P. 1
Chapter 01

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03/26/2015

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Chapter 1

Preliminaries

Preliminaries  Microeconomics deals with the behavior of individual units and the markets that these units comprise. Consumers Workers Firms Investors  Macroeconomics deals with aggregate economic quantities The level and growth rate of national output (GDP) Interest rates Unemployment Inflation .

1 The Themes of Microeconomics  Trade-Offs Consumers: Limited incomes A wide variety of spending their incomes Workers: 1st: decide whether and when to enter the workforce 2nd: face trade-offs in their choice of employment 3rd: decide how many hours per week they wish to work Firms: Limited kinds of products they can produce Limited resources available to produce those products .1.

. prices are set by the government. In a centrally planned economy. and firms. These interactions occur in markets²collections of buyers and sellers that together determine the price of a good.1. In a market economy.1 The Themes of Microeconomics  Prices and Markets Microeconomics describes how prices are determined. prices are determined by the interactions of consumers. workers.

1. of a firm. based on economic theory.1 The Themes of Microeconomics  Theories and Models Explanation and prediction are based on theories. or some other entity  Positive versus Normative Analysis Positive analysis: Analysis describing relationships of cause and effect Normative analysis: Analysis examining questions of what ought to be . Theories are developed to explain observed phenomena in terms of rules and assumptions A model is a mathematical representation. a market.

determine the price of a product or set of products.  Market Price: Price prevailing in a competitive market It can be the same or different for the same products.What is a Market?  Market: Collection of buyers and sellers that. so that no single one has a significant impact on price. through their actual or potential interactions. Noncompetitive market: individuals can jointly affect the price.  Arbitrage: Practice of buying at one location with low price and selling at another with high price  Competitive versus Noncompetitive Markets: Perfectly competitive market: Market with many buyers and sellers. .

Extent of a market: Boundaries of a market. and range of products that should be included in a particular market. sellers. both geographical and in terms of range of products produced and sold within it   It helps firms to understand their actual and potential competitors It can be important for public policy Examples   Markets for prescription drugs Markets for sweeteners .What is a Market?  Market Definition: Determination of the buyers.

Producer Price Index: Measure of the aggregate price level for intermediate products and wholesale goods  . price adjusted for inflation   Consumer Price Index: Measure of the aggregate price level. unadjusted for inflation Real Price: price of a good relative to an aggregate measure of prices.1.3 Real versus Nominal Prices  Nominal Price: Absolute price of a good.

4 CPI1980 CPI1970 38.01 \$12.8 Re al price of eggs in 1990 ! v nominal price in 1990 ! v \$1.548 \$0.7 2000 172.8 1980 82.91 \$20.568 \$0.4 1990 130.560 38.530 \$0.1 The Real Prices of Eggs and of a College Education 1970 Consumer Price Index Nominal Prices Grade A large eggs College education Real Prices (\$1970) Grade A large eggs College education \$0.30 130.84 \$4912 \$1.1.21 \$4.196 \$0.30 \$3.01 ! \$0.8 The real price of eggs in 1970 dollars is calculated as follows: CPI1970 Re al price of eggs in 1980 ! v nominal price in 1980 ! 38.40 \$2.7 CPI1990 .61 \$2530 \$0.018 \$0.40 82.186 \$1.31 \$5.84 ! \$0.61 \$2.3 Real versus Nominal Prices Table 1.8 v \$0.64 \$27.2 2007 205.313 \$0.

However. the minimum wage has increased steadily over the past 70 years.3 Real versus Nominal Prices Example 1. Figure 1.1. in real terms its expected 2010 level is below that of the 1970s.4 Minimum Wage In nominal terms.1: The Minimum Wage .

1. .4 Why Study Microeconomics?  Corporate Decision Making: Ford¶s Sport Utility Vehicles Think carefully about how the public would react to the design and performance of its new products. Be concerned with the cost of manufacturing these products. Design a pricing strategy and consider its competitors¶ reactions Consider both the risks and possible outcomes Worry about organizational problems Think about its relationship to the government and the effects of regulatory policies.

1.4 Why Study Microeconomics?  Public Policy Design: Automobile Emission Standards for the Twenty-First Century Evaluate the monetary impact of the program on consumers Determine how new standards will affect prices of cars through higher costs of producing cars Ask why air pollution are not solved by our market-oriented economy  Air pollution is external to the firm. .

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