MICROECONOMICS

by Robert S. Pindyck
Daniel Rubinfeld
Ninth Edition

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Part One
The Introduction: Markets and Prices Cost of
Production

Part 1 surveys the scope of CHAPTERS

microeconomics and introduces some
basic concepts and tools. 1. Preliminaries

2. The Basics of Supply and Demand

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Chapter 1
Preliminaries
CHAPTER OUTLINE CHAPTER OUTLINE

Microeconomics deals with the behavior of 1.1 The Themes of Microeconomics

individual economic units.
1.2 What Is a Market?
By contrast, macroeconomics deals with
aggregate economic quantities. 1.3 Real versus Nominal Prices

1.4 Why Study Microeconomics

LIST OF EXAMPLES

1.1 The Market for Sweeteners

1.2 A Bicycle Is a Bicycle. Or Is It?

1.3 The Price of Eggs and the Price of a

College Education

1.4 The Authors Debate the Minimum Wage

Health Care and College Textbooks

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1.1 The Themes of Microeconomics (1 of 5)
Microeconomics Branch of economics that deals with the behavior of individual economic
units—consumers, firms, workers, and investors—as well as the markets that these units
comprise.

Macroeconomics Branch of economics that deals with aggregate economic variables,

such as the level and growth rate of national output, interest rates, unemployment, and
inflation.

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1.1 The Themes of Microeconomics (2 of 5)
Trade-Offs

CONSUMERS

Trade-offs in the purchase of more of some goods for less of others

Trade-off between current consumption and future consumption

WORKERS

Trade-offs in their choice of employment

Trade-off between labor and leisure

FIRMS

Trade-offs in what to produce

Trade-offs in the resources to use in production

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1.1 The Themes of Microeconomics (3 of 5)
Prices and Markets

Trade-offs are based on the prices faced by consumers, workers, or firms.

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 in markets—collections of buyers and sellers that together determine the price of a
good.

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1.1 The Themes of Microeconomics (4 of 5)
Theories and Models

Like any science, economics is concerned with the explanations of observed phenomena
and predictions based on theories developed from a set of assumptions.

A model is a mathematical representation, based on economic theory, of a firm, a market,

or some other entity.

Statistics and econometrics let us measure the accuracy of our predictions.

When evaluating a theory, it is important to keep in mind that it is invariably imperfect and
has limited success in making predictions.

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1.1 The Themes of Microeconomics (5 of 5)
Positive versus Normative Analysis

Positive questions deal with explanation and prediction, normative questions with what
ought to be.

positive analysis Analysis describing relationships of cause and effect.

Positive analysis is central to microeconomics.

normative analysis Analysis examining questions of what ought to be.

Normative analysis is often supplemented by value judgments. When value judgments are
involved, microeconomics cannot tell us what the best policy is. However, it can clarify the
trade-offs and thereby help to illuminate the issues and sharpen the debate.

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1.2 What Is a Market? (1 of 6)
market Collection of buyers and sellers that, through their actual or potential interactions,
determines the price of a product or set of products.

market definition Determination of the buyers, sellers, and range of products that should
be included in a particular market.

Arbitrage Practice of buying at a low price at one location and selling at a higher price in
another.

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1.2 What Is a Market? (2 of 6)
Competitive versus Noncompetitive Markets

perfectly competitive market Market with many buyers and sellers, so that no single
buyer or seller has a significant impact on price.

Many other markets are competitive enough to be treated as if they were perfectly
competitive.

Other markets containing a small number of producers may still be treated as competitive
for purposes of analysis.

Some markets contain many producers but are noncompetitive; that is, individual firms can
jointly affect the price.

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1.2 What Is a Market? (3 of 6)
Market Price

market price Price prevailing in a competitive market.

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, and for many goods the
fluctuations can be rapid. This is particularly true for goods sold in competitive markets.

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1.2 What Is a Market? (4 of 6)
Market Definition—The Extent of a Market

extent of a market 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.

We must also think carefully about the range of products to include in a market.

Market definition is important for two reasons:

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.

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1.2 What Is a Market? (5 of 6)
EXAMPLE 1.1

THE MARKET FOR SWEETENERS

In 1990, the Archer-Daniels-Midland Company (ADM) acquired the Clinton Corn Processing
Company (CCP).

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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1.2 What Is a Market? (6 of 6)
EXAMPLE 1.2
A BICYCLE IS A BICYCLE. OR IS IT?
There are actually two different markets for bicycles, which can be identified by the type of
store where the bicycle is sold.
TABLE 1.1 MARKETS FOR BICYCLES
TYPE OF BICYCLE
Mass Market Bicycles: Sold
by mass merchandisers such
as Target, Wal-Mart, Kmart,
and Sears.
Dealer Bicycles: Sold by
bicycle dealers – stores that
sell only (or mostly) bicycles
and bicycle equipment.
COMPANIES AND PRICES (2011)
Huffy: $90—$140
Schwinn: $140—$240
Mantis: $129—$140
Mongoose: $120—$280
Trek: $400—$2500
Cannondale: $500—$2000
Giant: $500—$2500
Gary Fisher: $600—$2000
Mongoose: $700—$2000
Ridley: $1300—$2500
Scott: $1000—$3000
Ibis: $2000 and up
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1.3 Real versus Nominal Prices (1 of 7)
nominal price Absolute price of a good, unadjusted for inflation.

real price Price of a good relative to an aggregate measure of prices; price adjusted for
inflation.

Consumer Price Index Measure of the aggregate price level.

Producer Price Index Measure of the aggregate price level for intermediate products and
wholesale goods.

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1.3 Real versus Nominal Prices (2 of 7)
After correcting for inflation, was the price of butter more expensive in 2010 than in 1970?
To find out, let’s calculate the 2015 price of butter in terms of 1970 dollars. The CPI was
38.8 in 1970 and rose to about 237.0 in 2015.

38.8
 $3.48  $0.57
237.0

The nominal price of butter went up by about 300 percent, while the CPI went up 511
percent. Relative to the aggregate price level, butter prices fell.

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1.3 Real versus Nominal Prices (3 of 7)
EXAMPLE 1.3 THE PRICE OF EGGS AND THE PRICE OF A COLLEGE EDUCATION

TABLE 1.2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATION

Blank Cell 1970 1980 1990 2000 2016

Consumer Price
38.8 82.4 130.7 172.2 241.7
Index

Nominal Prices Blank Cell Blank Cell Blank Cell Blank Cell Blank Cell

Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $2.47

College Education $1,784 $3,499 $7,602 $12,922 $25,694

Real Prices ($1970) Blank Cell Blank Cell Blank Cell Blank Cell Blank Cell

Grade A Large Eggs $0.61 $0.40 $0.30 $0.21 $0.40

College Education $1,784 $1,624 $2,239 $2,912 $4,125

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1.3 Real versus Nominal Prices (4 of 7)
EXAMPLE 1.3 THE PRICE OF EGGS AND THE PRICE OF A COLLEGE EDUCATION

The real prices of eggs and a college education in 1970 dollars is calculated as follows:

Real price of eggs in 1980  CPI1970  nominal price in 1980

CPI1980

Real price of eggs in 1990  CPI1970  nominal price in 1990

CPI1990
and so forth.

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1.3 Real versus Nominal Prices (5 of 7)
EXAMPLE 1.3 THE PRICE OF EGGS AND THE PRICE OF A COLLEGE EDUCATION

Now, suppose we want to calculate the real price of eggs in 1990 dollars. Then:

Real price of eggs in 1970  CPI1990  nominal price in 1970 = 130.7  0.61 2.05
CPI1970 38.8

Real price of eggs in 2016  CPI1990  nominal price in 2016 = 130.7  2.47  1.34
CPI2016 241.7

Percentage change in real price  real price in 2016 - real price in 1970
real price in 1970

 1.34  2.05  0.34

2.05

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1.3 Real versus Nominal Prices (6 of 7)
EXAMPLE 1.4 THE AUTHORS DEBATE THE MINIMUM WAGE

It is the real minimum wage that matters, and

that has been declining

FIGURE 1.1

THE MINIMUM WAGE

In nominal terms, the minimum wage has

increased steadily over the past 80 years.
However, in real terms its 2016 level is below
that of the 1970s.

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1.3 Real versus Nominal Prices (7 of 7)
EXAMPLE 1.5 HEALTH CARE AND COLLEGE TEXT BOOKS

FIGURE 1.2

THE PRICES OF HEALTH CARE AND COLLEGE TEXTBOOKS

The prices of both health care and college textbooks have been rising much faster than
overall inflation. This is especially true of college textbook prices, which have increased
about three times as fast as the CPI.

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1.4 Why Study Microeconomics? (1 of 2)
Corporate Decision Making: The Toyota Prius

In 1997, Toyota Motor Corporation introduced the Prius in Japan, and started selling it worldwide
in 2001. The design and production of the Prius involved not only some impressive engineering,
but a lot of economics as well.

Many of the challenges faced by Toyota in building the Prius are discussed throughout this
textbook.
Issues Chapters Issues3 Chapters
Consumer preferences and Chapters 3, 4, and 5 Consumer preferences and Chapters 3, 4, and 5
demand demand

Production and cost Chapters 6 and 7 Production and cost Chapters 6 and 7

The profit-maximizing choice Chapters 8 and 10 The profit-maximizing choice of Chapters 8 and 10
of output output
Pricing Chapters 10 and 11 Pricing Chapters 10 and 11

Competitive strategy Chapters 12 and 13 Competitive strategy Chapters 12 and 13

Oil and other commodity Chapters 2 and 9 Oil and other commodity Chapters 2 and 9
markets markets

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1.4 Why Study Microeconomics? (2 of 2)
Public Policy Design: Fuel Efficiency Standards for the Twenty-First Century

In 1975, the U.S. government imposed regulations designed to improve the average fuel
economy of domestically-sold cars and light trucks. The CAFE (Corporate Average Fuel
Economy) standards have become increasingly stringent over the years.

A number of important decisions have to be made when designing a fuel efficiency

program, and most of those decisions involve economics.

First, the government must evaluate the monetary impact of the program on consumers.

Before imposing CAFE standards, it is important to estimate the likely impact those
standards will have on the cost of producing cars and light truck.

The government must also ask why problems related to oil consumption are not solved by
our market-oriented economy.

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