Sustainable Economics

• consumer surplus + producer surplus
• value to buyer - value to seller 

• efficiency is the resource allocation that maximizes the surplus of all society members
• equilibrium quantity: for same price, consumers have higher utility than what they pay and producer's production cost are lower than the sellin price 

1. free market allocate goods to buyers who value them the most (measured by willigness to pay) 
2. free markets allocate demand to sellers who produce at least costs 
3. free markets produce quantity of goods maximizing the sum of consumer and producer surplus 

euqilibrium quantity: when the additional gain of utility (value to buyers) is as high as the production costs (cost to sellers) 

• some people cannot afford certain goods 
• some producers cannot afford such low production prices
• neglects social benefits of some production activities
• neglects environmental and social cost
• relies on perfect competition 

size of tax multiplied by quantity sold 

• taxation on buyers reduces producer surplus
  • less quantity, lower price 
• taxation on sellers reduces consumer surplus 
  • less quantity, higher price 

• the tax revenue is not lost (spent on society), but a part of the tax is lost 
• triangle btw tax revenue and equilibrium

• can be compensated by social benefits from the tax spending
• if social externalities were considered in supply curve, the equilibrium would shift left -> no loss 
• tax corrects market signal to a social optimal one 

limit on consumption bundels that a consumer can afford 

depends on income and prices of goods 

relative price of two goods 

- price of good 1 ÷ price of good 2

steep slope: you need to give up less of good 1 for good 2/ flatter slope: you need to give up more 

• change in income: parallel shift 
• change in price: line rotates around axis intercept

shows consumption bundels that give the consumer the same level of satisfaction (utility) 

marginal rate of substitution

slope of the indifference curve 

bend depends on substituability of the goods 

(amount of a good that consumer requires as compensation to give up a good for another) 

1. higher indifference curves are preferred to lower ones
2. indifference curves are downward sloping
3. indifference curves do not cross
4. indifference curves are convex and non-linear 

• substitutes: curve is linear (a line)
• complements: vertical and horizontal line, parallel to both axis ex. 1 car and 4 tires  

point where the highest indifference curve and budget constraint are tangent 

relative price = marginal rate of substitution 

an increase in income shifts budget contraint outward. the consumer can choose combination of goods on a higher indifference curve 

not necessarily same increase for both goods, depends on shape of curve 

• consumer buys more of good 1 and 2 when income rises 

• consumers buys more of good 1 (normal good) when income rises, but less of good 2 (inferior good) 

• fall in price of good 1 rotates budget constraint outward and changes its slope 
  • steeper slope for a increase in price, flatter slope for an decrease in price 
• reach higher indifference curve for decrease in price 
• increases consumption of good 1 (which got cheaper) but decreases consumption of good 2 (became relatively more expensive) 

moves consumer to a higher or lower indifference curve 

positive when the indifference curve is higher 

moves consumer along the indifference curve to a point with a different marginal rate of substitution 

negative when the consumption of a good 2 decreases because the price of good 1 decreases 

can be compensated by positive income effect to some degree 

the demand curve is derived from these 2 more complex curves

it is a summary of the optimal decisions resulting from budget constraint and indifference curve 

1. changes in relative prices (taxing or subsidizing)
2. ban dirty goods
3. tax income
4. change preferences 

• saturation effect: additional utility decreases the more you consume
  • possible disutility
• basic needs are not substituable, utility stays the same  
• limits to rationality
• concept of utility is highly subjective and hard to measure 
• environmental and social costs are not reflected in prices 
• affordability concerns 

• resourceful evaluating maximizing man
• homo oeconomicus: acts rationally on basis of available information for utility maximization
  • rational
  • self interested
  • acts according to restrictions and incentives
  • has fixed preferences
  • has full information
• not a normative but a descriptive model 

• bounded rationality: limited cognitive capacity
• emotions: decisions influences by envy, fear, greed etc
• moral values: normative conceptions about good and bad, fair and unfair 

• maximizing utility: keep on searching until reaching option w highest utility
• satisficing: stop searching for options once your goal is reached 

1. utility maximization leads to wrong decisions
2. framing (presentation of data)
3. overestimation of abilities
4. opportunity cost anomaly (cost of not chosing option)
5. hindsight bias (overestimate ability to foresee outcome)
6. anchoring (rely on 1st info or benchmark)
7. prospect theory (gains and losses valued differently)
8. sunk costs (cannot be recovered) 

emotions and reward system of brain influence our behavior 

ex advertisement, brands, investment, auction 

human behavior tested in lab experiments 

• equity, reciprocity, competition theory
• people don't only derive utility from material goods but also from fair shares