Econ 201
Summer 2016
Introduction to
Microeconomics
What is Economics?
IT IS ALL ABOUT THE
INCENTIVES!!!
What is Economics?
IT IS ALL ABOUT THE INCENTIVES!!!
• Who’s Incentives?
• Buyers and Sellers of Goods in the Product Market we are
analyzing/modeling
• Why Incentives?
• Because that is what these participants are responding to
• What are Incentives?
• Prices of the good, similar goods, income, product quality,
costs of production, profits, personal value of the good ….
What is Economics?
• You may not like the market’s outcome:
• NYTimes: Drug (Daraprim) Goes From $13.50 a
Tablet to $750, Overnight
• Turing’s price increase is not an isolated example. While
most of the attention on pharmaceutical prices has been
on new drugs for diseases like cancer, hepatitis C and high
cholesterol, there is also growing concern about huge price
increases on older drugs, some of them generic, that have
long been mainstays of treatment.
What is Economics?
• But to change the outcome
• You need to change the drug manufacturer’s and CEO’s
incentives
• Need to model the market for the drug to be able to assess
what factors drove this result and how changing the factors
affect the drug’s price
• No competitors -> firm has market power (monopoly)
• High start-up costs (fixed costs of the plant)
• Government manufactures drug, price controls,
subsidizing initial costs of new entrants
Economics?
• Two major branches of economics
1. Microeconomics
• Study of how individual markets operate
• How/why consumers and producers of goods interact to determine
• What is produced, how much, at what price
2.
Macroeconomics
•
Focuses on the performance of the national economy ( sum of all
markets)
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Gross National Product (aggregate of all goods)
Unemployment/employment, inflation, interest rate
Other major factors affecting them (Fed’s monetary policy, taxes,
budget surpluses/deficits, international trade – exchange rates)
What We Are Modeling in Micro
Circular Flow – Micro (1 Market) Model of the Economy
A Model of Consumer Demand
First Law of Demand: As Price of Good X Decreases Quantity
Demanded of Good X Increases (and vice versa) – other factors held
constant
A Model of a Firm’s Supply
Decision
First Law of Supply: Quantity Supplied Increases as
Price Increases (other factors held constant)
A Micro Model
Demand & Supply – 1 good
Macro
Macroeconomics, on the other hand, looks at the big picture (hence "macro").
It focuses on the national economy as a whole and provides a basic knowledge of how
things work in the business world.
For example, people who study this branch of economics would be able to interpret the
latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not
necessarily a bad thing.
Thus, for an overall perspective of how the entire economy works, you need to have an
understanding of economics at both the micro and macro levels.
http://www.investopedia.com/terms/m/microeconomics.asp
Macro Modeling
A Bit More Complex
Macro’s Demand and Supply Model
Keynesian Aggregate Demand & Supply (Hick’s)
Effects of an Economic Recession
AD = C + I + G + NX
Or In Equation Form
Basic Microeconomic Models
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•
•
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Demand for a Product
Supply of a Product
Market Demand/Supply and Equilibrium
Production Function
Cost Function
Production Possibilities Frontier
How Do We Do It?
https://www.boundless.com/economics/textboo
ks/boundless-economics-textbook/principles-ofeconomics-1/economic-models-43/economicmodels-160-12258/
http://www.econmodel.com/classic/
Some Basic Micro Models
A Simple Demand Model
Supply Curve
Based on Cost of Production
Finding Equilibrium
The Price That Equates Qty Supplied
and Qty Demanded