Micro ch01

CHAPTER
Preliminaries
Prepared by:
Fernando & Yvonn Quijano
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
CHAPTER 1 OUTLINE
1.1 The Themes of Microeconomics
1.2 What Is a Market?
1.3 Real versus Nominal Prices
1.4 Why Study Microeconomics?

Chapter 1: Preliminaries
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 2 of 18
Preliminaries
● 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.
1.1 THE THEMES OF MICROECONOMICS
Trade-Offs
Consumers
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
labor for leisure.
Firms
Firms also face limits in terms of the kinds of products that
they can produce, and the resources available to produce
them.
Barter( 물물교환 ) by Sara Teasdale ( 장영희
역)
“Life will not give but she will sell”

Life has loveliness to sell, 삶은 아주 멋진 것들을 팝니다 .
All beautiful and splendid things; 모두 아름답고 훌륭한 것들이죠 .
Blue waves whitened on a cliff.., 벼랑에 하얗게 부서지는 푸른 파도
And children's faces looking up, 잔처럼 경이로움을
Holding wonder like a cup. 가득 담고 쳐다보는 아이들의 얼굴들 .
Music like a curve of gold, 금빛 줄기처럼 휘어지는 음악소리 .
Scent of pine trees in the rain, 비에 젖은 솔 내음새
Eyes that love you, arms that hold… 당신을 사랑하는 눈매 , 보듬어 안는 팔들 ,
Give all you have for loveliness; 전재산을 털어 아름다움을 사세요 .
Buy it, and never count the cost… 사고나서는 값을 따지지 마세요 .
And for a breath of ecstasy, 한 순간의 환희를 위해
Give all you have been, or could be. 당신의 모든 것을 바치세요 .
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—collections of

buyers and sellers that together determine the price
of a good.
Theories and Models
In economics, explanation and prediction are based on

theories. Theories are developed to explain observed
phenomena, and examining ideal states, in terms of a set of
basic rules and assumptions.
A model is an abstraction of real world of complexities with a

purpose of focusing on important matters.
Positive versus Normative Analysis
● positive analysis Explaining observed phenomena by

analyzing the relationships of cause and effect.
● normative analysis Examining ideal states by asking

the questions of what ought to be.
1.2 WHAT IS A MARKET?
● market Collection of buyers and sellers that, through

their actual or potential interactions, determine 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.
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.
Market Price
● market price Price prevailing in a competitive market.

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.
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.
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.
• Moohak- Daesun (2002)
– Moohak is a local soju producer in Kyungnam province, while

Daesun is a local producer in adjacent Busan area.
– Both are dominant in each region, and almost close to a
monopolistic position with market shares more than 80%.
– But they are fringe firms in national market with market shares
less than 10%. Jinro is a national producer with more than 50%.
– KFTC defining the relevant markets as the two regions, made an
injunctive order of shares disposal in 2003.
– Seoul high court, evaluating confronting economic analyses on
the relevant geographic market, made a final decision upholding

the KFTC’s decision in 2004.
• Jeon (2004) submitted economic analyses which confirmed
the KFTC’s market definition.
•23年 6月 21日 •12

• Hite-Jinro (2005)
– Hite and Jinro are dominant companies in Korean beer and soju
market, respectively – each with market share more than half.
– Opposing parties argued that beer and soju constitute a single
product market relevant to antitrust merger evaluation, so-called
“pub alcoholic drink ( 大衆酒 ).”
– KFTC concluded that beer and soju are separate product
markets, and approved the merger with some transitory
corrective remedies attached.
• Jeon-Kim-Park-Yoon (2005) submitted KFTC several
economic analyses to support that beer and soju are

separate product markets
•23年 6月 21日 •13

1.3 REAL VERSUS NOMINAL PRICES
● 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 for final consumption goods
● Producer Price Index Measure of the aggregate price

level for intermediate products and wholesale goods.
Table 1.1 The Real Price of Eggs and of a College Education

1970 1980 1990 2000 2007
Consumer Price Index 38.8 82.4 130.7 172.2 205.8
Nominal Prices
Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64
College Education $2,530 $4,912 $12,018 $20,186 $27,560
Real Prices ($1970)
Grade A Large Eggs $0.61 $0.40 $0.30 $0.21 $0.31
College Education $2,530 $2,313 $3,568 $4,548 $5,196
The real price of eggs in 1970 dollars is calculated as follows:
CPI1970 38.8
Re al price of eggs in 1980   nominal price in 1980   $0.84  $0.40
CPI1980 82.4
CPI1970 38.8
Re al price of eggs in 1990   nominal price in 1990   $1.01  $0.30
CPI1990 130.7
Figure 1.1
The Minimum Wage
In nominal terms,
the minimum wage
has increased
steadily over the
past 70 years.
However, in real
terms its expected
2010 level is below

that of the 1970s.
1.4 WHY STUDY MICROECONOMICS?
Corporate Decision Making: Ford’s Sport Utility Vehicles
The design and efficient production of Ford’s SUVs involved

not only some impressive engineering, but a lot of economics
as well.
First, Ford had to think carefully about how the public would
react to the design and performance of its new products.
Next, Ford had to be concerned with the cost of

manufacturing these cars.
Finally, Ford had to 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
The design of a program like the Clean Air Act involves a

good deal of economics.
First, the government must evaluate the monetary impact of

the program on consumers.
The government must determine how new standards will

affect the cost of producing cars.
Finally, the government must ask why the problems related to

air pollution are not solved by our market-oriented economy.

Micro ch01

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Micro ch01

Uploaded by

Copyright:

Available Formats

CHAPTER

1.1 The Themes of Microeconomics

1.2 What Is a Market?

1.3 Real versus Nominal Prices

1.4 Why Study Microeconomics?

● microeconomics Branch of economics that deals with

● macroeconomics Branch of economics that deals with

growth rate of national output, interest rates,

“Life will not give but she will sell”

Prices and Markets

Microeconomics describes how prices are

In a centrally planned economy, prices are set by

In a market economy, prices are determined by the

These interactions occur in markets—collections of

Theories and Models

In economics, explanation and prediction are based on

A model is an abstraction of real world of complexities with a

● positive analysis Explaining observed phenomena by

● normative analysis Examining ideal states by asking

● market Collection of buyers and sellers that, through

● market definition Determination of the buyers, sellers,

● arbitrage Practice of buying at a low price at one

Competitive versus Noncompetitive Markets

● perfectly competitive market Market with many buyers

● market price Price prevailing in a competitive market.

Market Definition—The Extent of a Market

Market definition is important for two reasons:

• A company must understand who its actual and potential

• Market definition can be important for public policy

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

The U.S. Department of Justice (DOJ) challenged the acquisition

– Moohak is a local soju producer in Kyungnam province, while

the relevant geographic market, made a final decision upholding

•23年 6月 21日 •12

economic analyses to support that beer and soju are

•23年 6月 21日 •13

● nominal price Absolute price of a good, unadjusted for

● real price Price of a good relative to an aggregate

● Consumer Price Index Measure of the aggregate price

● Producer Price Index Measure of the aggregate price

Table 1.1 The Real Price of Eggs and of a College Education

College Education $2,530 $2,313 $3,568 $4,548 $5,196

The real price of eggs in 1970 dollars is calculated as follows:

The Minimum Wage

2010 level is below

Corporate Decision Making: Ford’s Sport Utility Vehicles

The design and efficient production of Ford’s SUVs involved

Next, Ford had to be concerned with the cost of

manufacturing these cars.

Finally, Ford had to think about its relationship to the

Public Policy Design: Automobile Emission Standards for

The design of a program like the Clean Air Act involves a

First, the government must evaluate the monetary impact of

The government must determine how new standards will

Finally, the government must ask why the problems related to

You might also like