Introduction Lecture 1.2 ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 1 What is in these slides? What is Microeconomics ? Why Study Microeconomics? What are Theories and Models? What is Positive Analysis? What is Normative Analysis? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 2 “Economics is a study of men as they live and move and think in the ordinary business of life” Alfred Marshall (1842-1924). 1890. Principles of Economics What is Economics? “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses” Lionel Robbins (1898-1984) 1932. An Essay on the Nature and Significance of Economic Science “Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.“ Paul A. Samuelson (1915-2009) 1948. Economics What is Microeconomics ? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 4 What is Microeconomics ? • Branch of economics that studies the behavior of individual economic units, and markets that these units comprise • Study of the efficient allocation of scarce resources It describes the trade-offs that consumers, workers and firms face It shows how these trade-offs are best made. ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 5 Microeconomics is the branch of economics that deals with which of the following topics? A. The behavior of individual consumers B. Unemployment and interest rates C. The behavior of individual firms and investors D. B and C E. A and C ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 6 The Themes of Microeconomics Trade-Offs that consumers, workers, firms face and shows how these trade-offs are best made Scarcity Prices: how are they determined? It depends on the type of market Centrally planned economy: set by the government Important Economic Concept: Opportunity costs ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 7 Trade-Offs (Consumers) • Consumers have Limited Incomes • Purchase of more of some goods for the purchase of less of others • Current consumption for future consumption How much of income to save and how much to spend ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 8 Trade-Offs (cont.) Workers Work now (earn an immediate income) or continue with education (earn a higher future income) Who to work for? Large corporations? Small companies? Labor for leisure: How much to work? Firms What goods/service to produce? Labor for capital: how much labor to hire? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 9 Q1. The trade-offs facing consumers include: A. how to allocate income across goods and services B. how to allocate income between consumption and savings C. both A and B D. none of the above ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 10 Q2. Firms face trade-offs in production, including decisions related to: A. which products to produce B. how much of a particular product to produce C. the best way to produce a given amount of output D. all of the above ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 11 Why Study Microeconomics? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 12 • How does a modern economy function? Why Study Microeconomics? • Managerial decision making • Designing and understanding public policy ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 13 Introducing a new product/version ? - consumer demand - costs of productions Corporate decisionmaking Example 2008: Tesla Motors released its first car ( Roadster) In 2017: Tesla Model 3 o Estimate/predict demand o Estimate/predict production cost o Design of a pricing strategy ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 14 Introducing a new product/version ? - consumer demand - costs of productions Corporate decisionmaking Example: Plug-In Electric Cars o Predicting demand • What would the initial demand for the plug-in electric car be? • How fast will the demand grow? • How would the demand respond to the price? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 15 The Top 10 Plug-In Electric Cars In U.S. https://www.forbes.com/wheels/features/best-plug-in-hybrids-range/ https://www.forbes.com/wheels/features/ev-survey/ ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 16 Introducing a new product/version ? - consumer demand - costs of productions Corporate decisionmaking o Predict production cost • Cost of inputs (labor, raw materials) • How costs will change with gained experience in producing electric cars? • How many cars to produce each year? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 17 Introducing a new product/version ? - consumer demand - costs of productions Corporate decisionmaking o Design of a pricing strategy • What price to ask? ( 2022 Tesla offered incentives and lowered the price) • How would competitors react? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 18 Public Policy Design Fuel Efficiency Standards (environmental benefits, dependence on foreign oil) • 1975: the U.S. government imposed regulations on average fuel economy; CAFE (Corporate Average Fuel Efficiency) standards • 2007: President G.W. Bush signed into law the Energy Independence and Security Act; set a standard of 35 mpg by 2020 • 2011: the Obama administration set a standard of 55 mpg by 2020 • 2021 target was 37 mpg • April 2022: Standards to require fleet average of 49 mpg by 2026 (https://www.transportation.gov/briefing-room/usdotannounces-new-vehicle-fuel-economy-standards-model-year2024-2026) When designing these policies what to consider? • Impact on consumers and on suppliers ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 19 Public Policy Design When designing these policies what to consider? Monetary impact of the program on consumers • increased purchasing costs • decreased operating costs • Impact of standards on the cost of producing cars and light trucks ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 20 Determining the optimal level of vehicle tailpipe emissions standards Which of the following is NOT an example of ways in which microeconomic analysis can help in designing environmental policy? Designing laws to provide incentives for firms to implement clean technologies in new vehicles Lobbying consumers and firms to reduce consumption of energy Examining the tradeoffs between ecological benefits of environmental legislation and its impacts on consumers’ standard of living ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 21 Theories and Models (Section 1.4) ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 22 Theories and Models The Objective of Economics is to explain observed phenomena and predict behavior of consumers and firms as economic conditions change. ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 23 Theories and Models Theories are used to construct models from which predictions can be made Example: The theory of the firm Explains how firms choose Inputs: the amounts of labor, capital and raw material used for production Output: How much to produce how these choices depend on the prices of inputs and outputs and market type Predicts what happens to a firm’s output level if, for example, wage rates increase? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 24 What are Models ? A model is a simplified (mathematical) representation of a real situation that is used to better understand real-life situations A model is useful only if it succeeds in explaining and predicting the phenomena it was intended to explain. ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 25 Which Models are not useful? A model (theory) that cannot be evaluated empirically is not a good model. If it cannot be tested by comparing its predictions to data, then we cannot have any confidence in its predictions; it is of little use. ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 26 Normative and Positive Analysis ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 27 Normative vs Positive Analysis Positive Analysis describes relationships of cause and effect the way interdependences and interactions between economic units actually work Normative Analysis examines questions of What ought to be? What is best according to some criterion? Example New tax on gasoline ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 28 Example: New tax on gasoline Suppose the federal government is considering raising the tax on gasoline. Positive Analysis • The change would affect the price of gasoline, consumers’ purchasing of cars, the amount of driving • Firms (car producers, oil companies, etc) would need to estimate the impact of this change • Policymakers would also need a quantitative estimates of the change • Costs on consumers • Effects on employment in the oil and auto industries • the amount of tax revenue to be collected ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 29 Example: New tax on gasoline Suppose the federal government is considering raising the tax on gasoline. Normative Analysis Policymakers: Is the tax in the public interest? Should a different kind of tax (e.g., tariff on imported oil) be used? ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 30 Normative Analysis Normative Analysis is often supplemented by value judgments Example: Compare a gasoline tax and an oil import tariff • The gasoline tax will be easier to administer but will have a greater impact on lower-income consumers. • Society must make a value judgment, weighing equity against economic efficiency. When value judgments are involved, microeconomics cannot tell us what the best policy is but it • can clarify the trade-offs • illuminates the issues and sharpen the debate. ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 31 Do the following statements belong in positive economics, normative economics, or a combination of the two? 1. We should support the market because it is efficient. 2. Given certain conditions, the market achieves efficient results. 3. Based on past experience and our understanding of markets, if one wants a reasonably efficient result, markets should probably be relied on. 4. The distribution of income should be left to markets. 5. Markets allocate income according to contributions of factors of production. ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 32 To evaluate the potential impact of changes to its SUV business, Ford Motor Company would use: A. normative economic analysis B. positive economic analysis C. negative economic analysis D. arbitrage analysis ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 33 Themes of Microeconomics • Trade-Offs • Prices and Markets • Theories and Models • Positive and Normative Analysis Why Study Microeconomics ? Summary • Corporate Decision Making • Public Policy Design Next Class (on Wednesday) • Markets • What are they? • Market definition and extent of a Market • Types of Markets • Prices • Market price • Real vs Nominal ECON 3910: Lecture 1.2 Introduction (1.1 and 1.4) 34
