Ekonomi Bisnis dan Manajerial

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What is MICROECONOMICS?MICRO:

– study of economic behavior of (relatively) "small" units, e.g., workers, firms

Versus MACRO:– study of economy as a whole, – aggregate actor behavior

• Remarkable consensus on micro's underlying principles– "laws" and tools of analysis, but vast differences

in terms of what to do with the analysis.

• Micro inherently conservative (?!).

Role of Theory

Microeconomic theory evolved gradually – 1700s & late 1800s. – Marshall’s famous "scissors"– Few changes to core of micro

theory in many decades.

"Theory provides means or framework for explaining complex reality”– Simplifies/abstracts from reality– Need not fully or precisely describe reality

Basic Supply and Demand CurvesPrice

Quantity

S D

Role of Theory

• Best test of 'good' theory? – Whether it explains/predicts what it's designed

to, NOT whether its assumptions are correct or reflect reality

• CAVEAT:– Many controversies & issues here– Can have seemingly good theory, but as

result of non-modeled events or other supporting circumstances, lousy results

Positive v. Normative Analysis

Economists & others often called on to assess best policy approach. – Positive analysis — "WHAT IS“– Normative analysis — "WHAT SHOULD BE"

Important Distinction– Much of micro in realm of positive analysis, dealing

w/propositions that can be tested in terms of underlying logic (qualitative analysis) & empirical evidence (quantitative analysis)

Positive v. Normative Analysis

• Qualitatively determining expected effects of particular policy, based on micro theory– Likely effects on employment, production, prices

• Quantitatively determining size of actual effects of particular policy. – Stats./econometrics & statistical significance

• Then, go further (Steps 1 & 2). Use value judgments to decide whether or not such effects are desired — realm of normative analysis.

• Economists no better than anyone else at making these …

Value Judgments

"When analysis comes in conflict with [strongly held] values, values trump analysis every time."

• Theda Skocpol (1997 Harvard) on 'welfare devolution’

Continuing debate on the ‘success’ of welfare reform in U.S. CEA, Bill Clinton, Al From, Bush, others:

• Was it policy or the economy & how much of each? J. Bishop’s 1998 & R. Blank’s 2002 analysis of impacts v. CEA’s

Welfare Reform’s ‘Success’?

Labor Force Participation Rates for Women by Marital Status and Presence of Children, 1989-2001

0.600

0.620

0.640

0.660

0.680

0.700

0.720

0.740

0.760

0.780

0.800

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Single w/ kids under 18

Married w/ no kids

Single w/ no kids

Married w/ kids under 18

Figure 3-1

Source: Authors' tabulations of March Current Population Survey data, for

Consider Blank (2002)—

Why POLITICAL ECONOMY?

Why not just microeconomics taught by UT’s econ tribe?– Cheaper, easier? Why not? – For starters, check out stark contrast

in treatments by B&Z, Kuttner, Blank & McGurn …

QUESTIONS – Do “free markets” exist? Yes & No.

So what?– What share of GDP produced & sold

in “free markets”?

Considerations

• Influence of laws, institutions & “rules of the game”

• Effects of power & influence on market outcomes

• Issues surrounding “one-man/one vote,” “one-dollar/one-vote” – The Endowment Issue

• Effects of policies & policy shifts on markets & on market outcomes

Considerations

• Question: How deterministic is market analysis?

• Question: Is there ‘play’ in markets? If so, how much? – 2001 Austin Equity Comm. & “living wage”

issue; see J. Siedlecki piece, LBJ Journal (Spring/Summer 2005 – Link to article)

• Question: Do markets sometimes fail and, if so, whats’ to be done about it?

The Imperial Market

Considerable “market worship”• Not just among economists, but

policymakers of almost all stripes (Kuttner, ch. 2)

Theory of Second Best• i.e., where markets have multiple

‘distortions,’ removing one to create purer market won’t necessarily improve overall outcomes.

Market Analysis: Terms & Concepts

Market defined as —" Area” where potential buyers & sellers of a

good/service interact"interplay of all potential buyers & sellers involved in”

Prices (to economists)Relative (or real) prices, i.e., price relative to prices of

all other goods/services at point in time. Issue more one of dynamics, change over time...

Market Analysis: Key Actors

Buyers/consumers– Theoretical abstraction largely ignores

important market intermediaries, e.g., unions, trade associations.

‘Lost’ tribe of economists who emphasize institutions & their effects within a market economy.– Pure market analysis insufficient, per se

Galbraith

Marshall

Market Analysis: Time

Time • One of more important

dimensions of market analysis

• S & D responses can & do vary enormously over the short- and longer-term!

Behavioral Assumptions

Critical foundation for what follows:1. Self-interested behavior

• actors pursue own goals & objectives

2. Rational behavior• actors weigh choices & actions and act

deliberately

3. Scarce resources• or, as a famous (non-practicing) economist put

it, "you can't always get what you want!”

Note: 1 + 2 => generally prefer more to less

Behavioral Assumptions

THUS, • Actors must choose among available

options, pursuing desires rationally with limited resources

or• "Actors make choices subject to a

resource constraint"

Production Possibilities Frontier

• All possible combinations of goods/services a rational actor can attain with fixed resources

• Technology• [What does this mean?]

Illustrate with 2 choices • Say... research reports, R,

and research proposals, P • Might also view as Present v. Future

PPF

Research

Reports (presen

t)

Research Proposals

(future)

Production Possibilities Curve

PPF

Production Possibilities Curve

Research

Reports (presen

t)

Research Proposals

(future)

A

PPF

Production Possibilities Curve

Research

Reports (presen

t)

Research Proposals

(future)

A

B

PPF

Production Possibilities Curve

Research

Reports (presen

t)

Research Proposals

(future)

A

BC

PPF

Production Possibilities Curve

Research

Reports (presen

t)

Research Proposals

(future)

A

BC

D

PPF

Opportunity Cost:• Amount of one good that must be

foregone to produce added unit of another• PPF slope• Marginal Rate of Transformation, MRT

• Defined as: ∆R / ∆P • Think "rise over run”

PPF Questions

Q1: Why is PPF concave?A1: Efficiency of resource use dictates that as shift

resources to producing more of one, less of another, become less efficient in doing so.

Q2: Which goods combination = BEST?A2: Don't know (yet)! Depends on "preferences"

which we'll get to shortly.

PPF Questions …

Q3: Why not either devote more resources to production or improve technology to attain greater amounts of BOTH goods?

A3: Can't! In the short run, resources & technology are both FIXED.

Opportunity Cost

• Economic or opportunity cost of given action or choice comprised of both: – EXPLICIT (or accounting) Cost

• defined typically in terms of monetary costs; – IMPLICIT (or non-monetary) Cost

• imputed value of alternative use of resources

• “Value of resource in its best alternative use", includes both explicit (monetary) and implicit (or non-monetary) costs– Key concept in micro & policy analysis– Numerous applications, e.g., benefit/cost analysis

Discussion

Significance of accounting v. economic costs, in terms of: – Education & career choices?– The environment?– Welfare reform and related interventions?

What of "sunk costs"? – Already incurred, can't recoup. So, forget

them.

Demand Schedules & Curves

Demand – Schedule of prices & associated

quantities of goods/services consumers willing & able to purchase.

Demand Schedule, for example:– Functionally Q1 = a + bP1

Prices Quantities$7 2$6 3$5 4

Etc...

Demand Schedules & Curves

Law of Demand– The lower the price of a good or service, the

larger the quantity consumers wish to purchase (demand), ceteris paribus. • Law of D —> negative slope for D curve!• NOTE TERMS! Distinguish carefully between:

– ∆Qd (movement along)versus

– ∆ in D, a shift in D Curve

– Ceteris paribus — tastes, incomes, prices of other goods. E.g. iPods...

Demand Schedules & Curves

Price

Quantity

D1

Demand for iPods

Demand Schedules & Curves

Price

Quantity

D1

Demand for iPods

D2

Demand Depends On...

Incomes: Response depends very much on TYPE of good/service! – If “normal” good, increase in average

household income, Y• With P unchanged, leads to

increased consumption of iPods • That is, demand shifts from D1 to D2

– If "inferior" good, increase in Y• With P unchanged, leads to decreased iPod

consumption, again a demand shift.

Inferior Goods?

Inferior goods: – Spam– Texas wines– Hamburger– Others?

*Most goods = Normal*

Demand Depends On...

Prices of Other Goods– Depends very much on WHICH other goods!

Examples...– CD Prices? Sharp drop in P of CDs leads to

increased consumption of CD players• A shift out in demand, from D1 to D2. • Complements in consumption, I.e., their

consumption "goes together"...

Demand Depends On...

Prices of Other Goods• another example

– VCRs? Sharp drop in P of DVD players leads to decreased consumption of VCRs

• a shift in demand from D2 to D1. • Substitutes in consumption, alternatives for

meeting same needs... • “Either/or” goods.

Demand Depends On...

Tastes & Preferences– Can deal with these any

number of ways:

Consider introduction of new alternatives– growth of live music

venues, DATs & DAT players, iPods, "retro" (vinyl) movement

– E.g., the Wine Industry

Supply Schedules & Curves

SUPPLY, the producer side of the market: – schedule of prices & associated quantities producers willing &

able to produce & sell at point in time.LAW of SUPPLY:

– Higher the price, the larger the quantity producers will want to produce (supply) at any point in time, cet. par. So, positive slope!

P as "reward for production": – As more produced, per-unit opportunity cost of production tends

to increase. Higher Ps needed to elicit greater Qs.Ceteris paribus:

– Technology/production techniques, input factor prices/availability generally. Try same e.g., iPods...

Supply Schedules & Curves

Quantity

S1

Supply of iPodsPrice

Supply Schedules

Consider:• Technology of Production

– Intro of new, more efficient production techniques (e.g. HPWO) allows producers to produce more at every P. So, supply shifts out from S1 to S2

• Input Supply Conditions– Increase in labor costs—one NOT offset by

productivity increases—leads to reduced supply, a shift from S2 to S1.

Supply Schedules & Curves

Quantity

S1

Supply of iPods

S2

Price

Market Equilibrium, Disequilibrium

Equilibrium P & Q —> no forces acting to make them different! – Static, not really dynamic.

Example? – Try the market for Applied Microeconomics

textbooks...

Market Equilibrium

Price

Quantity

S D

Applied Microeconomics Textbook Market

Market Equilibrium

Applied Microeconomics Textbook Market

Quantity

S D

Pe $12

5

Qe

Price

Market Equilibrium

Applied Microeconomics Textbook Market

Quantity

S D

Pe$12

5

Qe

Price

SurplusP1

$200

Q1 Q2

Market Equilibrium

Applied Microeconomics Textbook Market

Quantity

S D

Pe$12

5

Qe

Price

P1$200

Shortage

Surplus

P2$75

Q1 Q2

Government Interventions...• NYC rent controls, minimum wage hikes

(1977-81, 1989, 1995)– classic illustrations of impact of market interventions– wage/price controls (1971-74)

Q: Are such interventions “bad”?– Maybe, if you're a market worshiper

• Otherwise, depends upon your values & other non-market considerations ...

• Some adverse market & non-market responses—– Non-price rationing– Quality deterioration– Black markets