microeconomics course introduction lecture slides
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1 | Introduction to Microeconomics Demand, normal and inferior goods, substitutes and complements
ECO217 Microeconomics I
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Why to study economics ?
Economics studies how people choose to use their limited resources (land, labor andcapital goods) to produce, exchange, and consume goods and services.
Microeconomics studies the economic decision making of firms and individuals in amarket setting. consumers, resource owners, business firms and individual markets.It is study of economy on a small scale.
Macroeconomics is the study of the economy as a whole, rather than individual markets,consumers and producers.
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Economic Good Free Good
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Good
Economic goods are anything, which satisfy needs, provides utility or are used in manufacturing
Not only commodities, but also services (haircut, tire repair etc.)
Utility – the satisfaction one receives from a good
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Free good and economic good
Free good can be obtained from nature at any time and in any quantity, example air, sunlight, water from rivers and lakes (also called non-economic resources)Economic good is scarce in relation to its demand and human effort is required to obtain it.
Free vs. economic good• Firewood was free good in past, but now become economic good• Water in cities has to be cleaned and distributed using pipelines• Air is supplied to deep mines by special devices
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Basic themes of economic scienceScarcity - unlimited wants of society are greater than its economy can meet. If what wewant to buy exceeds our income, we must make choices (without scarcity is no demandand supply)
Choice - everyone must make trade-offs - to have more of one thing, we must have lessof another
Specialization - the tendency of participants in economy (people, businesses, countries)to focus their activity on tasks they are particularly suits
Exchange – complements specialization by allowing individuals to trade goods andservices in while they specialize. Without exchange, specialization has no benefit
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Factors of production
Combination of Factors of production (FP) is used to produce goods and services:– Land or natural resources (water, air, soil, flora, fauna etc)– Labor (human physical or mental contribution)– Capital stock (monetary, machinery, tools, buildings, also patents, software,
“know-how” etc),– also Entrepreneurship - the talent that some people have for organizing the
resources of land, labor, and capital to produce goods, seek new businessopportunities, and develop new ways of doing things.
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Theories and hypothesisTheory is explanation of the relationship among factors that may be crucial determinants of a phenomenon
Hypothesis is a tentative assumption about a particular aspect of the relationship among several events or factors IF-THEN. Theory is hypothesis that has been successfully tested. The greater the number of successful tests, the greater the degree of confidence we have in theory
Model is a simplified representation of a phenomenonEconomic theories focus on the most important factors that determine economic behavior. This process is called abstractionTheory can be used to make predictionsLaw is a theory which is always true under the same set of circumstances, example, the law of gravity
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Ceteris paribus
Ceteris paribus principle in Latin means "other things being equal"
Any attempt to establish the relationship between two factors must hold constant the effects of other factors to avoid confusing the relationship
Econometrics deals with ceteris paribus problem by using econometric theory and statistics
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The Circular Flow
HOUSEHOLD FIRM
Factors of production
Goods and services
Payment for factors of production
Payment for goods and services
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Non-profitable industries (military)
Natural monopolies (post, railway, power transmission, aviation services)
Essential industries for state interests
HOUSEHOLD
CHURCHES
CHARITY FUNDS
SCIENTIFIC INSTITUTES
TRADEUNIONS
FAMILIES
FIRM
FARMS
FORESTRYGENERATION
POWER GENERATION
MANUFACTURERS
CRAFTSMENMINING CO
FISHERIESTRADE COMP
BANKS
INSURANCE
TRANSPORT
GOVERNMENT
Education Health services Law enforcement
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Demand Curve
p
QD
Good is normal
D
p1
p2
q1 q2
Demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price.
Quantity demanded is a function of price Q=D(p)
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Factors which influence demand
Demand for good X
Demand for good X
Price of good X
Prices of other goods
Income of household (m)Needs of the household
Tastes and preferences
Number of customers
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Snob effect (luxury good)
p
QD
DDemand for prestigious or status goodsExamples: works of art, designer clothing, sports cars etc.
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Giffen good
p
QD
D1 is a normal good D2 is a Giffen good
D2D1 Examples: potatoes, sweet potatoes, Japanese shochu etc. Evidence of Giffen goods observed in China, rice in Hunan, wheat in Gansu
Sir Robert Giffen (1837-1910)
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Normal good
m
QD
D m - income
If a good is normal, demand for it grows if income rises
Most of the goods are normal goods
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Inferior good
If good is inferior, its demand decrease if income increases
Example: instant noodles, potatoes, fake fur etc,
m
QD
D
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Saturation
m
QD
Demand for good reaches saturation at point q1 (example rice, toothpaste etc.)
D
q1
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Income and demand of good
m
QD
D
A2
A1
Inferior
Saturation
Normal
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Types of goods
Responsiveness to price changes
Responsiveness to income changes
GIFFEN GOODORDINARY GOOD
GIFFEN GOODNORMAL GOOD INFERIOR GOOD
LUXURY GOOD NECESSITY
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Substitute goods – can replace each other in use. Example: Oil and natural gas (for heating), Pepsi and Coca-cola, green and black tea
Complementary goods – tend to be consumed together. Example: DVD player and DVDs, car and gasoline, sugar and coffee
Substitutes Complementary goods
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Complementary goods
pX
QX
D
pX
QY
D
DVD player (X)
DVD player (X)
DVD disc (Y)
DVD player (X)
Example:DX DVD playerDY DVD disc
PX DVD player ↓ QX DVD player ↑ QY DVD disc ↑
p1
p2
q1 q2
p1
p2
q1 q2
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Substitute good
QY
DpXGood X and good Y are substitutes
If price of a good X rises, demand for a substitute good Y grows
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Substitutability of goods
D1 demand curve (goods X and Y are less possible to substitute)
D2 demand curve (goods X and Y are better substitutes)
D1pX
QY
D2
p1
p2
car
bicycleq1 q2 q3
△p X
△q1
△q2
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Not related goods
pX
QY
D Example: car and Coca-cola
If price of a good X rises, demand for not related good don’t change
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Shifts in demand curvePrice of a substitute good risesIncome rises and good is normalIncrease in the number of customers
Decrease of a price of a complementary good
Increase of customer’s subjective appreciation of a good
p
QD
D1D2
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Ceteris Paribus
p
QD
D1
