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Ch01

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  • 1. CHAPTER 1 Preliminaries Prepared by: Fe rna ndo & Yvonn Quija no Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
  • 2. CHAPTER 1 OUTLINE 1.1 The Themes of Microeconomics 1.2 What Is a Market? 1.3 Real versus Nominal Prices Chapter 1: Preliminaries 1.4 Why Study Microeconomics? Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 2 of 18
  • 3. Preliminaries Chapter 1: Preliminaries ● microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise. ● macroeconomics Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 3 of 18
  • 4. 1.1 THE THEMES OF MICROECONOMICS Trade Offs Consumers Consumers have limited incomes, which can be spent on a wide variety of goods and services, or saved for the future. Chapter 1: Preliminaries Workers Workers also face constraints and make trade-offs. First, people must decide whether and when to enter the workforce. Second, workers face trade-offs in their choice of employment. Finally, workers must sometimes decide how many hours per week they wish to work, thereby trading off labor for leisure. Firms Firms also face limits in terms of the kinds of products that they can produce, and the resources available to produce them. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 4 of 18
  • 5. 1.1 THE THEMES OF MICROECONOMICS Prices and Markets Microeconomics describes how prices are determined. Chapter 1: Preliminaries In a centrally planned economy, prices are set by the government. In a market economy, prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 5 of 18
  • 6. 1.1 THE THEMES OF MICROECONOMICS Theories and Models In economics, explanation and prediction are based on theories. Theories are developed to explain observed phenomena in terms of a set of basic rules and assumptions. A model is a mathematical representation, based on economic theory, of a firm, a market, or some other entity. Chapter 1: Preliminaries Positive versus Normative Analysis ● positive analysis cause and effect. ● normative analysis what ought to be. Analysis describing relationships of Analysis examining questions of Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 6 of 18
  • 7. 1.2 WHAT IS A MARKET? ● market Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. Chapter 1: Preliminaries ● market definition Determination of the buyers, sellers, and range of products that should be included in a particular market. ● arbitrage Practice of buying at a low price at one location and selling at a higher price in another. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 7 of 18
  • 8. 1.2 WHAT IS A MARKET? Competitive versus Noncompetitive Markets ● perfectly competitive market Market with many buyers and sellers, so that no single buyer or seller has a significant impact on price. Market Price Price prevailing in a competitive market. Chapter 1: Preliminaries ● market price Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 8 of 18
  • 9. 1.2 WHAT IS A MARKET? Market Definition—The Extent of a Market ● extent of a market Boundaries of a market, both geographical and in terms of range of products produced and sold within it. Market definition is important for two reasons: Chapter 1: Preliminaries • A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future. • Market definition can be important for public policy decisions. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 9 of 18
  • 10. 1.2 WHAT IS A MARKET? Markets are usually defined in terms of therapeutic classes of drugs. Chapter 1: Preliminaries For example, there is a market for antiulcer drugs that is very clearly defined. Sometimes, however, pharmaceutical market boundaries are more ambiguous, like painkillers. There are many types of painkillers, and some work better than others for certain types of pain. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 10 of 18
  • 11. 1.2 WHAT IS A MARKET? In 1990, the Archer-Daniels-Midland Company (ADM) acquired the Clinton Corn Processing Company (CCP). Chapter 1: Preliminaries The U.S. Department of Justice (DOJ) challenged the acquisition on the grounds that it would lead to a dominant producer of corn syrup with the power to push prices above competitive levels. ADM fought the DOJ decision, and the case went to court. The basic issue was whether corn syrup represented a distinct market. ADM argued that sugar and corn syrup should be considered part of the same market because they are used interchangeably to sweeten a vast array of food products. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 11 of 18
  • 12. 1.3 REAL VERSUS NOMINAL PRICES ● nominal price inflation. Absolute price of a good, unadjusted for Chapter 1: Preliminaries ● real price Price of a good relative to an aggregate measure of prices; price adjusted for inflation. ● Consumer Price Index level. Measure of the aggregate price ● Producer Price Index Measure of the aggregate price level for intermediate products and wholesale goods. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 12 of 18
  • 13. 1.3 REAL VERSUS NOMINAL PRICES Table 1.1 The Real Prices of Eggs and of a College Education 1970 1980 1990 2000 2007 38.8 82.4 130.7 172.2 205.8 Grade A large eggs $0.61 $0.84 $1.01 $0.91 $1.64 College education $2530 $4912 $12,018 $20,186 $27,560 Grade A large eggs $0.61 $0.40 $0.30 $0.21 $0.31 College education $2,530 $2,313 $3,568 $4,548 $5,196 Consumer Price Index Nominal Prices Chapter 1: Preliminaries Real Prices ($1970) The real price of eggs in 1970 dollars is calculated as follows: Re al price of eggs in 1980 = CPI1970 38.8 × nominal price in 1980 = × $0.84 = $0.40 CPI1980 82.4 Re al price of eggs in 1990 = 38.8 CPI1970 × $1.01 = $0.30 × nominal price in 1990 = 130.7 CPI1990 While the nominal price of eggs rose during these years, the real price of eggs actually fell. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 13 of 18
  • 14. 1.3 REAL VERSUS NOMINAL PRICES Table 1.1 The Real Prices of Eggs and of a College Education 1970 1980 1990 2000 2007 38.8 82.4 130.7 172.2 205.8 Grade A large eggs $0.61 $0.84 $1.01 $0.91 $1.64 College education $2530 $4912 $12,018 $20,186 $27,560 $2.05 $1.33 $1.01 $0.69 $1.04 Consumer Price Index Nominal Prices Chapter 1: Preliminaries Real Prices ($1980) Grade A large eggs The real price of eggs in 1990 dollars is calculated as follows: Re al price of eggs in 1970 = CPI1990 130.7 × nominal price in 1970 = × $0.61 = $2.05 CPI1970 38.8 Re al price of eggs in 2007 = CPI1990 130.7 × nominal price in 2007 = × $1.64 = $1.04 CPI 2007 205.8 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 14 of 18
  • 15. 1.3 REAL VERSUS NOMINAL PRICES Table 1.1 The Real Prices of Eggs and of a College Education 1970 1980 1990 2000 2007 38.8 82.4 130.7 172.2 205.8 Grade A large eggs $0.61 $0.84 $1.01 $0.91 $1.64 College education $2530 $4912 $12,018 $20,186 $27,560 $2.05 $1.33 $1.01 $0.69 $1.04 Consumer Price Index Nominal Prices Chapter 1: Preliminaries Real Prices ($1980) Grade A large eggs The percentage change in real price is calculated as follows: Percentage change in real price = real price in 2007 − real price in 1970 1.04 − 2.05 = = −0.49 real price in 1970 2.05 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 15 of 18
  • 16. 1.3 REAL VERSUS NOMINAL PRICES Figure 1.1 Chapter 1: Preliminaries The Minimum Wage In nominal terms, the minimum wage has increased steadily over the past 70 years. However, in real terms its expected 2010 level is below that of the 1970s. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 16 of 18
  • 17. 1.4 WHY STUDY MICROECONOMICS? Corporate Decision Making: Ford’s Sport Utility Vehicles The design and efficient production of Ford’s SUVs involved not only some impressive engineering, but a lot of economics as well. Chapter 1: Preliminaries First, Ford had to think carefully about how the public would react to the design and performance of its new products. Next, Ford had to be concerned with the cost of manufacturing these cars. Finally, Ford had to think about its relationship to the government and the effects of regulatory policies. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 17 of 18
  • 18. 1.4 WHY STUDY MICROECONOMICS? Public Policy Design: Automobile Emission Standards for the Twenty-First Century The design of a program like the Clean Air Act involves a good deal of economics. Chapter 1: Preliminaries First, the government must evaluate the monetary impact of the program on consumers. The government must determine how new standards will affect the cost of producing cars. Finally, the government must ask why the problems related to air pollution are not solved by our market-oriented economy. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 18 of 18

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