1.Mengetahui ruang lingkup mata kuliah ini
2. Mengetahui lingkungan ekonomi di dalam mana bisnis dilakukan

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 (?!).

Microeconomic theory evolved gradually
– 1700s & late 1800s.
– Marshall’s famous "scissors"
– Few changes to core of micro theory in many decades.
Price
Basic Supply and Demand Curves
"Theory provides means or framework for explaining complex reality”
– Simplifies/abstracts from reality
– Need not fully or precisely describe reality
S D
Quantity

• 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

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)

• 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 …

"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

Consider Blank (2002)—
Figure 3-1
Labor Force Participation Rates for Women by Marital Status and Presence of Children, 1989-2001
0.800
0.780
0.760
Single w/ no kids
0.740
0.720
Single w/ kids under 18
0.700
0.680
0.660
0.640
Married w/ kids under 18
Married w/ no kids
0.620
0.600
1989 1990 1991 1992 1993 1994
Source: Authors' tabulations of March Current Population Survey data, for
1995 1996 1997 1998 1999 2000 2001

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”?

• 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

• 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?

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 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...

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

Time
• One of more important dimensions of market analysis
• S & D responses can & do vary enormously over the short- and longer-term!

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

THUS,
• Actors must choose among available options, pursuing desires rationally with limited resources or
• "Actors make choices subject to a resource constraint"

• 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

Research
Reports
(present)
Production Possibilities
Curve
Research Proposals
(future)

Research
Reports
(present)
A
Production Possibilities
Curve
Research Proposals
(future)

Research
Reports
(present)
Production Possibilities
Curve
A
B
Research Proposals
(future)

Research
Reports
(present)
A
B
Research Proposals
(future)
Production Possibilities
Curve
C

Research
Reports
(present)
A
B
D
Production Possibilities
Curve
C
Research Proposals
(future)

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”

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.

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 .

• 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

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
– Schedule of prices & associated quantities of goods/services consumers willing & able to purchase. Prices Quantities
$7 2
Demand Schedule,
$6 3 for example:
$5 4
– Functionally Q
1
= a + bP
1 Etc...

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 for iPods
Price
D
1
Quantity

Demand for iPods
Price
D
1
Quantity
D
2

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 D
1 to D
2
– If "inferior" good , increase in Y
• With P unchanged, leads to decreased iPod consumption, again a demand shift.

Inferior goods:
– Spam
– Texas wines
– Hamburger
– Others?
*Most goods = Normal*

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 D
1 to D
2
.
• Complements in consumption, I.e., their consumption "goes together"...

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 D
2 to D
1
.
• Substitutes in consumption, alternatives for meeting same needs...
• “Either/or” goods.

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, 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...

Price Supply of iPods
S
1
Quantity

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 S
1 to S
2
• Input Supply Conditions
– Increase in labor costs—one NOT offset by productivity increases —leads to reduced supply, a shift from S
2 to S
1
.

Price Supply of iPods
S
1
S
2
Quantity

Equilibrium P & Q —> no forces acting to make them different!
– Static, not really dynamic.
Example?
– Try the market for Applied Microeconomics textbooks...

Price
Applied Microeconomics
Textbook Market
S
D
Quantity

Price
Applied Microeconomics
Textbook Market
P e
$125
S
Q e
D
Quantity

Price
P
1
$200
P e
$125
Applied Microeconomics
Textbook Market
Surplus
S
Q
1
Q e
Q
2
D
Quantity

Applied Microeconomics
Textbook Market
Price
P
1
$200
P e
$125
P
2
$75
S
Surplus
Shortage
Q
1
Q e
D
Q
2 Quantity

• 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