|
|||||
Microeconomics
ECO402
VU
Lesson
1
ECONOMICS
Economics is
the study of how societies
use scarce resources to
produce valuable
commodities
and distribute them among
different people.
Microeconomics
deals with:
·
Behavior
of individual units
·
When
Consuming; How we choose
what to buy
·
When
Producing; How we choose
what to produce
·
Markets:
The interaction of consumers
and producers
·
Analysis
of aggregate issues:
Economic
growth
Inflation
Unemployment
Microeconomics
vs. Macroeconomics
Microeconomics
is the foundation of macroeconomic
analysis.
Themes
of Microeconomics
According
to Mick Jagger & the
Rolling Stones, "You can't
always get what you
want".
Why
Not?
Limited
Resources
Unlimited
Wants
Allocation
of Scarce Resources and
Trade-offs
In
a planned economy
In
a market economy
Microeconomics
and Optimal
Trade-offs
1.
Consumer Theory
2.
Workers
3.
Theory of the Firm
Microeconomics
and Prices
The
role of prices in a market
economy
How
prices
are
determined
Theories
and Models
Microeconomic
Analysis
Theories
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
Models:
A
mathematical representation of a theory
used to make a
prediction.
Validating
a Theory
The
validity of a theory is determined by
the quality of its
prediction, given
the
assumptions.
Evolving
the Theory
Testing
and refining theories is
central to the development of
the science of
economics.
Positive
versus Normative
Economics
Positive
Economics
Positive
economics deals with the
observations or predictions of the
facts of
economic
life. For example:
What
will be the impact of an
increase in wages on the
price of a product?
1
Microeconomics
ECO402
VU
Normative
Economics
Normative
Economics is the value
judgments about how
economics should
operate,
based on certain moral
principles or preferences?" For
example:
What
wage rate should be paid to
the auto workers to make
them an active
member
of the society?
What
is a Market?
Markets
A
geographically defined area
where buyers and sellers
interact to determine
the
price
of a product or a set of
products.
Markets
vs. Industries
Industries
are the supply side of
the market.
Defining
the Market
The
market parameters must be
set before an analysis of
the market can
take
place.
Arbitrage
Buying
a product at a low price in
one location and selling at
a high price in
another.
Competitive
vs. Noncompetitive
Markets
Competitive
Markets
Because
of the large number of
buyers and sellers, no
individual buyer
or
seller can influence the
price.
Example:
Most agricultural
markets
Noncompetitive
Markets
Markets
where individual producers
can influence the
price.
Example:
OPEC
Market
Price
Competitive
markets establish one
price.
Noncompetitive
markets may set many
prices for the same
product.
Market
Definition - The Extent of a
Market
Market
Definition
Which
buyers and sellers should be
included in a given
market?
Market
Extent
Defines
the boundaries of the
market
Geographic
Range
of products
Examples
Geographic
boundaries
Gold:
Lahore vs. Karachi
Housing:
Islamabad vs.
Rawalpindi
Range of
Products
Gasoline:
regular, super, &
diesel
Cameras:
Polaroid, point & shoot,
digital
Markets
for Prescription
Drugs
Well-defined
markets - therapeutic
drugs
Ambiguous
markets painkillers
2
Table of Contents:
|
|||||