copyright (c) 2000 by harcourt, inc. all rights reserved. what is microeconomics? economics –the...

Copyright (c) 2000 by Harcourt, Inc. All rights reserved.

What is Microeconomics?

• Economics– The study of the allocation of scarce resources

among alternative uses

• Microeconomics– The study of the economic choices individuals

and firms make and how those choices create markets


APPLICATION 1.1: Scarcity in Nature

• Nature provides examples of scarcity and choice– Birds of prey recognize a trade-off between

spending time and energy in one area and moving to another location

– To avoid using too much energy, animals will leave an area before the food supply is exhausted


Economic Models

• Simple theoretical descriptions that capture the essentials of how the economy works– Used because the “real world” is too

complicated to describe in detail– Models tend to be “unrealistic” but useful

• While they fail to show every detail (such as houses on a map) they provide enough structure to solve the problem (such as how a map provides you with a way to solve how to drive to a new location)


Uses of Microeconomics

Individuals making decisions regarding jobs, purchases, and finances

Businesses making decisions regarding the demand for their product or their costs

Governments making policy decisions regarding laws and regulations


Model of Supply and Demand

• In Figure 1.2(a), the amount of a good purchased is shown on the horizontal axis and the price is on the vertical axis

• The demand curve shows the amount people want to buy at each price and is negatively sloped reflecting the marginalism principle


Model of Supply and Demand

• The upward sloping supply curve reflects the idea of increasing cost of making one more unit of a good as total production increases

• Supply reflects increasing marginal costs and demand reflects decreasing marginal usefulness


PriceDemand

Supply

Equilibrium pointP*

Quantity per week

0Q*

FIGURE 1.2: The Marshall Supply-Demand Cross


Nonequilibrium Outcomes

• If something causes the price to be set above P*, demanders would wish to buy less than Q* while suppliers would produce more than Q*

• If something causes the price to be set below P*, demanders would wish to buy more than Q* while suppliers would produce less than Q*


APPLICATION 1.4: Shortages in Formerly Communist Economies• In the former Soviet Union price controls

on housing led to long waiting lists for people who wanted to move– underground economies were established

through bribes and apartment swaps with cash payments

• High inflation rates resulted from the elimination price controls in Poland


Shifters of Demand

• Income

• Preferences

• Other prices

• Expectations

• Not Price!!


Price

D

D’ S

P*

P**

Quantityper week

0 Q* Q**

FIGURE 1.3: An increase in Demand Alters Equilibrium Price and Quantity


Shifters of Supply

• Costs

• Other prices

• Expectations

• Not Price!!


Price

D

S’

S

P*

P**

Quantityper week

0 Q** Q*

FIGURE 1.4: A shift in Supply Alters Equilibrium Price and Quantity


The Production Possibility Frontier

A graph showing all possible combinations of goods that can be produced with a fixed amount of resources


Amountof food

per week

4

10A

B

Amountof clothing

per week

0 3 12

FIGURE 1.5: Production Possibility Frontier


Opportunity Cost

• The cost of a good or service as measured by the alternative uses that are foregone by producing the good or service


Amountof food

per week

4

9.510

A

B

Opportunity cost ofclothing = ½ pound of food

Opportunity cost ofclothing = 2 poundsof food

2

Amountof clothing

per week

0 3 4 1213

FIGURE 1.5: Production Possibility Frontier


Two General Equilibrium results from the Production Possibility Frontier

• Because resources are scare, producing more of one good means producing less of another good– “There is no such thing as a free lunch”

• The extent of the opportunity cost of any good depends upon how much of the good is currently being produced


How Economists Verify Theoretical Models

• Two methods are used– Testing Assumptions: Verifying economic

models by examining validity of the assumptions on which they are based

– Testing Predictions: Verifying economic models by asking if they can accurately predict real-world events


The Positive-Normative Distinction

Distinction between theories that seek to explain the world as it is (positive) and theories that postulate the way the world should be (normative).


APPLICATION 1.6: Economic Confusion

• Many jokes and popular opinion suggest that economists do not agree on many issues

• This belief arises primarily because people fail to distinguish between positive and normative issues

• As Table 1 shows, there is much agreement regarding positive issues but much less agreement with normative issues


TABLE 1: Percentage of Economists Agreeing with Various Propositions in Three Nations

Proposition U.S.A.Switzer-

land GermanyTariffs reduce economicwelfare 95 87 94

Flexible exchange rates areeffective for internationaltransactions

94 91 92

Rent controls reduce thequality of housing 96 79 94

Government shouldredistribute income 68 51 55

Government should hire thejobless 51 52 35

copyright (c) 2000 by harcourt, inc. all rights reserved. what is microeconomics? economics –the...

Documents

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vertical axisthe demand