chapter 1 preliminaries. chapter 1: preliminariesslide 2 topics to be discussed the themes of...
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Chapter 1
PreliminariesPreliminaries
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Chapter 1: Preliminaries Slide 2
Topics to be Discussed
The Themes of Microeconomics
What Is a Market?
Real Versus Nominal Prices
Why Study Microeconomics?
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Chapter 1: Preliminaries Slide 3
Preliminaries
Microeconomics deals with:Behavior of individual units
When Consuming• How we choose what to buy
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Chapter 1: Preliminaries Slide 4
Preliminaries
Microeconomics deals with:Behavior of individual units
When Producing• How we choose what to produce
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Chapter 1: Preliminaries Slide 5
Preliminaries
Microeconomics deals with:Markets: The interaction of consumers and
producers
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Chapter 1: Preliminaries Slide 6
Preliminaries
Macroeconomics deals with:Analysis of aggregate issues:
Economic growth Inflation Unemployment
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Chapter 1: Preliminaries Slide 7
Preliminaries
The Linkage Between Micro and Macro-economicsMicroeconomics is the foundation of
macroeconomic analysis
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Chapter 1: Preliminaries Slide 8
The Themes of Microeconomics
According to Mick Jagger* & the Rolling Stones“You can’t always get what you want”
*Economics degree from London School of Economics
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Chapter 1: Preliminaries Slide 9
The Themes of Microeconomics
Why Not?Limited Resources
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Chapter 1: Preliminaries Slide 10
The Themes of Microeconomics
MicroeconomicsAllocation of Scarce Resources and
Trade-offs In a planned economy In a market economy
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Chapter 1: Preliminaries Slide 11
The Themes of Microeconomics
Microeconomics and Optimal Trade-offs
1. Consumer Theory
2. Workers
3. Theory of the Firm
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Chapter 1: Preliminaries Slide 12
The Themes of Microeconomics
Microeconomics and PricesThe role of prices in a market economy
How prices are determined
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Chapter 1: Preliminaries Slide 13
Theories and Models
Microeconomic AnalysisTheories are used to explain observed
phenomena in terms of a set of basic rules and assumptions.
For example The Theory of the Firm The Theory of Consumer Behavior
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Chapter 1: Preliminaries Slide 14
Theories and Models
Microeconomic AnalysisModels:
a mathematical representation of a theory used to make a prediction.
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Chapter 1: Preliminaries Slide 15
Theories and Models
Microeconomic AnalysisValidating a Theory
The validity of a theory is determined by the quality of its prediction, given the assumptions.
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Chapter 1: Preliminaries Slide 16
Theories and Models
Microeconomic AnalysisEvolving the Theory
Testing and refining theories is central to the development of the science of economics.
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Chapter 1: Preliminaries Slide 17
Positive Versus Normative Analysis
Positive AnalysisPositive analysis is the use of theories and
models to predict the impact of a choice.
For example: 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?
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Chapter 1: Preliminaries Slide 18
Positive versus Normative Analysis
Normative AnalysisNormative analysis addresses issues from
the perspective of “What ought to be?”
For example: Consider the equity and efficiency trade-
off of an increase in the gasoline excise tax versus import restriction on foreign oil.
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Chapter 1: Preliminaries Slide 19
What is a Market?
MarketsA geographically defined area where
buyers and sellers interact to determine the price of a product or a set of products.
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Chapter 1: Preliminaries Slide 20
What is a Market?
Markets vs. IndustriesIndustries are the supply side of the
market.
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Chapter 1: Preliminaries Slide 21
What is a Market?
Defining the MarketThe market parameters must be set before
an analysis of the market can take place.
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Chapter 1: Preliminaries Slide 22
What is a Market?
ArbitrageBuying a product at a low price in one
location and selling at a high price in another
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Chapter 1: Preliminaries Slide 23
What is a Market?
Competitive vs. Noncompetitive MarketsCompetitive Markets
Because of the large number of buyers and sellers, no individual buyer or seller can influence the price.
Example: Most agricultural markets
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Chapter 1: Preliminaries Slide 24
What is a Market?
Competitive vs. Noncompetitive MarketsNoncompetitive Markets
Markets where individual producers can influence the price.
Example: OPEC
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Chapter 1: Preliminaries Slide 25
What is a Market?
Market PriceCompetitive markets establish one price.
Noncompetitive markets may set many prices for the same product.
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Chapter 1: Preliminaries Slide 26
What is a Market?
Market Definition & The Extent of a MarketMarket Definition
Which buyers and sellers should be included in a given market
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Chapter 1: Preliminaries Slide 27
What is a Market?
Market Definition - The Extent of a MarketMarket Extent
Defines the boundaries of the market• Geographic• Range of products
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Chapter 1: Preliminaries Slide 28
What is a Market?
ExamplesGeographic boundaries
Gasoline: US vs California Housing: Chicago vs a Chicago
neighborhood
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Chapter 1: Preliminaries Slide 29
What is a Market?
ExamplesRange of Products
Gasoline: regular, super, & diesel Cameras: SLR’s, point & shoot, digital
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Chapter 1: Preliminaries Slide 30
What is a Market?
ExamplesMarkets for Prescription Drugs
Well-defined markets - therapeutic drugs Ambiguous markets - painkillers
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Chapter 1: Preliminaries Slide 31
Real Versus Nominal Prices
Nominal price is the absolute or current dollar price of a good or service when it is sold.
Real price is the price relative to an aggregate measure of prices or constant dollar price.
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Chapter 1: Preliminaries Slide 32
Real Versus Nominal Prices
The Consumer Price Index (CPI) is an aggregate measure.Real prices are emphasized to permit the
analysis of relative prices.
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Chapter 1: Preliminaries Slide 33
Real Versus Nominal Prices
Calculating Real Prices
yearcurrent yearcurrent
yearbase Price Nominal x CPI
CPI Price Real
(base year = 100)
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Chapter 1: Preliminaries Slide 34
An Example:Calculating the Real Price of Milk
1970 .40 38.8 .40 = 38.8/38.8 x .40
1980 .65 82.4 .31 = 38.8/82.4 x .65
1999 1.05 167.0 .24 = 38.8/167.0 x 1.05
Nominal Price Real Price of MilkYear of Milk CPI in 1970 dollars
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Chapter 1: Preliminaries Slide 35
Calculating Real Prices:An Example - Eggs & College
$4,573$19,213x 163.0
38.8
Real Price of a College Education 1998 (1970 = 100)
1.04x163
38.8Eggs of Price Real 1970
1998 (1970 = 100)
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Chapter 1: Preliminaries Slide 36
Calculating Real Prices:An Example - Eggs & College
Consumer Price Index(1983 = 100) 38.8 53.8 82.4 107.6 130.7 163.0
Nominal PricesGrade A Large Eggs $0.61 $0.77 $0.84 $0.80 $0.98 $1.04College Education $2,530 $3,403 $4,912 $8,156 $12,800 $19,213
Real Prices ($1970)Grade A Large Eggs $0.61 $0.56 $0.40 $0.29 $0.30 $0.25College Education $2,530 $2,454 $2,313 $2,941 $3,800 $4,573
1970 1975 1980 1985 1990 1998
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Chapter 1: Preliminaries Slide 37
An Example: The Minimum Wage
Observations
1. The minimum wage has been increasing in nominal terms since 1940.
2. The 1999 real minimum wage was no higher in 1999 than 1950.
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Chapter 1: Preliminaries Slide 38
An Example: The Minimum Wage
What Do You Think?What are the positive and normative issues
of raising the minimum wage?
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Chapter 1: Preliminaries Slide 39
Why Study Microeconomics?
Microeconomic concepts are used by everyone to assist them in making choices as consumers and producers.
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Chapter 1: Preliminaries Slide 40
Why Study Microeconomics?
Two ExamplesFord and the development of its SUV’s
Public Policy Design Automobile emission standards for the
21st century
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Chapter 1: Preliminaries Slide 41
Why Study Microeconomics?
Ford and the development of its SUV’sQuestions
Consumer acceptance and demand Production cost Pricing strategy
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Chapter 1: Preliminaries Slide 42
Why Study Microeconomics?
Ford and the development of its SUV’sQuestions
Risk analysis Organizational decisions Government regulation
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Chapter 1: Preliminaries Slide 43
Why Study Microeconomics?
Auto emission standards for the 21st centuryQuestions
Impact on consumers Impact on producers How to enforce the standards What are the benefits and costs?
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Chapter 1: Preliminaries Slide 44
Summary
Microeconomics is concerned with the decisions made by small economic units.
Microeconomics relies heavily on the use of theory and models.
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Chapter 1: Preliminaries Slide 45
Summary
Microeconomics is concerned with positive questions and normative analysis.
A market refers to a collection of buyers and sellers who interact and to the possibility for sales and purchases that results from that interaction.
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Chapter 1: Preliminaries Slide 46
Summary
The market price is established by the interaction of buyers and sellers.
A market’s geographic boundaries and range of products must be defined.
To eliminate the effects of inflation we measure real prices, rather than nominal prices.
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End of Chapter 1
PreliminariesPreliminaries