Microeconomics Lecture Outline

1. Utility maximization with two goods (x, y)

2. Budget constraint: P_xX+P_yY=I (Fig. 3-1a)

3. Budget line slope: dy/dx = -P_x/P_y

4. Stable preference:
   • Utility function U(x,y)
   • Indifference curve U(x,y)=K: equal-utility combinations (Fig. 3-1b)
   • Marginal utility (MU): positive, but diminishing
   • Marginal rate of substitution: MRS^x,y = |dy/dx| = MU_x/MU_y

5. Special goods: bads, satiation, extreme, lexicographic (Fig. 3-2)
   (eg) Complements: Coffee and Sugar, Fries and Ketchup
   (eg) Substitutes: Cell phone v. Pay phoneOptimal choice: MRS^x,y = P_x/P_y (tangency) (Fig. 3-3)

6. Therefore: MU_x/P_x = MU_y/P_y (equal MU per dollar spent)

7. Comparative statics:
   • Income change effect: Engle curve (normal v. inferior) (Fig. 3-4)
     (eg) Movie (inferior) v. Concert (normal)
     (eg) Local parks (inferior) v. Beach resorts (normal)
   • Price change effect: ordinary v. Giffen (Fig. 3-5)

8. Pure exchange economy: 2 consumers (A and B), 2 goods (X and Y)
   • Edgeworth box: feasible allocations, perferences (Fig. 3-6a)
   • Endowment
   • Pareto optimality/efficiency/improvement/superiority (皆大歡喜)
   • Contract curve: tangency, same MRS
   • Relative price: exchange rate

9. Equity/fairness:
   • Super-fairness: "no envy" (Fig. 3-6b)

     U_A(x_A,y_A) > U_A(x_B,y_B), U_B(x_B,y_B) > U_B(x_A,y_A)

   • Fair allocations may not be PO, and vice versa
   • Achieving both efficiency and fairness: equal endowment and free market

10. Utility possibility frontier (UPF)

11. Social welfare function: (weighted) utilitarian, Rawlsian

12. Intertemporal consumption choice: saving v. borrowing (Fig. 3-7)