Introduction

Math: Vectors, Dot-product, Domain, Level curves

Microeconomics for
AE 2024-2025
28 October 2024
Learning goals today
After this lecture you are able to:

1. Introduction
• Understand the setup of the course
• Explain in broad terms what microeconomics is

2. Mathematics
• Explain what a vector is
• Determine the length, addition, subtraction, scalar-multiplication, and the dot-
product of vectors, both graphically and by calculation
• Calculate the angle between two vectors, and determine whether the vectors are
orthogonal or parallel
• Define a function of two variables, determine and draw its domain, its level curves,
and a contour map 1
Course setup
Mathematics
• Weeks 1-2
• Book: Stewart, Calculus
• Midterm exam 30%

Microeconomics
• Weeks 3-7
• Book: Varian, Intermediate
Microeconomics with Calculus
• Endterm exam 70%

Video
• Lectures
• Not tutorials

Attendance
• not mandatory 2
Canvas
Course guide

Microeconomics
• Lecture slides
• Lecture video
• Tutorial exercises
• Tutorial solutions

Previous exams

3
Chapter 1 Varian

INTRODUCTION MICROECONOMICS

4
What is Microeconomics?
Study of how individual actors make Philosophy of decision making
decisions/allocations about scarce resources (basic idea on how actors make decisions)
• Actors can be individual persons, households, firms,
banks, etc.
• Scarce resources are e.g. food, water, time, labor Simplify
(might be wrong, oversimplified)
How do these decisions affect prices, markets, and welfare?

Mathematical representation
(very valuable to clarify your thinking)

Attention: you might reach strong conclusions,

always remember the simplifying assumptions
you have made!

5
First Welfare Theorem Assumptions
Formalization of Adam Smith's “invisible hand” Assumptions underlying First Welfare Theorem
idea.
1. Perfect competition
Free market is optimal (i.e., firms have no market power)
• Pareto-efficient allocation of goods Firms have market power
Monopoly, Oligopoly - week 5-6
Taxes, subsidies, price ceilings, etc. lead to a
“loss of welfare”:
2. Agents are fully rational
• Pareto-inefficient allocation of goods
Agents are not fully rational
Behavioural Economics - week 7

3. Markets are complete

Externalities - week 6
6
Two Economic Principles Maximum profit 𝝅𝝅(𝒙𝒙, 𝒚𝒚)
Optimisation Minimum costs 𝒄𝒄(𝒙𝒙, 𝒚𝒚)
• Economics agents optimise an objective function given Minimum production time 𝑻𝑻(𝒙𝒙𝟏𝟏 , 𝒙𝒙𝟐𝟐 )
their constraints
• Math week 1-2, and Micro week 3 Maximum production 𝒒𝒒(𝒙𝒙, 𝒚𝒚)
Maximum consumer utility 𝒖𝒖(𝒙𝒙𝟏𝟏 , 𝒙𝒙𝟐𝟐 )

Equilibrium
• All individual choices are consistent with each other
• Micro week 4

How would the equilibrium change if the government

intervenes in the market?
Who would be better off, and who would be worse off?
Pareto-efficiency: It is not possible anymore to make
everyone better off
7
Chapters 12.1-12.3 Stewart

VECTORS

8
 𝟐𝟐 𝑦𝑦
Vectors in ℝ
𝑣𝑣1
𝑣𝑣⃗ = 𝑣𝑣 = 𝑣𝑣1 , 𝑣𝑣2 = 𝑣𝑣1 𝚤𝚤⃗ + 𝑣𝑣2 𝚥𝚥⃗
2
B (-5, 4)
𝑣𝑣⃗ is a vector, with direction and length
A (4, 3)
𝒃𝒃 𝒂𝒂
Length of a vector 𝑣𝑣⃗ : 𝑣𝑣⃗ = 𝑣𝑣12 + 𝑣𝑣22
For example 𝑎𝑎⃗ = 42 + 32 = 5
𝝋𝝋
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
and 𝑏𝑏 = 52 + 42 = 41 𝑥𝑥

Direction of a vector 𝑣𝑣⃗ :

• Angle 𝜑𝜑 of vector with 𝑥𝑥-axis
4 0.8
• Unit vector 1
5
� 3
= 0.6

9
Vectors in ℝ𝟐𝟐
Find all vectors of length 5 in the origin.

Solution:
𝑥𝑥
𝑥𝑥⃗ = 5 ⟺ =5 A (4, 3)
𝑦𝑦
⟺ 𝑥𝑥 2 + 𝑦𝑦 2 = 5 C (5, 0)
⟹ 𝑥𝑥 2 + 𝑦𝑦 2 = 52 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
𝑥𝑥

𝑥𝑥 2 + 𝑦𝑦 2 = 𝑟𝑟 2
circle with center at (0, 0) and radius 𝑟𝑟

(𝑥𝑥 − 𝑎𝑎)2 + (𝑦𝑦 − 𝑏𝑏)2 = 𝑟𝑟 2

circle with center at (𝑎𝑎, 𝑏𝑏) and radius 𝑟𝑟
Vectors in ℝ𝟑𝟑
2
𝑣𝑣⃗ = 2, 3, −1 = 3 = 2⃗𝚤𝚤 + 3⃗𝚥𝚥 − 𝑘𝑘
−1

Length of vector 𝑣𝑣⃗ ∶

𝑣𝑣⃗ = 22 + 32 + −1 2 = 14 ≈ 3.74

Direction of vector 𝑣𝑣⃗ ∶

• Two angles:
• one within the horizontal xy-plane, 𝒗𝒗
another off the horizontal xy-plane
• Unit vector:
1 2
3
14 −1
Unit vectors
𝑢𝑢1
Notation: 𝑢𝑢 = 𝑢𝑢2 with length 1: 𝑢𝑢 = 𝑢𝑢12 + 𝑢𝑢22 + 𝑢𝑢32 = 1
𝑢𝑢3
Functions as a directional vector: vector that indicates the direction

Special unit vectors:

1 0 0
𝚤𝚤⃗ = 0 𝚥𝚥⃗ = 1 𝑘𝑘 = 0
0 0 1
𝚤𝚤⃗ = 𝚥𝚥⃗ = 𝑘𝑘 = 12 + 02 + 02 = 1 𝑘𝑘

𝑣𝑣1 𝚥𝚥⃗
𝚤𝚤⃗
Vector 𝑣𝑣⃗ = 𝑣𝑣2 has length 𝑣𝑣⃗ = 𝑣𝑣12 + 𝑣𝑣22 + 𝑣𝑣32
𝑣𝑣3
𝑣𝑣1 2 2
1
And directional unit vector 𝑢𝑢 = 𝑣𝑣2 3 has directional unit vector 1
3
𝑣𝑣 𝑣𝑣3 14
−1 −1
Special vectors in ℝ𝟐𝟐 and ℝ𝟑𝟑
0 0
Null vector 0 = Null vector 0 = 0
0
0

with length 0 = 012 + 022 =0 with length 0 = 012 + 022 + 023 = 0

1 0 0
1 0
Standard basis vectors 𝚤𝚤⃗ = 𝚥𝚥⃗ = 𝚤𝚤⃗ = 0 𝚥𝚥⃗ = 1 𝑘𝑘 = 0
0 1
0 0 1

Vector representation with standard basis Vector representation with standard basis vectors:
vectors:
2 2 0 0
𝑣𝑣⃗ =
3
= 3𝚤𝚤⃗ + 4𝚥𝚥⃗ = 3 + 0 𝑣𝑣⃗ = 3 = 2⃗𝚤𝚤 + 3⃗𝚥𝚥 − 1𝑘𝑘 = 0 + 3 + 0
4 0 4 −1 0 0 −1
Decomposition Decomposition
 𝑦𝑦
Addition and subtraction of vectors
4 −3
𝑣𝑣⃗ = and 𝑤𝑤 =
3 1
𝟒𝟒
4 −3 4 + −3 1 𝟑𝟑
𝑣𝑣⃗ + 𝑤𝑤 = + = =
3 1 3+1 4
−𝟑𝟑
−3 4 −3 + 4 1
𝒗𝒗
𝑤𝑤 + 𝑣𝑣⃗ = + = = 𝟏𝟏
1 3 1+3 4 𝒘𝒘
Addition is commutative -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
𝑥𝑥
4 −3 4 − −3 7
𝑣𝑣⃗ − 𝑤𝑤 = − = =
3 1 3−1 2

−3 4 −3 − 4 −7
𝑤𝑤 − 𝑣𝑣⃗ = − = =
1 3 1−3 −2
 𝑦𝑦
Scalar multiplication
𝑣𝑣1
𝑣𝑣⃗ = 𝑣𝑣2 ∈ ℝ3 and 𝑎𝑎 ∈ ℝ (scalar)
𝑣𝑣3
𝑣𝑣1 𝑎𝑎𝑣𝑣1 A (4, 3)
then 𝑎𝑎𝑣𝑣⃗ = 𝑎𝑎 𝑣𝑣2 = 𝑎𝑎𝑣𝑣2 𝟒𝟒
𝑣𝑣3 𝑎𝑎𝑣𝑣3 𝟑𝟑
1
4 �4 2 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
For example in ℝ2 : 1
2 3
= 2
1 = 1
1 𝑥𝑥
2
�3 2

𝑣𝑣1 /𝑎𝑎
𝑣𝑣
and = 𝑣𝑣2 /𝑎𝑎
𝑎𝑎
𝑣𝑣3 /𝑎𝑎
4 4
2
For example in ℝ2 : 3
= 2
3 = 1
1
2 2
2
 Summary – Vectors
Decomposition
𝑥𝑥 1 0 𝑥𝑥 0 𝑥𝑥 1
𝑥𝑥
1
𝑥𝑥
Notation 𝑣𝑣⃗ = 𝑦𝑦 = 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥⃗𝚤𝚤 + 𝑦𝑦⃗𝚥𝚥 = 𝑥𝑥 + 𝑦𝑦 = + = 𝑦𝑦 = 2 + 2
0 1 0 𝑦𝑦 𝑎𝑎 𝑦𝑦 − 𝑎𝑎
0 0 0
1 1
Base vectors in ℝ2 : 𝚤𝚤⃗ = 𝚥𝚥⃗ = and in ℝ3 : 𝚤𝚤⃗ = 0 𝚥𝚥⃗ = 0 𝑘𝑘 = 0
0 0
0 0 0
3
𝑥𝑥 𝑎𝑎𝑥𝑥 9
Scalar multiplication 𝑎𝑎 𝑦𝑦 = 𝑎𝑎𝑦𝑦 Factorize 10
2
1
= 30
15
4
𝑥𝑥 𝑝𝑝 𝑥𝑥 + 𝑝𝑝 𝑝𝑝 + 𝑥𝑥 𝑝𝑝 𝑥𝑥
Addition 𝑣𝑣⃗ + 𝑤𝑤 = 𝑦𝑦 + 𝑞𝑞 = 𝑦𝑦 + 𝑞𝑞 = Commutativity
𝑞𝑞 + 𝑦𝑦 = 𝑞𝑞 + 𝑦𝑦 = 𝑤𝑤 + 𝑣𝑣⃗
𝑥𝑥 𝑝𝑝 𝑥𝑥 − 𝑝𝑝 Decomposition
Subtraction 𝑣𝑣⃗ − 𝑤𝑤 = 𝑦𝑦 − 𝑞𝑞 = 𝑦𝑦 − 𝑞𝑞

𝑥𝑥 𝑣𝑣 𝑥𝑥
Length 𝑣𝑣⃗ = 𝑦𝑦 = 𝑥𝑥 2 + 𝑦𝑦 2 Unit vector 𝑢𝑢 = = 1
𝑥𝑥 𝑦𝑦 Length 𝑢𝑢 = 1
𝑣𝑣
𝑦𝑦
Chapters XXXX Stewart

DOT PRODUCT

17
 𝑦𝑦
Vector multiplication: dot-product or inproduct
𝑎𝑎1 𝑏𝑏1
If 𝑎𝑎⃗ = ⋮ and 𝑏𝑏 = ⋮ then
𝑎𝑎𝑛𝑛 𝟒𝟒
𝑏𝑏𝑛𝑛
𝟑𝟑
𝑛𝑛
𝑎𝑎⃗ � 𝑏𝑏 = 𝑎𝑎1 𝑏𝑏1 + ⋯ + 𝑎𝑎𝑛𝑛 𝑏𝑏𝑛𝑛 = ∑𝑖𝑖=1 𝑎𝑎𝑖𝑖 𝑏𝑏𝑖𝑖
dot-product is a number, not vector −𝟑𝟑
𝟏𝟏
1.99 2 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
𝑥𝑥
𝑝𝑝⃗ = 2.35 𝑞𝑞⃗ = 1 𝑝𝑝⃗ � 𝑞𝑞⃗ = 18.30
3.99 3
price quantity amount

4 −3
𝑣𝑣⃗ = and 𝑤𝑤 =
3 1
𝑣𝑣⃗ � 𝑤𝑤 = 4 � −3 + 3 � 1 = −9
𝑤𝑤 � 𝑣𝑣⃗ = −3 � 4 + 1 � 3 = −9
 𝑦𝑦
Vector multiplication: dot-product or inproduct
Find all vectors 𝒗𝒗 that have dot-product
𝟐𝟐
𝒗𝒗 � 𝒘𝒘 = 𝟗𝟗 with vector 𝒘𝒘 = 𝟑𝟑
𝟐𝟐
Solution 𝒘𝒘 =
𝟑𝟑
𝑥𝑥
𝑣𝑣⃗ =
𝑦𝑦
𝑥𝑥 2
𝑣𝑣⃗ � 𝑤𝑤 = 9 ⟹ � =9 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
𝑦𝑦 3 𝑥𝑥
⟹ 2𝑥𝑥 + 3𝑦𝑦 = 9
⟹ 3𝑦𝑦 = 9 − 2𝑥𝑥
2
⟹ 𝑦𝑦 = 3 − 𝑥𝑥
3
For example:
0 2 3 2
� = 9 and � =9
3 3 1 3
 𝑦𝑦
Vector multiplication: dot product or inproduct
5
How much is the inproduct of vector 𝑣𝑣⃗ =
0
with vectors
3 2 0 −2 −3 −2 0 2
, , , , , , ,
0 2 3 2 0 −2 −3 −2

5 3 𝒗𝒗
� = 5 � 3 + 0 � 0 = 𝟏𝟏𝟏𝟏
0 0
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
5
�
2
= 5 � 2 + 0 � 2 = 𝟏𝟏𝟏𝟏 𝑥𝑥
0 2
5 0
� = 5 � 0 + 0 � 3 = 𝟎𝟎
0 3
5 −2
� = 5 � −2 + 0 � 2 = −𝟏𝟏𝟏𝟏
0 2
5 −3
� = 5 � −3 + 0 � 0 = −𝟏𝟏𝟏𝟏
0 0
etc.
 Orthogonality (perpendicular)
(1) Two vectors 𝒂𝒂 and 𝒃𝒃 are orthogonal if the
𝟔𝟔
angle between them is 𝟗𝟗𝟎𝟎° or 𝟏𝟏𝟐𝟐𝝅𝝅, then 𝒂𝒂 � 𝒃𝒃 = 𝟎𝟎
𝟒𝟒
−𝟐𝟐 𝟑𝟑
1 0 𝟐𝟐
� = 1�0+0�1 = 0 𝟑𝟑
0 1
3 −2
� = 3 � −2 + 2 � 3 = 0
2 3
6 −2
� = 6 � −2 + 4 � 3 = 0
4 3

(2) If 𝒂𝒂 � 𝒃𝒃 = 𝟎𝟎 and 𝒂𝒂 ≠ 𝟎𝟎 = 𝒃𝒃, then 𝒂𝒂 ⊥ 𝒃𝒃

The null vector is never orthogonal (or parallel)

Dot product: angle between vectors
𝒂𝒂 � 𝒃𝒃 = 𝒂𝒂𝟏𝟏 𝒃𝒃𝟏𝟏 + 𝒂𝒂𝟐𝟐 𝒃𝒃𝟐𝟐 = 𝒂𝒂 𝒃𝒃 𝒄𝒄𝒄𝒄𝒄𝒄 𝜽𝜽

𝒂𝒂 � 𝒃𝒃
𝒄𝒄𝒄𝒄𝒄𝒄 𝜽𝜽 = 𝐢𝐢𝐢𝐢 𝒂𝒂 ≠ 𝟎𝟎 𝐚𝐚𝐚𝐚𝐚𝐚 𝒃𝒃 ≠ 𝟎𝟎
𝒂𝒂 𝒃𝒃

Special cases:
𝑎𝑎⃗ and 𝑏𝑏 orthogonal ⟹ 𝑎𝑎⃗ � 𝑏𝑏 = 0
𝑎𝑎⃗ and 𝑏𝑏 parallel ⟹ 𝑎𝑎⃗ � 𝑏𝑏 = ± 𝑎𝑎⃗ 𝑏𝑏
Chapters XXXX Stewart

DOMAIN

23
 Functions, domains, restrictions
𝑓𝑓 𝑥𝑥 has domain 𝐷𝐷𝑓𝑓 ∶ restrictions:
𝟏𝟏
set of all 𝑥𝑥 for which 𝑓𝑓 𝑥𝑥 is defined 𝒙𝒙
∶ 𝒙𝒙 ≠ 𝟎𝟎
𝒙𝒙 ∶ 𝒙𝒙 ≥ 𝟎𝟎
𝑓𝑓 𝑥𝑥 = 9 − 𝑥𝑥 𝐥𝐥𝐥𝐥 𝒙𝒙 ∶ 𝒙𝒙 > 𝟎𝟎
9 − 𝑥𝑥 ∶ 9 − 𝑥𝑥 ≥ 0 ⟹ 9 ≥ 𝑥𝑥 ⟹ 𝑥𝑥 ≤ 9
3
𝐷𝐷𝑓𝑓 = 𝑥𝑥 ∈ ℝ ∶ 𝑥𝑥 ≤ 9
2
𝑔𝑔 𝑥𝑥, 𝑦𝑦 has domain 𝐷𝐷𝑔𝑔 ∶
1
set of all (𝑥𝑥, 𝑦𝑦) for which 𝑔𝑔 𝑥𝑥, 𝑦𝑦 is defined
-3 -2 -1 0 1 2 3
1 -1
𝑔𝑔 𝑥𝑥, 𝑦𝑦 = 2
4𝑥𝑥 + 𝑦𝑦 2 − 4
-2
4𝑥𝑥 2 + 𝑦𝑦 2 − 4 ≠ 0 ⟹ 22 𝑥𝑥 2 + 𝑦𝑦 2 ≠ 22
𝐷𝐷𝑓𝑓 = 𝑥𝑥, 𝑦𝑦 ∈ ℝ2 ∶ 22 𝑥𝑥 2 + 𝑦𝑦 2 ≠ 22 -3
 Functions, domains, restrictions
Find the domain of function 𝒇𝒇 𝒙𝒙, 𝒚𝒚 ∶
𝑥𝑥
𝑓𝑓 𝑥𝑥, 𝑦𝑦 =
𝑥𝑥 2 + 𝑦𝑦 2
𝑥𝑥
=
𝑥𝑥 2 + 𝑦𝑦 2

𝑥𝑥 ∶ 𝑥𝑥 ≥ 0
1
∶ 𝑥𝑥 2 + 𝑦𝑦 2 ≠ 0
𝑥𝑥 2 + 𝑦𝑦 2
⟹ 𝑥𝑥 2 + 𝑦𝑦 2 ≠ 0
⟹ 𝑥𝑥, 𝑦𝑦 ≠ 0,0
𝑥𝑥 2 + 𝑦𝑦 2 ∶ 𝑥𝑥 2 + 𝑦𝑦 2 ≥ 0 ⟹ any 𝑥𝑥, 𝑦𝑦

𝐷𝐷𝑓𝑓 = 𝑥𝑥, 𝑦𝑦 ∈ ℝ2 \(0,0) ∶ 𝑥𝑥 ≥ 0

 Functions, domains, restrictions
Find the domain of function 𝒈𝒈 𝒙𝒙, 𝒚𝒚 ∶
ln 𝑦𝑦
𝑔𝑔 𝑥𝑥, 𝑦𝑦 = 2
𝑥𝑥 − 4

ln 𝑦𝑦 : 𝑦𝑦 > 0

1 2−4 ≠0
∶ 𝑥𝑥
𝑥𝑥 2 − 4
⟹ 𝑥𝑥 2 ≠ 4
⟹ 𝑥𝑥 ≠ −2 ∧ 𝑥𝑥 ≠ 2

𝐷𝐷𝑔𝑔 = 𝑥𝑥, 𝑦𝑦 ∈ ℝ2 ∶ y > 0 ∧ 𝑥𝑥 ≠ −2 ∧ 𝑥𝑥 ≠ 2

Chapters XXXX Stewart

LEVEL CURVES

27
Level curves, contour map
𝑧𝑧 = 𝑓𝑓 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥 2 + 𝑦𝑦 2 𝑧𝑧 = 9 ⟹ 𝑓𝑓 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥 2 + 𝑦𝑦 2 = 32
𝑧𝑧 = 4 ⟹ 𝑓𝑓 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥 2 + 𝑦𝑦 2 = 22
𝑧𝑧 = 1 ⟹ 𝑓𝑓 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥 2 + 𝑦𝑦 2 = 12

Level curves

Contour plot
Level curves, contour map
𝑧𝑧 = 𝒌𝒌 ⟹ 𝑓𝑓 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥 2 − 𝑦𝑦 2 = 𝑘𝑘
𝑧𝑧 = 𝑓𝑓 𝑥𝑥, 𝑦𝑦 = 𝑥𝑥 2 − 𝑦𝑦 2
⟹ 𝑦𝑦 2 = 𝑥𝑥 2 − 𝑘𝑘

⟹ 𝑦𝑦 = 𝑥𝑥 2 − 𝑘𝑘 ∨ 𝑦𝑦 = − 𝑥𝑥 2 − 𝑘𝑘