Download Perfectly Divisible Goods: Indifference Curves, Demand

Microeconomics
Corso E
John Hey
What do we know?
• The reservation price of a buyer is...
• ...the maximum price he or she would pay.
• The reservation price of a seller is ...
• ...the minimum price he or she would
accept.
What do we know?
• The surplus of a buyer is ...
• ... the area between the price paid and the
demand curve.
• The surplus of a seller is ...
• ... the area between the price received and the
supply curve.
• An indifference curve is ...
• ... a set of points about which the individual
is indifferent.
An indifference curve and
reservation prices
• Beginning at the
point (0,9)
• Buyer
• For the first unit 4
• For the second 3
• For the third 2
Reservation prices and the demand
curve
• [Beginning at the
point (0,9)]
• Buyer
• For the first unit 4
• For the second 3
• For the third 2
An indifference curve and
reservation prices
• Starting at the
point (3,0)
• Seller
• For the first unit
2
• For the second 3
• For the third 4
Reservation prices and the supply
curve
• [Starting at the
point (3,3)]
• Seller
• For the first unit
2
• For the second 3
• For the third 4
Deduction and inference
• If we know the preferences of the individual
(the indifference curves or the reservation
prices) and the endowment of the
individual...
• ...we can deduce the demand curve or the
supply curve of the individual...
• If instead we observe the demand and
supply of the individual...
• ...we can infer the preferences of the
individual.
Deduction and inference
The preferences of the individual (the
indifference curves or the
reservationprices) and the endowment

Whether the individual is a buyer or a seller
and either the demand or supply curve of
the individual.
A Quiz
• I do not like Japanese beer...
• ...hence I never buy Japanese beer.
• Hence my indifference curves (between
money and Japanese beer) are ...?
• .....
• My reservation prices (as a buyer) for
Japanese beer are ....?
Chapter 4
• In Chapter 3 we have worked with a discrete
good – that is, a good that can be traded in
integer units.
• In Chapter 4 we work with a perfectly divisible
good .... which can be traded in any quantities,
not only integer units.
• We continue to work with a particular kind of
preferences – quasi-linear ...
• ... which imply indifference curves parallel in a
vertical direction.
If you like mathematics...
• m – 60/q = costant is the equation of an indifference curve – the
larger the constant, the higher the indifference curve.
• pq + m = 3p + 30 is the equation of the budget line. Here 3 is the
endowment of the good and 30 that of money, p is the price of
the good, q the quantity consumed and m the amount of money
left to spend on other goods.
• If we maximise the constant given the budget constraint we
obtain the gross demand for the good:
• q = √(60/p)
• The individual begins with 3 units of the good; hence the net
demand is:
• q = √(60/p) – 3
• Note: this is positive if p < 60/9 = 6.66666...
•
is negative if p > 60/9 = 6.6666...
•
is zero if p = 60/9 = 6.6666....
Chapter 4
• Goodbye!