MicroCh1

Macroeconomics

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.

Arbitrage

Practice of buying at a low price at one location and selling at a higher price in another.

Tradeoff

tradeoff is an exchange - giving up one thing to get something else.

Market Defintion

Determination of the buyers, sellers, and range of products that should be included in a particular market.

Opportunity Cost

opportunity cost of something is the best thing you must give up to get it. o Choices have an opportunity costs; for example, the opportunity cost of attending college include goods and services forgone from paying for tuition and textbooks, and the goods and services forgone because the student does not have the income from a full-time job.

Market Definition—The Extent of a Market

Boundaries of a market, both geographical and in terms of range of products produced and sold within it. For some goods, it makes sense to talk about a market only in terms of very restrictive geographic boundaries. We must also think carefully about the range of products to include in a market. Market definition is important for two reasons: • 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.

Market

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

EX) Consumer Tradeoff

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

Chapter 1: Preliminaries

Core economic question: What is Microeconomics all about? o Section 1: The Themes of Microeconomics o Section 2: What Is a Market? o We will not cover Section 3 o Section 4: Why Study Microeconomics?

Economics

Economics is the social science that studies the choices that individuals, businesses, governments and entire societies make when they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them

Positive versus Normative Analysis

Economists sometimes disagree about assumptions, models, and policies. • Disagreements that can be settled by facts are positive statements, statements about "what is" and are testable. A positive statement is "Raising the tax on a gallon of gasoline will raise the price of gasoline and lead more people to buy smaller cars" while a normative statement is "The tax on gasoline should be raised." o positive analysis: Analysis describing relationships of cause and effect. • Disagreements that can't be settled by facts are normative statements, statements about "what ought to be," which are opinions and so are inherently not testable. o normative analysis: Analysis examining questions of what ought to be.

EX) Firm Tradeoff

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

Theories and Models

Economists try to understand and predict the effects of economic forces by using the scientific method - a commonsense way of systematically checking what works and what doesn't work. o An economist begins with a question or a puzzle about cause and effect arising from some observed facts. 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. o An economist's second step is to build an economic model, a description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts. A model is a mathematical representation, based on economic theory, of a firm, a market, or some other entity. o The third step is to check the economic model against the facts by using: A natural experiment: a situation that arises in the ordinary course of economic life in which the one factor of interest is different and other things are equal (or similar). A statistical investigation: looking for a correlation - a tendency for the values of two variables to move together in a predictable and related way. An economic experiment: puts people in a decision-making situation and varies the influence of one factor at a time to discover how they respond.

Decision Making EX) the toyota prius

Hybrid cars are more energy efficient than cars with just a gasoline engine; the Prius, for example, can get 45 to 55 miles per gallon. The Prius was a big success, and within a few years other manufacturers began introducing hybrid versions of some of their cars. • The design and efficient production of the Prius involved not only some impressive engineering, but a lot of economics as well. • First, Toyota had to think carefully about how the public would react to the design and performance of this new product. • Next, Toyota had to be concerned with the cost of manufacturing these cars. • Finally, Toyota had to think about its relationship to the government and the effects of regulatory policies.

Decision Making EX2) Public Policy Design: Fuel Efficiency Standards

In 1975, the U.S. government imposed regulations designed to improve the average fuel economy of domestically-sold cars and light trucks. The CAFE (Corporate Average Fuel Economy) standards have become increasingly stringent over the years. • A number of important decisions have to be made when designing a fuel efficiency program, and most of those decisions involve economics. • First, the government must evaluate the monetary impact of the program on consumers. • Before imposing CAFE standards, it is important to estimate the likely impact those standards will have on the cost of producing cars and light truck. • The government must also ask why problems related to oil consumption are not solved by our market-oriented economy.

Example 1: THE MARKET FOR SWEETENERS

In 1990, the Archer-Daniels-Midland Company (ADM) acquired the Clinton Corn Processing Company (CCP). • The U.S. Department of Justice (DOJ) challenged the acquisition on the grounds that it would lead to a dominant producer of corn syrup with the power to push prices above competitive levels. • ADM fought the DOJ decision, and the case went to court. The basic issue was whether corn syrup represented a distinct market. • ADM argued that sugar and corn syrup should be considered part of the same market because they are used interchangeably to sweeten a vast array of food products.

Why study microeconomics?

Microeconomic principles aid in rational and optimal decision-making by individuals, firms, and governments.

Microeconomics

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.

Market Price

Price prevailing in a competitive market. In markets that are not perfectly competitive, different firms might charge different prices for the same product. This might happen because one firm is trying to win customers from its competitors, or because customers have brand loyalties that allow some firms to charge higher prices than others. The market prices of most goods will fluctuate over time, and for many goods the fluctuations can be rapid. This is particularly true for goods sold in competitive markets.

Trade-Offs

Trade-Offs: tradeoffs exist and all economic players face opportunity costs • Because we face scarcity, we must make choices and select from the available alternatives.

EX) Worker Tradeoff

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.

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. Many other markets are competitive enough to be treated as if they were perfectly competitive. Other markets containing a small number of producers may still be treated as competitive for purposes of analysis. Finally, some markets contain many producers but are noncompetitive; that is, individual firms can jointly affect the price.

Prices and Markets

• Microeconomics describes how prices are determined. • 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.