qy)⎪(qx, qy) ∼ (1, 1)}

26
Q

What is the “utility function”?

A

For any preference over S, you can find some function “u” such that ∀(x,y) ∈S, x>y < = > u(x) > u(y)

27
Q

Why do people prefer bundles?

A

People prefer mixed bundles because they prefer diversity.

28
Q

How is represented the bettering graph?

A
29
Q

What is a “partial equilibrium”?

A

My consumption on a simple market.

30
Q

What are the 3 characteristics to define a good or a commodity?

A

Physical characteristics

Location

Time

31
Q

What is a “bundle of goods”?

A

List of everything I wanna buy with the quantities.

32
Q

What is a “bundle of goods” mathematically?

A

It is a vector (q1, q2…qn)

33
Q

What are the 3 axioms for épreferences”?

A

Preference relation is completed, a consiummer can always order 2 bundles

Transitivity

Monotonicity: I prefer when I have more.

34
Q

Why is an indifference curve always decreasing?

A

Because of monotonicity.

35
Q

What kind of bundles do you prefer?

A

Mixed bundles are prefered.

36
Q

Can an indifference curve be crossed?

Why?

A

NO! It violates monotonicity and transitivity.

37
Q

Why are the curve always bent in the same shape?

A

Because of convexity.

38
Q

What is the decreasing marginal utility line?

A

Line on which the choice is equivalent for the consummer.

39
Q

What are the 2 extreme indifference curves?

A

Straight lines: 2 groups are exact substitutes, the only matter is quantity.

“L”: perfect complements: both goods need to be consumed exactely in the same quantity.

40
Q

What does tell us an increasing curve?

A

It tells us that a good is, in fact, a bad (you don’t want to buy it).

41
Q

What is the equivalent of the “utility function”?

A

It is an alternative representation of a consumer preferences.

42
Q

What does represent the “utility function”?

A

It reprensents the degree of satisfaction of an agent.

43
Q

What is the interest of the values of this function?

A

You can compare values but they have no meaning by themselves.

44
Q

What are the properties of the “utility function”?

A

Preferences are monotonic

Concavitiy

Quasi-concavity:

45
Q

What does measure the “marginal utility”?

A

It measures how much the degree of satisfaction will increase / decrease when one more good is given.

46
Q

What is the marginal rate of substitution?

And what is its formula?

A

It tells us the amount of good 2 a consumer is ready to give up in order to get one more good 1.

If it is low, I care a lot of good 2.

If it is high, I care a lot of good 1.

MRS12(q) = (MU1(q))/(MU2(q))

MRS12(q) = q2/q1

MRS12(q) = p1/p2

47
Q

What is the equation for the linear budget constrain?

A

nΣi=1(piqi) ≤ x

I maximize the utility staying under the line given by this inequality.

48
Q

What is the consumer optimization?

A

Studying together: budget sets and preferences

49
Q

What is the best optimization of the budget set?

A

The point that crosses budget line and utility function: q’.

The slope of the busget set is the slope of the utility function.

50
Q

At the tangent point, what is the slope value?

A

slope = p1/p2 = MRS

51
Q

What is MRS ≠ p1/p2?

MRS > p1/p2

MRS < p1/p2

A

I go to the market to exchange.

> : I exchange good 2 for good 1

< : I exchange good 1 for good 2.

52
Q

What are the 2 equations to find the “Marshallian demand function”?

A

MU1/MU2= p1/p2

p1q1+p2q2 = x

53
Q

What is the Lagrangian function of utility?

A

L = u(q) + λ(x-pq)

λ: marginal utility of the income or wealth

54
Q

Do we really observe preferences directly?

A

No, we observe choices.

55
Q

Which parameters do give the choice?

A

Different levels of prices p1, p2.

Different income level x.

56
Q

WHat is a revealed preference relation?

A

If at some budget set B, two bundles are affordable and the consumer chooses q over q’, q is said to be revealed preferred to q’.

57
Q

How do you write a “revealed preference relation”?

A

qRPq’

58
Q

What are the 2 axioms for the revealed preference?

A

Strong: the relation is asymmetric: qRPq’ so q’RPq is not possible. q is chosen under B and q’ is chosen under B’.

Weak: the relation is acyclic: q1RPq2, … qn-1RPqn, qnRPq1 is impossible.

59
Q

What does mean that a a consumer chooses a bundle which maximzes his utility under his budget set?

A

At this bundle, the MRS between 2 good is equal to the price ratio.

60
Q

WHen are choices rational?

A

When they satisfy the strong (or weak) axiom of revealted preferences.

Economic behavior (6 decks)

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