Introduction to Microeconomics

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 Introduction to Microeconomics
Textbook
• Required: Pindyck, R. S., & Rubinfeld, D. (2018). Microeconomics (8th ed.).
China Renmin University Press.

• Additional:
• Mankiw, N. G. (2016). Principles of economics (8th ed.).
CENGAGE Learning Custom Publishing.
• Krugman, P.; Wells R. (2015). Microeconomics (4th ed.).
Worth Publishers. 2
Introduction to Microeconomics

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 Introduction to Microeconomics
1. Economy a. (n.) a person who studies or writes about economics
2. Economics b. (adj.) connected with the trade, industry, and
3. Economic development of wealth of a country
c. (v.) (on something) to use less money, time, etc. than
4. Economical
you normally use
5. Economist
d. (n.) the relationship between production, trade and
6. Economize the supply of money in a particular country or region
e. (n.) the study of how a society organizes its money,
trade, and industry
f. (adj.) providing good service or value in relation to
the amount of time or money spent

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 Introduction to Microeconomics
Put one of the following words in each sentence:
• economics, economic, economize, economy, economist, economical

1. “The Japanese __________

economy is in recession.”
2. “He studied politics and __________
economics at Yale.”
3. “The firm has made an important __________
economic decision.”
4. “This is an __________
economical car to drive.”
5. “John M. Keynes was a famous __________.”
economist
6. “Old people often try to __________
economize on heating, thus endangering their health.”

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 Part One
Introduction: Markets and Prices
Chapter 1 Preliminaries
Chapter 2 The Basics of Supply and Demand
 Chapter 1: Preliminaries – Outline
1.1 The Themes of Microeconomics
1.2 What Is a Market?
1.3 Real versus Nominal Prices
1.4 Why Study Microeconomics?

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 Chapter 1: Preliminaries
Economics is divided into two main branches:
• Microeconomics ( 微观经济学 ) – branch of economics that deals with the
behaviour of individual economic units – consumers, firms, workers, and investors
– as well as the markets and industries where these units interact.
• Macroeconomics ( 宏观经济学 ) – branch of economics that deals with aggregate
economic variables, such as the level and growth rate of national output, interest
rates, unemployment, and inflation.

Although these two branches of economics address different questions, the boundary
between them is not always distinct.

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 1.1 The Themes of Microeconomics
“You can’t always get what you want.”
Trade-offs ( 权衡取舍 )
We have to choose how to allocate our scarce resources ( 配置稀缺资源 ). To get
something, we often have to give up another thing: we make trade-offs.
Consumers ( 消费者 )
• Consumers have limited incomes, which can be spent on a wide variety of goods
and services, or saved for the future.
Workers
• Workers also face constraints and make trade-offs. First, people must decide
whether and when to enter the workforce. Second, workers face trade-offs in their
choice of employment. Finally, workers must sometimes decide how many hours
per week they wish to work, thereby trading off labour for leisure.
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 1.1 The Themes of Microeconomics
Firms ( 厂商 )
• Firms also face limits in terms of the kinds of products that they can produce, and
the resources available to produce them.

Prices and Markets

• Microeconomics describes how prices are determined.
• In a centrally planned economy, prices are set by the government.
• In a market economy, prices are determined by the interactions of consumers,
workers, and firms. These interactions occur in markets.

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 1.1 The Themes of Microeconomics
Theories and Models ( 理论与模型 )
• In economics, explanation and prediction are based on theories. Theories are
developed to explain observed phenomena in terms of a set of basic rules and
assumptions.
• A model is a representation of a more complicated reality, based on economic
theory.

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 1.1 The Themes of Microeconomics
Positive versus Normative Analysis
• Positive analysis ( 实证分析 ) – Analysis describing and explaining the world as it
is. It can be used to make predictions.
– “The average price of electricity increased by 5.2%.”
• Normative analysis ( 规范分析 ) – Analysis examining questions of what should
be, it includes judgement and opinion.
– “The price of electricity is too high.”

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 1.1 The Themes of Microeconomics
Decide whether the following statements are positive or normative.
• Poor people should not pay any taxes. Normative
• Lower price of alcohol leads to its higher consumption. Positive
• The consumption of alcohol is some countries is too high. Normative
• The Czech Republic has the highest beer consumption per capita in the world. Positive
• The unemployment rate in 1990 was 5%. Positive

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 1.2 What is a Market?
• oil markets, housing markets, bond markets, labour markets, and markets for all
kinds of goods and services.
• Market is a collection of buyers and sellers that, through their actual or potential
interactions, determine the price of a product.
• We should determine which buyers and sellers should be included in a particular
market.
– In the market for laptops, for example, the buyers are business firms, households, and students. The
sellers are various producers, such as Huawei or Apple.

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 1.2 What is a Market?
Competitive versus Non-competitive Markets
• In this course, we will study both competitive and noncompetitive markets.
• Perfectly competitive market ( 完全竞争市场 ) is a market with many buyers and
sellers, so that no single buyer or sellers has a significant influence on price.
• For example, most agricultural markets (such as wheat, corn, soy bean, etc.) are
close to being perfectly competitive.
• In other markets, however, producers may be able to influence the price
significantly (such as monopoly, or cartel).

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 1.2 What is a Market?
Market Price
• In a perfectly competitive market, a single price – the market price – will usually
prevail.
– For example, the market for gold is unlikely to have very different prices in different locations.
– Otherwise, significant differences in the price of a commodity create a potential for arbitrage ( 套
利 ).
– If the price of gold in Shanghai is significantly lower than in Quanzhou, you can buy it at a lower price
and sell it at a higher price.
– This possibility of arbitrage prevents the price from being significantly different.
• In markets that are not perfectly competitive, different firms might charge different
prices for the same product.
• The market prices of most goods will fluctuate over time, sometimes even during a
single day.
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 1.2 What is a Market?
Market Definition and The Extent of a Market
Extent of a market ( 市场范围 ) – boundaries of a market, both geographical and in
terms of range of products produced and sold within it.
– For some goods, it makes sense to talk about a market only in terms of very restrictive geographic
boundaries, such as housing or hamburgers (no potential for arbitrage).
Market definition is important because:
• A company must understand who its actual and potential competitors are for the
various products that it sells or might sell in the future.
• Market definition can be important for public policy decisions (see the following
example).

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 1.2 What is a Market?

In 1990, the Archer-Daniels-Midland Company (ADM)

acquired the Clinton Corn Processing Company. The U.S.
Department of Justice (DOJ) challenged the acquisition
on the grounds that it would lead to a dominant
producer of corn syrup with the power to push prices
above competitive levels.
ADM fought the DOJ decision, and the case went to court. The basic issue was
whether corn syrup represented a distinct market.
ADM argued that sugar and corn syrup should be considered part of the same
market because they are used interchangeably to sweeten a vast array of food
products.
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 1.3 Real versus Nominal Prices
• In 1970, the price of eggs was $0.61. In 2010, the price was $1.54.
• Does this mean that buying eggs was times more expensive?

• Such a comparison is more difficult because money loses its value over time. One
dollar today is worth less than before and the overall level of prices ( 总体价格水
平 ) generally increases. This is what we call inflation ( 通货膨胀 ).

• The most commonly used measure of overall prices is the Consumer Price Index
(CPI, 消费者价格指数 ). It is a number that records how prices of goods purchased
by a typical consumer change across time.
– The CPI is used to measure the inflation rate. When CPI increases by 10% from one year to the next, we
say the inflation rate is 10%.
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 1.3 Real versus Nominal Prices
• We often want to compare the price of a good today with what it was in the past
to find out whether it becomes more or less affordable. However, we need to be
careful when making such comparisons.
• Although the price of eggs is higher today, when we measure it in relation to the
overall price level, it is actually lower.
• This fact represents the difference between nominal and real prices.

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 1.3 Real versus Nominal Prices
• Nominal price ( 名义价格 ) of a good is its absolute price. This is the price you
would see in a supermarket.
• Real price ( 实际价格 ) of a good is the price relative to an aggregate measure of
prices. This price has to be calculated in order to make meaningful comparisons
across time.

• How can the CPI be used to calculate real prices?

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 1.3 Real versus Nominal Prices
The overall level of prices
more than doubled

The real prices of eggs, using 1970 as the

base year (we say real price in 1970 dollars)
is calculated as follows:

While the nominal price of eggs rose during these years, the real price of eggs
actually fell. We can conclude that eggs were more and more affordable.
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 1.3 Real versus Nominal Prices

( 最低工资 )

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 1.4 Why Study Microeconomics?
Microeconomic principles can be applied to actual decision-making problems.
Suppose you are a car factory manager. What kinds of decisions would you be
expected to make?
• How many workers should be hired
• What kind and how many machines do we need
• What types and how many cars should be produced
• How to decrease production costs
• What price should be charged for these cars
• Where should the factory be located
• What laws need to be followed
• How to improve the workers’ skills
• etc. 24
 1.4 Why Study Microeconomics?
Corporate Decision Making: The Toyota Prius
• The world’s first mass-produced hybrid car

• Understand consumer preferences and trade-offs

• Costs of manufacturing these cars
• Pricing strategy, reaction of competitors
• Investing in new capital equipment
• The government and regulatory policies

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 Review
The following table shows the average retail price of butter and the Consumer Price
Index from 1980 to 2010, scaled so that the CPI = 100 in 1980.

a. Calculate the real price of butter in 1980 dollars. Has the real price increased /
decreased / stayed the same from 1980 to 2000?
b. What is the percentage change in the real price (1980 dollars) from 1980 to 2000?
From 1980 to 2010?
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 Review
The problem of scarcity means that people face trade-offs. Which of the following
trade-offs are the concern of microeconomics?
A) Trade-offs faced by consumers in the purchase of goods
B) Trade-offs faced by workers between work and leisure
C) Trade-offs faced by firms in what goods to produce
D) all of the above

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 Review
________ questions have to do with explanation and prediction; ________ questions
have to do with what ought to be.
A) Positive; negative.
B) Negative; normative.
C) Affirmative; positive.
D) Positive; normative.

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 Review
Which of the following markets has the most restrictive geographic boundary?
A) The market for retail gasoline
B) The market for housing
C) The market for gold
D) The market for beef

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 Review
In a perfectly competitive market:
A) there are a few buyers.
B) there is a single seller.
C) there is a cartel.
D) no single buyer or seller can significantly affect the market price.

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 Review
Boeing Corporation and Airbus Industries are the only two producers of long-range
commercial aircraft. This market is not perfectly competitive because:
A) Each company has annual sales over $10 billion.
B) Each company can significantly affect prices.
C) Airbus receives subsidies from the European Union.
D) Airbus cannot sell aircraft to the United States government.

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 Review
Which of the following goods is NOT a likely component of the Consumer Price Index?
A) Hamburger
B) Gasoline
C) Steel
D) Movie tickets

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 Review
The reward for the capture of Jesse James, a famous bank robber, was $500 in 1881.
Suppose the CPI in 1881 was 0.25. What is the real value of the reward in today’s
dollars if the CPI is 218.1 now?

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 Review
Suppose the minimum wage was $0.25 per hour in 1938 and the CPI in that year was
11.5. If the CPI in 1990 was 130.7, what is the real value of the 1938 minimum wage in
terms of 1990 dollars? The real value of the 1990 minimum wage in terms of 1990
dollars is $4.25. Has the real value of the minimum wage declined since 1938?

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