Economics 100B Microeconomics

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Economics 100BMicroeconomics
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Announcements

• Midterm in class on May 3rd
• No problem set this week
• Extra office hours check course website

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Course Outline
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Todays plan

• Equity (2nd Welfare Theorem)
• Departures from Perfect Competition
• Midterm Review

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I. Equity and Perfect Competition

• Competitive markets need not yield equitable
  distributions of resources

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Contract Curve
E1
OB
?
?
?
?
E2
U3A
?
U2A
U1B
U1A
U2B
U3B
OA
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Utility Possibilities Frontier
Utility of Person B
OA
Utility of Person A
OB
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Competitive Equilibrium
E1
OB
E2
?
e
e0
?
U0A
U0B
OA
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Social Indifference Curves
Utility of Person B
W W(UA,UB)
A
OA
B
C
UB
W2
W1
Utility of Person A
OB
UA
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Reallocating Endowments
E1
OB
?
e'
E2
e0
?
U0'A
U0'B
OA
OA
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Second Welfare Theorem

• Any desired distribution of welfare among
  individuals in an economy can be achieved in an
  efficient manner through competitive pricing if
  initial endowments are adjusted appropriately

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Income Inequality in the United States
Source Piketty and Saez (2003)
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II. Departures From Perfect Competition

• The ability of competitive markets to achieve
  efficiency may be impaired because of
• imperfect competition
• imperfect information
• externalities
• public goods

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Imperfect Competition

• Economic agents exert some market power in
  determining market prices
• Market prices no longer carry the informational
  content required to achieve Pareto efficiency

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Imperfect Information

• Adverse selection (unobserved types) may lead
  to missing markets
• Moral hazard (unobserved actions) can lead to
  inefficient outcomes

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Externalities

• There are interactions among firms and
  individuals that are not adequately reflected in
  market prices
• market prices no longer reflect all of a goods
  costs (or benefits) in production or consumption

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Public Goods

• Two properties make them unsuitable for
  production in markets
• nonrival
• additional people can consume the benefits of
  these goods at zero cost
• nonexclusive
• extra individuals cannot be precluded from
  consuming the good

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II. Review for Midterm

• Logistics
• Center Hall 214, class time
• Exam lasts 90 minutes
• No calculators or other aids allowed
• Bring a bluebook (we will reassign bluebooks
  before the exam)
• Midterm is worth 100 points (40 of total grade)
• Allocate your time wisely
• It includes 1 definitions 1 true-false and 2
  problems

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Last Midterm Numerical Score
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Last MidtermCorrespondence Score-Letter Grade
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Topics Covered

• Econ 100A
• Consumer demand
• Constrained utility maximization
• Firm supply
• Cost minimization
• Profit maximization
• Firm-level supply curve
• Perfectly competitive market equilibrium
• Very short run, short run, long run

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Topics covered

• Chapter 11
• Social surplus
• Deadweight loss of interventions
• Taxes
• Price ceilings and floors
• Import tariffs and quotas

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Topics covered

• Chapter 12
• General equilibrium pricing
• In an exchange economy
• In a production economy
• Efficiency of perfect competition
• Exchange efficiency
• Technical (production) efficiency
• Product-mix efficiency
• Equity and perfect competition

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Example

• 2 goods x and y with prices px and py
• Production xlx and y2ly
• Bob U(x,y)x0.2y0.8
• Bob may work 100 hours at wage w per hour
• Questions
• w/px1 and w/py2
• Bob's optimal consumption x and y
• Suppose px/py1 in the rest of the world. What
  happens to production? Consumption? Trade?

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Assignments

• Midterm in class on May 3rd
• No problem set this week
• Extra office hours check course website