microeconomics chapter 1

8/18/2019 Microeconomics Chapter 1

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1 of 18Copyright © 2015 Pearson Education • Microeconomics • Pindyck/Rubinfeld !e "E#

1.1 $he $he%es of

&icroecono%ics

1.2 'hat (s a &arket)

1.3 Real *ersus +o%inalPrices

1.4 'hy ,tudy

&icroecono%ics)

C H A P T E R 1

Prepared by-

.ernando uiano (llustrator

Preli%inaries

CHAPTER OUTLINE


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● microeconomics ranch of econo%ics that deals ith the beha*ior of

indi*idual econo%ic units3consu%ers fir%s orkers and in*estors3as ell

as the %arkets that these units co%prise#

● macroeconomics ranch of econo%ics that deals ith aggregate

econo%ic *ariables such as the le*el and groth rate of national output

interest rates une%ploy%ent and inflation#


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CONSUMERS

Consu%ers ha*e li%ited inco%es hich can be spent on a ide *ariety of goods and ser*ices or sa*ed for the future#

OR!ERS

'orkers also face constraints and %ake trade4offs# .irst people %ust decide hether and hen to enter the orkforce# ,econd orkers face trade4offs intheir choice of e%ploy%ent# .inally orkers %ust so%eti%es decide ho %any hours per eek they ish to ork thereby trading off labor for leisure#

"IRMS

.ir%s also face li%its in ter%s of the kinds of products that they can produce and the resources a*ailable to produce the%#

• The Themes of Microeconomics1.1

Trade-Offs


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&icroecono%ics describes ho prices are deter%ined#

(n a centrally planned econo%y prices are set by the go*ern%ent#

(n a %arket econo%y prices are deter%ined by the interactions of consu%ersorkers and fir%s# $hese interactions occur in markets3collections of buyersand sellers that together deter%ine the price of a good#

Prices and Markets


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Theories and Models

(n econo%ics eplanation and prediction are based on theories# $heories are

de*eloped to eplain obser*ed pheno%ena in ter%s of a set of basic rules andassu%ptions#

6 model is a %athe%atical representation based on econo%ic theory of afir% a %arket or so%e other entity#

Posi$i%e %ers&s Norma$i%e Ana'(sis

● )osi$i%e ana'(sis 6nalysis describing relationships of cause and effect#

● norma$i%e ana'(sis 6nalysis ea%ining 7uestions of hat ought to be#


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* of 18Copyright © 2015 Pearson Education • Microeconomics • Pindyck/Rubinfeld !e "E#

● mar+e$ Collection of buyers and sellers that through their actual orpotential interactions deter%ine the price of a product or set of products#

● mar+e$ ,efini$ion 8eter%ination of the buyers sellers and range ofproducts that should be included in a particular %arket#

● ar-i$rae Practice of buying at a lo price at one location and selling at ahigher price in another#

• What Is a Market?1.2


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Competitive versus Noncompetitive Markets

●

)erfec$'( com)e$i$i%e mar+e$ &arket ith %any buyers and sellers sothat no single buyer or seller has a significant i%pact on price#

&any other %arkets are co%petiti*e enough to be treated as if they ereperfectly co%petiti*e#

9ther %arkets containing a s%all nu%ber of producers %ay still be treated asco%petiti*e for purposes of analysis#

.inally so%e %arkets contain %any producers but are noncompetitive: that isindi*idual fir%s can ointly affect the price#


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Mar+e$ Price

● mar+e$ )rice Price pre*ailing in a co%petiti*e %arket#

(n %arkets that are not perfectly co%petiti*e different fir%s %ight chargedifferent prices for the sa%e product# $his %ight happen because one fir% istrying to in custo%ers fro% its co%petitors or because custo%ers ha*e brand

loyalties that allo so%e fir%s to charge higher prices than others#

$he %arket prices of %ost goods ill fluctuate o*er ti%e and for %any goodsthe fluctuations can be rapid# $his is particularly true for goods sold inco%petiti*e %arkets#



Market Definition—The Extent of a Market

● e$en$ of a mar+e$ oundaries of a %arket both geographical and in

ter%s of range of products produced and sold ithin it#

&arket definition is i%portant for to reasons-

• 6 co%pany %ust understand ho its actual and potential co%petitors are forthe *arious products that it sells or %ight sell in the future#

• &arket definition can be i%portant for public policy decisions#

.or so%e goods it %akes sense to talk about a %arket only in ter%s of *eryrestricti*e geographic boundaries#

'e %ust also think carefully about the range of products to include in a %arket#



In 1990, the Archer-Daniels-Midland Company (ADM) acquired theClinton Corn Processin Company (CCP)!

"he #!$! Department o% &ustice (D'&) challened the acquisition on therounds that it ould lead to a dominant producer o% corn syrup ith

the poer to push prices ao*e competiti*e le*els!

ADM %ouht the D'& decision, and the case ent to court! "he asicissue as hether corn syrup represented a distinct mar+et!

ADM arued that suar and corn syrup should e considered part o% the

same mar+et ecause they are used interchanealy to seeten a *astarray o% %ood products!

E;6&P



E;6&Puffy- ?@03?1A0

,chinn- ?1A03?2A0&antis- ?12@3?1A0&ongoose- ?1203?2!0

6ea'er ic(c'es9 ,old bybicycle dealers B stores thatsell only or %ostlyD bicyclesand bicycle e7uip%ent#

$rek- ?A003?2500Cannondale- ?5003?2000"iant- ?5003?2500"ary .isher- ?003?2000

&ongoose- ?F003?2000Ridley- ?1G003?2500,cott- ?10003?G000(bis- ?2000 and up

$here are actually to different %arkets for bicycles%arkets that can be identified by the type of store in

hich the bicycle is sold#



● nomina' )rice 6bsolute price of a good unadusted for inflation#

● rea' )rice Price of a good relati*e to an aggregate %easure of prices:price adusted for inflation#

● Cons&mer Price In,e &easure of the aggregate price le*el#

● Pro,&cer Price In,e &easure of the aggregate price le*el for

inter%ediate products and holesale goods#

• Real versus Nominal Prices1.3

6fter correcting for inflation do e find that the price of butter as %oreepensi*e in 2010 than in 1@F0) $o find out letHs calculate the 2010 price ofbutter in ter%s of 1@F0 dollars# $he CP( as G!#! in 1@F0 and rose to about21!#1 in 2010# $here as considerable inflation in the Inited ,tates during the1@F0s and early 1@!0s#D (n 1@F0 dollars the price of butter as

•

(n real ter%s therefore the price of butter as loer in 2010 than it as in 1@F0#



E;6&P


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E;6&Poe*er in real ter%s its epected 2010 le*el is belo that of the 1@F0s#

"I:URE 1.1


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Cor)ora$e 6ecision Ma+in9 Tybrid cars are %ore energy efficient than cars ith ust a gasoline engine: thePrius for ea%ple can get A5 to 55 %iles per gallon# $he Prius as a bigsuccess and ithin a fe years other %anufacturers began introducing hybrid*ersions of so%e of their cars#

$he design and efficient production of the Prius in*ol*ed not only so%ei%pressi*e engineering but a lot of econo%ics as ell#

.irst $oyota had to think carefully about ho the public ould react to thedesign and perfor%ance of this ne product#

+et $oyota had to be concerned ith the cost of %anufacturing these cars#

.inally $oyota had to think about its relationship to the go*ern%ent and theeffects of regulatory policies#


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P&-'ic Po'ic( 6esin9 "&e' Efficienc( S$an,ar,s for$"irs$ Cen$&r(

(n 1@F5 the I#,# go*ern%ent i%posed regulations designed to i%pro*e thea*erage fuel econo%y of do%estically4sold cars and light trucks# $he C6.ECorporate 6*erage .uel Econo%yD standards ha*e beco%e increasinglystringent o*er the years#

6 nu%ber of i%portant decisions ha*e to be %ade hen designing a fuel

efficiency progra% and %ost of those decisions in*ol*e econo%ics#

.irst the go*ern%ent %ust e*aluate the %onetary i%pact of the progra% onconsu%ers#

efore i%posing C6.E standards it is i%portant to esti%ate the likely i%pact

those standards ill ha*e on the cost of producing cars and light truck#

$he go*ern%ent %ust also ask hy proble%s related to oil consu%ption are notsol*ed by our %arket4oriented econo%y#

microeconomics chapter 1

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