Chapter 1: Preliminaries

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 The Economic Problem

• What goods and services should produce?

• – should the emphasis be on agriculture, manufacturing
or services, should it be on sport and leisure or housing?
• How should goods and services be produced? –
labour intensive, land intensive, capital intensive?
Efficiency?
• Who should get the goods and services produced? –
even distribution? more for the rich? for those who work
Chapter 1: Preliminaries

hard?

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 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
Chapter 1: Preliminaries

that deals with aggregate economic

variables, such as the level and growth rate
of national output, interest rates,
unemployment, and inflation.

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Chapter 1: Preliminaries

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 CHAPTER 1 OUTLINE

1.1 The Themes of Microeconomics

1.2 What Is a Market?

1.3 Real versus Nominal Prices

1.4 Why Study Microeconomics?

Chapter 1: Preliminaries

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 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.
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.
Chapter 1: Preliminaries

Firms
Firms also face limits in terms of the kinds of products that
they can produce, and the resources available to produce
them.

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 1.1 THE THEMES OF MICROECONOMICS

Prices and Markets

• Microeconomics describes how prices are determined.

• 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.
Chapter 1: Preliminaries

• These interactions occur in markets—collections of

buyers and sellers that together determine the price of a
good.

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 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, and
examining ideal states, in terms of a set of basic rules and
assumptions.
• A model is an abstraction of real world of complexities with a
purpose of focusing on important matters.
Positive versus Normative Analysis
Chapter 1: Preliminaries

● positive analysis Explaining observed phenomena by

analyzing the relationships of cause and effect.

● normative analysis Examining ideal states by asking

the questions of what ought to be.

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 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.

● market definition Determination of the buyers, sellers,

and range of products that should be included in a particular
market.
Chapter 1: Preliminaries

● arbitrage Practice of buying at a low price at one

location and selling at a higher price in another.

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 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

● market price Price prevailing in a competitive market.

Chapter 1: Preliminaries

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 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:

• A company must understand who its actual and potential

competitors are for the various products that it sells or
might sell in the future.
Chapter 1: Preliminaries

• Market definition can be important for public policy

decisions.

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 1.3 REAL VERSUS NOMINAL PRICES

● nominal price Absolute price of a good, unadjusted for

inflation.

● real price Price of a good relative to an aggregate

measure of prices; price adjusted for inflation.

● Consumer Price Index Measure of the aggregate price

level for final consumption goods
Chapter 1: Preliminaries

● Producer Price Index Measure of the aggregate price

level for intermediate products and wholesale goods.

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 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.

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

Chapter 1: Preliminaries

manufacturing these cars.

Finally, Ford had to think about its relationship to the

government and the effects of regulatory policies.

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 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.

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.
Chapter 1: Preliminaries

Finally, the government must ask why the problems related to

air pollution are not solved by our market-oriented economy.

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