Eco 100
Microeconomics
What is Economics?
• First what constitutes the economy? The economy is
the mechanism through which the use of labor, land,
vehicles, equipments (factories), and natural resources
(row materials) are organized to satisfy the desires of
those who live in the society.
• Economics is the study of how human beings make
choices to use scarce(limited) resources as they seek to
satisfy their seemingly unlimited wants.
Other Definition Of Economics
• Economics is the study of the production and
consumption of goods and the transfer of
wealth to produce and obtain those goods.
Economics explains how people interact
within markets to get what they want or
accomplish certain goals. Since economics is a
driving force of human interaction, studying it
often reveals why people and governments
behave in particular ways.
Macroeconomics Vs. Microeconomics
• Economics is divided into two main branches:
– Microeconomics
– Macroeconomics.
Macroeconomics
• Macroeconomics looks at the economy from a
broader perspective by considering its overall
performance and the way various sectors of
the economy relate to one another.
• Examples:
•
•
•
•
Performance of annual production in an industrial sector.
Interest Rate.
Inflation.
Unemployment rate.
Other Definition of Macroeconomics
• Macroeconomics takes a much broader view
of the economy by analyzing the economic
activity of an entire country or the
international marketplace.
Microeconomics
• Microeconomics deals with the behavior of
individual economic units.
• These economic units include:
•
•
•
•
•
Consumers
Workers
Investors
owners of land
business firms
• Microeconomics places special emphasis on the
role of prices in business and personal decisions.
Other Definition of Microeconomics
• Microeconomics focuses on the actions of
individuals and industries, like the dynamics
between buyers and sellers, borrowers and
lenders.
4 Themes of Microeconomics
1.
2.
3.
4.
Tradeoffs.
Prices and Markets.
Theories and Models.
Positive and Normative questions
Themes of Microeconomics
• Tradeoffs.
– Consumers have limited incomes, which can be spent on a
wide variety of goods and services, or saved for the future.
– Workers make trade-offs as well, First, they must decide
whether and when to enter the workforce, depending on
pay scales or as an alternative seek education to attain
new skills.
– Firms also face limits in the kinds of products that they can
produce, and the resources available to produce them.
Themes of Microeconomics
• Prices and Markets:
– Role of Prices: Prices influence consumer behavior, as an
example a consumer may purchase beef or chicken based
partly on his or her preferences for each one, but also on
their prices.
– Market is a collection of buyers and sellers that together
determine the price of a good. In the automobile market,
for example, car prices are affected by competition among
auto manufacturers, and also by the demands of
consumers.
Themes of Microeconomics
• Theories and Models:
– Theories are developed to explain observed phenomena in
terms of a set of basic rules and assumptions.
– Example: The theory of the firm begins with a simple
assumption-firms try to maximize their profits.
– A Model is a mathematical representation based on an
economic theory.
– Example: We can develop a model for a firm and use it to
predict by how much the firm’s output level will change as
a result of, say, a 10-percent drop in the price of raw
materials.
Exercise
• Suppose an economic model that states that an
increase in the price of fuel by 10% will decrease the
annual sales of new cars by 20%.
• Assuming the annual sales of new cars in Morocco in
2013 is around 30,000 cars, and the price of fuel has
increased by 10%.
• What will be the predicted number of new car sales
in the following year of 2014?
Answer
• Annual car sales in 2014 is :
• 30,000- (30,000*10/100)
• Answer is: 27,000 cars
Themes of Microeconomics
• Positive and Normative questions
– Positive questions deal with explanation and
prediction.
• Suppose the U.S, government imposes a quota on the import of
foreign cars. What will happen to the price, production, and sales of
cars? What impact will this policy change have on American
consumers? On workers in the automobile industry? These questions
belong to the realm of positive analysis: statements that describe
relationships of cause and effect.
– Normative questions with what ought to be.
• Normative analysis is often supplemented by value judgments. For
example, Income tax ought to be higher for people with high
annual income and lower for people with low annual income.
What is a market?
• A market is the collection of buyers and sellers that,
through their actual or potential interactions,
determine the price of a product or set of products.
• A market includes more than one industry.
• An industry is a collection of firms that sell the same
or closely related products.
• Significant differences in the price of a commodity
create a potential for arbitrage. (example of a priced
good that is significantly different from one location
to another).
Example of a Market and its Industries
• Market= Automobile Market
• Industries that are part of the Auto Market
are:
– Steel Industry.
– Tires Industry.
– Auto manufacturing insdutry.
– Dealship industry.
– Oil industry.
Class Exercise
• Get into small groups.
1. Select a Market then provide the major
industry players of the chosen Market.
2. Name a few companies within each industry.
3. Identify the competitors among each
industry.
4. Is the selected market competitive?
Competitive vs. Noncompetitive Markets
• A perfectly competitive market has many
buyers and sellers, so that no single buyer or
seller has a significant impact on price.
(Computer Manufacturers)
• When individual firms can jointly affect the
price of a product, we then have a
noncompetitive market. (OPEC)
Market definition - The Extent of a
Market
• Market definition identifies which buyers and sellers should
be included in a given market.
• In order to define the extent of a market, we will need to
define its boundaries, both geographically and in terms of the
range of products to be included in it.
• Group exercise: Define a Market, identify one player of this
market, the extent of its market, identify few of its
competitors.
Real Price Vs. Nominal Price
• The nominal price of a good (sometimes called its "currentdollar" price) is its absolute price.
• These are the prices you would have seen in supermarkets in
those years.
• The real price of a good (sometimes called its "constantdollar" price) is the price relative to an aggregate measure of
prices. In other words, it is the price adjusted for inflation.
• For consumer goods, the aggregate measure of prices most
often used is the Consumer Price Index (CPI).
Case for Nominal vs. Real
• When I buy stocks for $200 at the start of the year, and I sell
them at the end of the year and earn $210, we say that I have
earned an interest of 5%. This is my nominal interest rate.
However, inflation needs to be factored in order to get the real
value of my interest rate. Since, for example, in that year the
inflation rate was 3%, it means that if I was to buy goods for
$200 at the start of the year, I would have to buy the same
goods for $206 at the end of that year. The effect of inflation
means that the real value of my interest is much less, because of
reduced purchasing power as a result of inflation. Therefore to
get the real value of what I have earned, I would have to
subtract the inflation rate from the nominal interest rate. In this
case therefore, the real interest rate is 2%, which reflects the
real value of my stocks.
Consumer Price Index (CPI)
• Consumer Price Index (CPI). The CPI is
calculated by the U.S. Bureau of Labor
Statistics by surveying retail prices, and is
published monthly. It records how the cost of
a large basket of goods purchased by a
"typical" consumer changes over time.
Percentage changes in the CPI measure the
rate of inflation in the economy.
Calculate the real Prices of Eggs and College education using this
formula:
Real price in 1990 = (CPI in 1970/CPI in 1990)x nominal price in 1990
Calculate the Real Prices (1970)
Problem# 1
• Suppose that the Japanese yen rises against
the U.S. dollar-that is, it will take more dollars
to buy a given amount of [Japanese yen.
Explain why this increase simultaneously
increases the real price of Japanese cars for
US. Consumers and lowers the real price of
US. Automobiles for [Japanese consumers.
Problem# 2
• The price of long-distance telephone service
fell from 40 cents per minute in 1996 to 22
cents per minute "in 1999, a 45-percent (18
cents/40 cents) decrease. The Consumer Price
Index increased by 10 percent over this
period. What happened to the real price of
telephone service?