Chapter 1 Preliminaries Economics is the study of

Chapter 1 Preliminaries

Economics is the study of production and consumption of goods and services with the utilization of minimum resources. n Economics is divided into three school of thoughts: n Classical School of Thought n Neo-Classical School of Thought n Modern Economics Chapter 1: Preliminaries Slide 2

Classical School of thought n The Scotland economist Adam Smith was first economist who gave the idea and define the economics as “Economics is the study of production or earning of money, distribution and interchange of money”. Many other economists support this idea e. g. J. S. Mill, Recordo and Walker of American Economist. But after the some time many people put objection on this idea and named it the knowledge of diamal sciences and pig philosophy. Chapter 1: Preliminaries Slide 3

Neo-Classical School of Thought Due to the objection on Adam Simith idea and his followers then Dr. Marshal introduce the economics as “it is the knowledge of welfare and named it welfare economics” After that Prof. Robens and many other economists objected that this definition limited that only cover the concept of human welfare. Chapter 1: Preliminaries Slide 4

Modern Economics According to Prof. Robens “Economics is the knowledge of human behavior and relationship between interchange of goods or services to get maximum benefit under the utilization of minimum resources” According to Keynes “Economics is the knowledge which give the opportunities of earnings due to the utilization of minimum resources and enhance the income of the economy” Chapter 1: Preliminaries Slide 5

Preliminaries n Microeconomics deals with: l Behavior of individual units u. When Consuming • How we choose what to buy u. When Producing • How we choose what to produce Chapter 1: Preliminaries Slide 6

Preliminaries n The Linkage Between Micro and Macroeconomics l Microeconomics is the foundation of macroeconomic analysis Chapter 1: Preliminaries Slide 7

Theories and Models n Microeconomic Analysis l Models: u a mathematical representation of a theory used to make a prediction. Chapter 1: Preliminaries Slide 8

Positive Versus Normative Analysis n Positive Analysis l n Positive analysis is the use of theories and models to predict the impact of a choice. Normative Analysis l Normative analysis addresses issues from the perspective of “What ought to be? ” A normative statement expresses a judgment about whether a situation is desirable or undesirable Chapter 1: Preliminaries Slide 9

What is a Market? n n Markets l The interaction of consumers and producers l A geographically defined area where buyers and sellers interact to determine the price of a product or a set of products. Markets vs. Industries l Industries are the supply side of the market. Chapter 1: Preliminaries Slide 10

What is a Market? n Arbitrage l Buying a product at a low price in one location and selling at a high price in another Chapter 1: Preliminaries Slide 11

What is a Market? n Competitive vs. Noncompetitive Markets l Competitive Markets u u l Because of the large number of buyers and sellers, no individual buyer or seller can influence the price. Example: Most agricultural markets Noncompetitive Markets u Markets where individual producers can influence the price. Chapter 1: Preliminaries Slide 12

What is a Market? n Market Price l Competitive markets establish one price. l Noncompetitive markets may set many prices for the same product. Chapter 1: Preliminaries Slide 13

Real Versus Nominal Prices n Nominal price is the absolute or current dollar price of a good or service when it is sold. n Real price is the price relative to an aggregate measure of prices or constant dollar price. Chapter 1: Preliminaries Slide 14

Real Versus Nominal Prices n Calculating Real Prices Chapter 1: Preliminaries Slide 15

An Example: Calculating the Real Price of Milk Nominal Price Year of Milk CPI Real Price of Milk in 1970 dollars 1970 . 40 38. 8 . 40 = 38. 8/38. 8 x. 40 1980 . 65 82. 4 . 31 = 38. 8/82. 4 x. 65 1999 1. 05 167. 0 Chapter 1: Preliminaries . 24 = 38. 8/167. 0 x 1. 05 Slide 16

Calculating Real Prices: An Example - Eggs & College 1970 Consumer Price Index 38. 8 53. 8 1975 1980 82. 4 107. 6 Nominal Prices A Large Eggs College Education $0. 61 $0. 77 $0. 84 $2, 530 $3, 403 $4, 912 1985 1990 130. 7 163. 0 $0. 61 $0. 56 $0. 40 $2, 530 $2, 454 $2, 313 Chapter 1: Preliminaries (1983) Grade $0. 80 $0. 98 $1. 04 $8, 156 $12, 800 $19, 213 Real Prices ($1970) A Large Eggs College Education 1998 $0. 29 $0. 30 $2, 941 $3, 800 Grade $0. 25 $4, 573 Slide 17

Summary n Microeconomics is concerned with the decisions made by small economic units. n Microeconomics relies heavily on the use of theory and models. Chapter 1: Preliminaries Slide 18

Summary n The market price is established by the interaction of buyers and sellers. n A market’s geographic boundaries and range of products must be defined. n To reduce the effects of inflation we measure real prices, rather than nominal prices. Chapter 1: Preliminaries Slide 19

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