Microeconomics

CESEM 2021-2022

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 Why Economics

• Fundamental Economic Problem: Scarcity

Scarcity: The limited nature of society's resources
Examples? land, labor, capital

• Economics: The study of how society

manages its scarce resources.

• The Economy: All the production and exchange

activities that take place every day
 Why Economics
• Economists study:
– How people make decisions
• Work, buy, save, invest, produce
– How people interact with one another
– Analyze forces and trends that affect the
economy as a whole
• Growth in average income
• Fraction of the population that cannot find
work
• Rate at which prices are rising
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 Micro vs. Macro
• Microeconomics
– The study of how households and firms
make decisions and how they interact in
markets
• Macroeconomics
– The study of economy-wide phenomena,
including inflation, unemployment, and
economic growth
❖ The focus of this course is on Microeconomics

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 Micro vs. Macro
• Exercise:
– A family's decision about how much income to save is
related to?
– The effect of government regulations on auto emissions
is related to?
– The impact of higher saving on economic growth is
related to?
– A firm's decision about how many workers to hire is
related to?
– The relationship between the inflation rate and changes
in the quantity of money is related to?

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Next: Some Basic Principles In Economics

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 Individual Decision Making
• People face tradeoffs.
– Follows from the principle of scarcity
– We must compromise. Compare the costs and
benefits of your decisions.
• “There is no free lunch.”

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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Individual Decision Making
• Opportunity cost
– What to give up to get something or the
value of the benefits you give up
– Ex. The opportunity cost of getting a
higher education should include not just
the tuition fee, but also the foregone
opportunities such as working and earning
wages

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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Individual Decision Making
• Exercise
Mallory decides to spend three hours working overtime
rather than watching a video with her friends. She earns
$8 an hour. Her opportunity cost of working is
a. the $24 she earns working.
b. the $24 minus the enjoyment she would have received
from watching the video.
c. the enjoyment she would have received had she
watched the video.
d. nothing, since she would have received less than $24
of enjoyment from the video.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Individual Decision Making
• Thinking at the Margin
– Framework of reasoning that simplifies decision-
making
– Small-scale adjustment of an action
– Making decisions with the highest marginal
benefit

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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 How People Make Decisions, #3
• Exercise
Tom is restoring a car and has already spent $3500 on the restoration.
He expects to be able to sell the car for $5000. Tom discovers that he
needs to do an additional $2000 of work to make the car worth $5000
to potential buyers. He could also sell the car now, without completing
the additional work, for $2800. What should he do?

a. He should sell the car now for $2800.

b. He should keep the car since it wouldn’t be rational to spend

$5500 restoring a car and then sell it for only $5000.

c. He should complete the additional work and sell the car for $5000.

d. It does not matter which action he takes since the outcome will be
the same either way.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Individual Decision Making
• People respond to incentives
• Incentive:
– Something that induces a person to act
– E.g., prices
• Buyers – lower price, consume more
• Sellers – higher price, produce more
– E.g., Public policies
• Change costs or benefits
• Change people’s behavior

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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Interaction Among Agents
• Markets are usually a good way to
organize economic activity
– Through decentralized decisions of many
firms and households
– As they interact in markets for goods and
services
– Guided by prices and self-interest
❖Adam Smith’s “invisible hand”
❖Government intervention could disrupt the
invisible hand
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 Interaction Among Agents
• But sometimes, free market could have
failures. Then, we need the government
to improve market outcomes
– Unclear property rights
– Externalities
– Market power, e.g., monopoly

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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 The Economist As A Scientist
Positive vs. Normative analysis
• Positive statements
– Attempt to describe the world as it is
– Descriptive
– Confirm or refute by examining evidence
• Normative statements
– Attempt to prescribe how the world should
be
– Prescriptive
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 The Economist As A Scientist
• Exercise:
– A rapid growth rate of money is the cause of inflation.
dfcd
– The government should keep the growth rate of money
low.
– Society faces a short-run trade-off between inflation and
unemployment.
– The Federal Reserve should reduce the rate of money
growth.
– Society ought to require welfare recipients to look for
jobs.
– Lower tax rates encourage more work and more saving.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 The Economist As A Scientist
How do economists work as a scientist?
• Questions
• Models
• Theorems
• Hypotheses
• Tests (using data)
• Results

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Logistics
• Instructor@Reims:
• Ran TAO, Ph.D.
• ran.tao@neoma-bs.fr

• Instructor@Paris:
• Ilyess EL KAROUNI, Ph.D.
• i.el.karouni@gmail.com

• Courses website
• https://courses.neoma-bs.fr/login/index.php
 Logistics
• Textbook
– Mankiw and Taylor
• Textbook
– Mankiw and Taylor, Micronomics, 5th or 4th or even 3rd Ed.
– Economics is also fine, but likely more expensive, because it
has micro and macro combined.
– There is French translated version of the book.
– You could buy the book from Amazon, or Cengage website,
or 2nd hand book websites.
– If you do not want to spend the money purchasing the book,
then use the NEOMA partnered e-Library to read it. But there
is limited amount of copies.
• Notice: Do not download the book! That will make the book
unavailable to the others. Simply use the "read online" function.
– Also, ask last year’s students, they might have a copy you
could borrow.
 Logistics
Grading
30%: Controle Continu
9 quizzes, 4 problem sets
20%: Midterm Exam
Multiple Choice
50%: Final Exam
Comprehensive Exercises

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 21
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Logistics
Grading
30%: Controle Continu
9 quizzes, 4 problem sets
▪ Quizzes
▪ Where: Courses: https://courses.neoma-bs.fr/
▪ When: due Tuesdays, (almost) every week
▪ How: directly choose your answers online. Once
submitted, you cannot change your answers.
▪ No makeups! So be wary of your internet
connection, the deadlines, etc.
▪ Answers available after quiz closed
22
 Logistics
Grading
30%: Controle Continu
9 quizzes, 4 problem sets
▪ Problem sets
▪ Where: also Courses
▪ When: check the submission deadlines on Courses
▪ How: upload your write-ups back onto Courses
▪ Won’t be graded, so check answers by yourself
▪ You receive the points as long as you submit on time

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 23
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.