Microeconomics

• The Invisible Hand dictates that economies are generally predictable even if they are Complex Systems.
  • This holds for as long as two principles hold
    • That there is enough competition among buyers and sellers
    • That all agents in the economy operate with rationality.
  • It also suggests that Pareto optimality can be achieved even among selfish agents ¹
  • Supply and demand reveal themselves through the behaviors of producers and consumers.

• All choices are governed by tradeoffs due to scarcity of resources
• Every market is more or less subject to the laws of supply and demand. We can analyze the dynamics of the market using a four step process that analyzes the relationship between the two.
  • Identify the supply and demand curves and the equilibrium point
  • Decide whether the economic change affects supply and demand
  • Decide how it affects supply or demand (does it induce a shift to the right or the left) . If there are multiple variables and effects, analyze each individually.
  • Compare the new equilibrium to the old equilibrium

Misc §

• Consider an economic system with agents and resources.

  Assume we have a price vector corresponding to the price of each commodity, and an allocation matrix where represents the amount of resource allocated to agent .

  Each agent also has an endowment and a utility function

  The Competitive (Walrasian) equilibrium satisfies the following properties.

  • The allocation is feasible :
  • All agents maximize their utilities under the budget induced by the prices.

Topics §

• Scarcity, Supply, and Demand

• Consumer Behavior and Transactions

• Firms, Production and Externalities

• Competition between Firms

• Labor Market Theory

• Financial Market

• Public Economy

Links §

• Principles of Economics by Shapiro, MacDonald and Greenlaw
• Thinking Fast And Slow - helps in understanding why people act the way they do.

Footnotes §

1. See more here. Incomplete information and uncertainty also helps. ↩