•MES 3023 - MICROECONOMICS

Chapter 1: Preliminaries

FAKULTI PENGURUSAN PERNIAGAAN DAN PERAKAUNAN

Lecturer : Tel / email :

TENGKU KHAIRI BIN TENGKU A.RAHMAN 0145433146 / [email protected]

Day / Lecture time : Grading

Wednesday : 8am-10am. GC22 Exercises and Quizzes(20%) Midexam (30%) Final Exam (50%)

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Chapter 1: Preliminaries

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CHAPTER

1 Preliminaries

Robert S.Pindyck dan Danielby: L.Rubinfeld , Prepared Microeconomics, 7th Edition, Prentice-Hall, Fernando & Yvonn Quijano New York

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CHAPTER 1 OUTLINE

1.1 The Themes of Microeconomics 1.2 What Is a Market? 1.3 Real versus Nominal Prices

Chapter 1: Preliminaries

1.4 Why Study Microeconomics?

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Preliminaries ● microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise.

Chapter 1: Preliminaries

● macroeconomics Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation.

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Preliminaries • Microeconomics deals with: –

Behavior of individual units •

When Consuming How we choose what to buy

Chapter 1: Preliminaries

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Preliminaries • Microeconomics deals with: –

Behavior of individual units •

When Producing How we choose what to produce

Chapter 1: Preliminaries

–

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Preliminaries • Microeconomics deals with: Markets: The interaction of consumers and producers

Chapter 1: Preliminaries

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Preliminaries • Macroeconomics deals with: Analysis of aggregate issues: •

Economic growth

•

Inflation

•

Unemployment

Chapter 1: Preliminaries

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Preliminaries • The Linkage Between Micro and Macro-economics Microeconomics is the foundation of macroeconomic analysis

Chapter 1: Preliminaries

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The Themes of Microeconomics

• According to Mick Jagger* & the Rolling Stones

Chapter 1: Preliminaries

– “You can’t always get what you want”

•Chapter 1: Preliminaries

•Slide 12

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The Themes of Microeconomics • Why Not?

Chapter 1: Preliminaries

– Limited Resources

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1.1

THE THEMES OF MICROECONOMICS

Trade Offs

Consumers Consumers have limited incomes, which can be spent on a wide variety of goods and services, or saved for the future.

Chapter 1: Preliminaries

Workers Workers also face constraints and make trade-offs. First, people must decide whether and when to enter the workforce. Second, workers face trade-offs in their choice of employment. Finally, workers must sometimes decide how many hours per week they wish to work, thereby trading off labor for leisure.

Firms Firms also face limits in terms of the kinds of products that they can produce, and the resources available to produce them.

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1.1

THE THEMES OF MICROECONOMICS

Prices and Markets

Microeconomics describes how prices are determined.

Chapter 1: Preliminaries

In a centrally planned economy, prices are set by the government. In a market economy, prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good.

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1.1

THE THEMES OF MICROECONOMICS

Theories and Models

In economics, explanation and prediction are based on theories. Theories are developed to explain observed phenomena in terms of a set of basic rules and assumptions. A model is a mathematical representation, based on economic theory, of a firm, a market, or some other entity.

Chapter 1: Preliminaries

Positive versus Normative Analysis ● positive analysis Analysis describing relationships of cause and effect.

● normative analysis of what ought to be.

Analysis examining questions

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The Themes of Microeconomics • Microeconomics – Allocation of Scarce Resources and Trade-offs

Chapter 1: Preliminaries

• In a planned economy • In a market economy

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Theories and Models • Microeconomic Analysis –

Models:

a mathematical representation of a theory used to make a prediction.

Chapter 1: Preliminaries

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Positive Versus Normative Analysis • Positive Analysis –

Chapter 1: Preliminaries

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Positive 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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Positive versus Normative Analysis • Normative Analysis – –

Normative 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.

Chapter 1: Preliminaries

•

•Slide 21

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1.2

WHAT IS A MARKET?

● market Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products.

Chapter 1: Preliminaries

● market definition Determination of the buyers, sellers, and range of products that should be included in a particular market. ● arbitrage Practice of buying at a low price at one location and selling at a higher price in another.

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1.2

WHAT IS A MARKET?

Competitive versus Noncompetitive Markets

● perfectly competitive market Market with many buyers and sellers, so that no single buyer or seller has a significant impact on price. Market Price Price prevailing in a competitive market.

Chapter 1: Preliminaries

● market price

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1.2

WHAT IS A MARKET?

Market Definition—The Extent of a Market ● extent of a market Boundaries of a market, both geographical and in terms of range of products produced and sold within it.

Market definition is important for two reasons:

Chapter 1: Preliminaries

• A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future.

• Market definition can be important for public policy decisions.

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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.

Chapter 1: Preliminaries

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What is a Market? • Markets vs. Industries Industries are the supply side of the market.

Chapter 1: Preliminaries

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What is a Market? • 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

Chapter 1: Preliminaries

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What is a Market? • Competitive vs. Noncompetitive Markets Noncompetitive Markets •

Markets where individual producers can influence the price.

•

Example: OPEC

Chapter 1: Preliminaries

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Real Versus Nominal Prices

Chapter 1: Preliminaries

• 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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1.3

REAL VERSUS NOMINAL PRICES

● nominal price inflation.

Absolute price of a good, unadjusted for

Chapter 1: Preliminaries

● real price Price of a good relative to an aggregate measure of prices; price adjusted for inflation. ● Consumer Price Index level.

Measure of the aggregate price

● Producer Price Index Measure of the aggregate price level for intermediate products and wholesale goods.

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1.3

REAL VERSUS NOMINAL PRICES

Table 1.1 The Real Prices of Eggs and of a College Education 1970

1980

1990

2000

2007

38.8

82.4

130.7

172.2

205.8

Grade A large eggs

$0.61

$0.84

$1.01

$0.91

$1.64

College education

$2530

$4912

$12,018

$20,186

$27,560

Grade A large eggs

$0.61

$0.40

$0.30

$0.21

$0.31

College education

$2,530

$2,313

$3,568

$4,548

$5,196

Consumer Price Index Nominal Prices

Chapter 1: Preliminaries

Real Prices ($1970)

The real price of eggs in 1970 dollars is calculated as follows:

Re al price of eggs in 1980

CPI1970 nominal price in 1980 CPI1980

38.8 $0.84 $0.40 82.4

Re al price of eggs in 1990

CPI1970 nominal price in 1990 CPI1990

38.8 $1.01 $0.30 130.7

While the nominal price of eggs rose during these years, the real price of eggs actually fell. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

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1.3

REAL VERSUS NOMINAL PRICES

Table 1.1 The Real Prices of Eggs and of a College Education 1970

1980

1990

2000

2007

38.8

82.4

130.7

172.2

205.8

Grade A large eggs

$0.61

$0.84

$1.01

$0.91

$1.64

College education

$2530

$4912

$12,018

$20,186

$27,560

$2.05

$1.33

$1.01

$0.69

$1.04

Consumer Price Index

Nominal Prices

Real Prices ($1980) Chapter 1: Preliminaries

Grade A large eggs

The real price of eggs in 1990 dollars is calculated as follows:

Re al price of eggs in 1970

CPI1990 nominal price in 1970 CPI1970

130.7 $0.61 $2.05 38.8

Re al price of eggs in 2007

CPI1990 nominal price in 2007 CPI 2007

130.7 $1.64 $1.04 205.8

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1.3

REAL VERSUS NOMINAL PRICES

Table 1.1 The Real Prices of Eggs and of a College Education 1970

1980

1990

2000

2007

38.8

82.4

130.7

172.2

205.8

Grade A large eggs

$0.61

$0.84

$1.01

$0.91

$1.64

College education

$2530

$4912

$12,018

$20,186

$27,560

$2.05

$1.33

$1.01

$0.69

$1.04

Consumer Price Index

Nominal Prices

Real Prices ($1980) Chapter 1: Preliminaries

Grade A large eggs

The percentage change in real price is calculated as follows:

Percentage change in real price

real price in 2007 real price in 1970 real price in 1970

1.04 2.05 2.05

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0.49

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1.3

REAL VERSUS NOMINAL PRICES

Figure 1.1

Chapter 1: Preliminaries

The Minimum Wage

In nominal terms, the minimum wage has increased steadily over the past 70 years. However, in real terms its expected 2010 level is below that of the 1970s.

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Why Study Microeconomics?

Chapter 1: Preliminaries

• Microeconomic concepts are used by everyone to assist them in making choices as consumers and producers.

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Why Study Microeconomics? • Two Examples – PROTON and the development of its SUV’s ? – Public Policy Design

Automobile emission standards for the 21st century

Chapter 1: Preliminaries

•

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Why Study Microeconomics? • Ford and the development of its SUV’s –

Questions •

•

Chapter 1: Preliminaries

•

Consumer acceptance and demand Production cost Pricing strategy

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Why Study Microeconomics? • PROTON and the development of its SUV’s –

Questions •

•

Chapter 1: Preliminaries

•

Risk analysis Organizational decisions Government regulation

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Why Study Microeconomics? • Auto emission standards for the 21st century –

Questions •

• •

Chapter 1: Preliminaries

•

Impact on consumers Impact on producers How to enforce the standards What are the benefits and costs?

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Summary

Chapter 1: Preliminaries

• Microeconomics is concerned with the decisions made by small economic units. • Microeconomics relies heavily on the use of theory and models. • 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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Summary

Chapter 1: Preliminaries

• 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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