Where Are We in the Course? We are studying the 1st of the three blocks of microeconomics: Consumer behavior, production theory, and market equilibrium Within the 1st block, we are working on the 2nd of the three components: choice set, preference, and consumer demand

Where are We in the Course? We are working on the 1st of the 3 components of microeconomics: Consumer behavior, production theory, and market. There are three elements of consumer behavior: budget constraint, preference, and choices

Market Equilibrium A market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers

From Individual to Market Demand Functions Think of an economy containing n consumers, denoted by i = 1, … ,n. Consumer i’s ordinary demand function for commodity j is

Monetary Measures of Gains-to￾Trade You can buy as much rice as you wish at RMB1 per kilogram once you enter the gasoline market. Q: What is the most you would pay to enter the market?

What Are We Doing in this Chapter? We apply our basic framework of consumer choice to study issues of choices across different time periods; Again, in terms of theoretical framework, not much is new!

The Purpose of this Chapter To begin to understand the art of building an economic model To begin to understand three basic elements of modeling in economics: –Purpose –Simplification through assumptions –Value judgment

Main Issue Mean-Variance Utility Budget Constraints for Risky Assets Measuring Risk Capital Asset Pricing Model

Main Issue A state-contingent consumption plan Preferences Under Uncertainty and Expected utility Risk-aversion, risk-loving, and risk￾neutrality Competitive Insurance

Assets An asset is a commodity that provides a flow of services over time. E.g. a house, or a computer. A financial asset provides a flow of money over time -- a security