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ECONOMICS:Themes of Microeconomics, Theories and Models

Economics: Another Perspective, Factors of Production >>
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Microeconomics ­ECO402
VU
Lesson 1
ECONOMICS
Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people.
Microeconomics deals with:
·  Behavior of individual units
·  When Consuming; How we choose what to buy
·  When Producing; How we choose what to produce
·  Markets: The interaction of consumers and producers
·  Analysis of aggregate issues:
Economic growth
Inflation
Unemployment
Microeconomics vs. Macroeconomics
Microeconomics is the foundation of macroeconomic analysis.
Themes of Microeconomics
According to Mick Jagger & the Rolling Stones, "You can't always get what you want".
Why Not?
Limited Resources
Unlimited Wants
Allocation of Scarce Resources and Trade-offs
In a planned economy
In a market economy
Microeconomics and Optimal Trade-offs
1. Consumer Theory
2. Workers
3. Theory of the Firm
Microeconomics and Prices
­  The role of prices in a market economy
­  How prices are determined
Theories and Models
Microeconomic Analysis
­  Theories are used to explain observed phenomena in terms of a set of basic
rules and assumptions. For example
­  The Theory of the Firm
­  The Theory of Consumer Behavior
­  Models:
A mathematical representation of a theory used to make a prediction.
­  Validating a Theory
The validity of a theory is determined by the quality of its prediction, given
the assumptions.
­  Evolving the Theory
Testing and refining theories is central to the development of the science of
economics.
Positive versus Normative Economics
Positive Economics
Positive economics deals with the observations or predictions of the facts of
economic life. For example:
What will be the impact of an increase in wages on the price of a product?
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Microeconomics ­ECO402
VU
Normative Economics
Normative Economics is the value judgments about how economics should
operate, based on certain moral principles or preferences?" For example:
What wage rate should be paid to the auto workers to make them an active
member of the society?
What is a Market?
Markets
A geographically defined area where buyers and sellers interact to determine the
price of a product or a set of products.
Markets vs. Industries
Industries are the supply side of the market.
Defining the Market
The market parameters must be set before an analysis of the market can take
place.
Arbitrage
Buying a product at a low price in one location and selling at a high price in
another.
Competitive vs. Noncompetitive Markets
­  Competitive Markets
Because of the large number of buyers and sellers, no individual buyer
or seller can influence the price.
Example: Most agricultural markets
­  Noncompetitive Markets
Markets where individual producers can influence the price.
Example: OPEC
Market Price
­  Competitive markets establish one price.
­  Noncompetitive markets may set many prices for the same product.
Market Definition - The Extent of a Market
­  Market Definition
Which buyers and sellers should be included in a given market?
­  Market Extent
Defines the boundaries of the market
Geographic
Range of products
­  Examples
­  Geographic boundaries
Gold: Lahore vs. Karachi
Housing: Islamabad vs. Rawalpindi
­  Range of Products
Gasoline: regular, super, & diesel
Cameras: Polaroid, point & shoot, digital
­  Markets for Prescription Drugs
Well-defined markets - therapeutic drugs
Ambiguous markets ­ painkillers
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Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor