A consumption externality is a situation where a consumer cares directly about another agent’s consumption or production of a particular good. An externality can be positive or negative: 1. Negative: Loud mobile phone use in public places. 2. Positive: Pipe smoking in enclosed public places

In the last lecture two concepts were introduced: Pareto efficiency and general equilibrium. How do they relate? Theorem: The first welfare theorem states that every general equilibrium involves a Pareto efficient llocation

Endowments and Allocations Consider first the case of a pure exchange economy. (One with no production). Suppose there are two consumers, A and B, in a two good economy. A starts with an endowment of ωA =

Production — Oligopoly 1 Cournot Duopoly Suppose there are two firms in an industry. Their strategy spaces are quantities. Their payoffs are profits. Industry demand is given by the inverse demand function, P(Q), where industry production is Q = q1 + q2. They

Production — Games 1 Monopolistic Competition Monopolistic competition arises when there are a large number of price-setting firms in an industry with free entry. Suppose there are n firms. In the short run, each firm faces an nth of the market demand curve

Structure Describe preferences Indifference curves(无差异曲线) Well- behaved preferences Marginal rate of substitution(边际替代率)

The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine. an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions John Maynard Keynes

Information in Competitive Markets In purely competitive markets all agents are fully informed about traded commodities and other aspects of the market. What about markets for medical services, or insurance, or used cars?

What Are We Doing in this Chapter? We take a further look at the comparative statics of demand function with respect to prices; We divide the changes in demand due to price changes into two effects:

What Do We Do in This Chapter? We conduct comparative statics analysis of ordinary demand functions -- the study of how ordinary demands