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Chapter 1

Chapter 1. Preliminaries. Introduction. What are the key themes of microeconomics? What is a Market? Why study microeconomics?. Themes of Microeconomics. Microeconomics deals with limits Limited budgets Limited time Limited ability to produce How do we make the most of limits?

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Chapter 1

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  1. Chapter 1 Preliminaries

  2. Introduction • What are the key themes of microeconomics? • What is a Market? • Why study microeconomics? Chapter 1

  3. Themes of Microeconomics • Microeconomics deals with limits • Limited budgets • Limited time • Limited ability to produce • How do we make the most of limits? • How do we allocate scarce resources? Chapter 1

  4. Themes of Microeconomics • Workers, firms and consumers must make trade-offs • Do I work or go on vacation? • Do I purchase a new car or save my money? • Do we hire more workers or buy new machinery? • How are these trade-offs best made? Chapter 1

  5. Themes of Microeconomics • Consumers • Limited incomes • Consumer theory – describes how consumers maximize their well-being. • How do consumers make decisions about consumption? Chapter 1

  6. Themes of Microeconomics • Workers • Individuals decide when to enter the work-force • Trade-offs of working now or obtaining more education/training • What choices do individuals make in terms of jobs or work places? • How many hours do individuals choose to work? • Trade-off of labor and leisure Chapter 1

  7. Themes of Microeconomics • Firms • What types of products do firms produce? • Constraints on production capacity & financial resources create needs for trade-offs. • Theory of the Firm – describes how these trade-offs are best made Chapter 1

  8. Themes of Microeconomics • Prices • Trade-offs are often based on prices faced by consumers and producers • Workers make decisions based on prices for labor – wages • Firms make decisions based on wages and prices for inputs and on prices for the goods they produce Chapter 1

  9. Themes of Microeconomics • Prices • How are prices determined? • Centrally planned economies -governments control prices • Market economies – prices determined by interaction of market participants • Markets – collection of buyers and sellers whose interaction determines the prices of goods. Chapter 1

  10. Theories and Models • Economics is concerned with explanation of observed phenomena • Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions. • The Theory of the Firm • The Theory of Consumer Behavior Chapter 1

  11. Theories and Models • Theories are used to make predictions • Economic models are created from theories • Models are mathematical representations used to make quantitative predictions Chapter 1

  12. Theories and Models • Validating a Theory • The validity of a theory is determined by the quality of its prediction, given the assumptions. • Theories must be tested and refined • Theories are imperfect – but gives much insight into observed phenomena Chapter 1

  13. Positive & Normative Analysis • Positive Analysis – statements that describe the relationship of cause and effect • Questions that deal with explanation and prediction • What will be the impact of an import quota on foreign cars? • What will be the impact of an increase in the gasoline excise tax? Chapter 1

  14. Positive & Normative Analysis • Normative Analysis – analysis examining questions of what ought to be • Often supplemented by value judgments • Should the government impose a larger gasoline tax? • Should the government decrease the tariffs on imported cars? Chapter 1

  15. What is a Market? • Markets • Collection of buyers and sellers, through their actual or potential interaction, determine the prices of products • Buyers: consumers purchase goods, companies purchase labor and inputs • Sellers: consumers sell labor, resource owners sell inputs, firms sell goods Chapter 1

  16. What is a Market? • Market Definition • Determination of the buyers, sellers, and range of products that should be included in a particular market • Arbitrage • The practice of buying a product at a low price in one location and selling it for more in another location Chapter 1

  17. What is a Market? • Defining the Market • Many of the most interesting questions in economics concern the functioning of markets • Why are there a lot of firms in some markets and not in others? • Are consumers better off with many firms? • Should the government intervene in markets? Chapter 1

  18. Types of Markets • Perfectly competitive markets • Because of the large number of buyers and sellers, no individual buyer or seller can influence the price. • Example: Most agricultural markets • Fierce competition among firms can create a competitive market Chapter 1

  19. Types of Markets • Noncompetitive Markets • Markets where individual producers can influence the price. • Cartel – groups of producers who act collectively • Example: OPEC dominates with world oil market Chapter 1

  20. Market Definition • Market Definition • Which buyers and sellers should be included in a given market • This depends on the extent of the market – boundaries, geographical and by range of products, to be included in it • Market for housing in New York or Indianapolis • Market for all cameras or digital cameras Chapter 1

  21. Market Definition • Importance of market definition • In order to set price, make budgeting decisions, etc., companies must know • Their competitors • Product-characteristic and geographic boundaries of the market • Important for public policy decisions • Should government allow a merger between companies in same market? Chapter 1

  22. Why Study Microeconomics? • Microeconomic concepts are used by everyone to assist them in making choices as consumers and producers. • Examples show the numerous levels of microeconomic questions necessary in many decisions Chapter 1

  23. Ford SUV’s • Built Ford Explorer in 1991, Ford Expedition in 1997 and the Ford Excursion in 1999 • In each of these cases, Ford had to consider many aspects of the economy to ensure their introduction was a sound investment Chapter 1

  24. Ford SUV’s • Questions • How strong in demand and how quickly will it grow? • Must understand consumer preferences and trade-offs • What are the costs of manufacturing • Given all costs of production, how many should be produced each year? Chapter 1

  25. Ford SUV’s • Questions (cont.) • Ford had to develop pricing strategy and determine competitors reactions? • Risk analysis • Uncertainty of future prices: gas, wages • Organizational decisions • integration of all divisions of production • Government regulation • Emissions standards Chapter 1

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