Ekonomi Bisnis dan Manajerial 1 Mengetahui ruang lingkup

Ekonomi Bisnis dan Manajerial 1. Mengetahui ruang lingkup mata kuliah ini 2. Mengetahui lingkungan ekonomi di dalam mana bisnis dilakukan

What is MICROECONOMICS? MICRO: – study of economic behavior of (relatively) "small" units, e. g. , workers, firms Versus MACRO: – study of economy as a whole, – aggregate actor behavior • Remarkable consensus on micro's underlying principles – "laws" and tools of analysis, but vast differences in terms of what to do with the analysis. • Micro inherently conservative (? !).

Role of Theory Microeconomic theory evolved gradually – 1700 s & late 1800 s. – Marshall’s famous "scissors" – Few changes to core of micro theory in many decades. Basic Supply and Demand Curves Price "Theory provides means or framework for explaining complex reality” – Simplifies/abstracts from reality S – Need not fully or precisely describe reality D Quantity

Role of Theory • Best test of 'good' theory? – Whether it explains/predicts what it's designed to, NOT whether its assumptions are correct or reflect reality • CAVEAT: – Many controversies & issues here – Can have seemingly good theory, but as result of non-modeled events or other supporting circumstances, lousy results

Positive v. Normative Analysis Economists & others often called on to assess best policy approach. – Positive analysis — "WHAT IS“ – Normative analysis — "WHAT SHOULD BE" Important Distinction – Much of micro in realm of positive analysis, dealing w/propositions that can be tested in terms of underlying logic (qualitative analysis) & empirical evidence (quantitative analysis)

Positive v. Normative Analysis • Qualitatively determining expected effects of particular policy, based on micro theory – Likely effects on employment, production, prices • Quantitatively determining size of actual effects of particular policy. – Stats. /econometrics & statistical significance • Then, go further (Steps 1 & 2). Use value judgments to decide whether or not such effects are desired — realm of normative analysis. • Economists no better than anyone else at making these …

Value Judgments "When analysis comes in conflict with [strongly held] values, values trump analysis every time. " • Theda Skocpol (1997 Harvard) on 'welfare devolution’ Continuing debate on the ‘success’ of welfare reform in U. S. CEA, Bill Clinton, Al From, Bush, others: • Was it policy or the economy & how much of each? J. Bishop’s 1998 & R. Blank’s 2002 analysis of impacts v. CEA’s

Welfare Reform’s ‘Success’? Consider Blank (2002)—

Why POLITICAL ECONOMY? Why not just microeconomics taught by UT’s econ tribe? – Cheaper, easier? Why not? – For starters, check out stark contrast in treatments by B&Z, Kuttner, Blank & Mc. Gurn … QUESTIONS – Do “free markets” exist? Yes & No. So what? – What share of GDP produced & sold in “free markets”?

Considerations • Influence of laws, institutions & “rules of the game” • Effects of power & influence on market outcomes • Issues surrounding “one-man/one vote, ” “one-dollar/one-vote” – The Endowment Issue • Effects of policies & policy shifts on markets & on market outcomes

Considerations • Question: How deterministic is market analysis? • Question: Is there ‘play’ in markets? If so, how much? – 2001 Austin Equity Comm. & “living wage” issue; see J. Siedlecki piece, LBJ Journal (Spring/Summer 2005 – Link to article) • Question: Do markets sometimes fail and, if so, whats’ to be done about it?

The Imperial Market Considerable “market worship” • Not just among economists, but policymakers of almost all stripes (Kuttner, ch. 2) Theory of Second Best • i. e. , where markets have multiple ‘distortions, ’ removing one to create purer market won’t necessarily improve overall outcomes.

Market Analysis: Terms & Concepts Market defined as — " Area” where potential buyers & sellers of a good/service interact "interplay of all potential buyers & sellers involved in” Prices (to economists) Relative (or real) prices, i. e. , price relative to prices of all other goods/services at point in time. Issue more one of dynamics, change over time. . .

Market Analysis: Key Actors Buyers/consumers – Theoretical abstraction largely ignores important market intermediaries, e. g. , unions, trade associations. ‘Lost’ tribe of economists who emphasize institutions & their effects within a market economy. Galbraith – Pure market analysis insufficient, per se Marshall

Market Analysis: Time • One of more important dimensions of market analysis • S & D responses can & do vary enormously over the short- and longer-term!

Behavioral Assumptions Critical foundation for what follows: 1. Self-interested behavior • actors pursue own goals & objectives 2. Rational behavior • actors weigh choices & actions and act deliberately 3. Scarce resources • or, as a famous (non-practicing) economist put it, "you can't always get what you want!” Note: 1 + 2 => generally prefer more to less

Behavioral Assumptions THUS, • Actors must choose among available options, pursuing desires rationally with limited resources or • "Actors make choices subject to a resource constraint"

Production Possibilities Frontier • All possible combinations of goods/services a rational actor can attain with fixed resources • Technology • [What does this mean? ] Illustrate with 2 choices • Say. . . research reports, R, and research proposals, P • Might also view as Present v. Future

PPF Research Reports (present) Production Possibilities Curve Research Proposals (future)

PPF Research Reports (present) Production Possibilities Curve A Research Proposals (future)

PPF Research Reports (present) Production Possibilities Curve A B Research Proposals (future)

PPF Research Reports (present) Production Possibilities Curve A C B Research Proposals (future)

PPF Research Reports (present) Production Possibilities Curve A B D C Research Proposals (future)

PPF Opportunity Cost: • Amount of one good that must be foregone to produce added unit of another • PPF slope • Marginal Rate of Transformation, MRT • Defined as: ∆R / ∆P • Think "rise over run”

PPF Questions Q 1: Why is PPF concave? A 1: Efficiency of resource use dictates that as shift resources to producing more of one, less of another, become less efficient in doing so. Q 2: Which goods combination = BEST? A 2: Don't know (yet)! Depends on "preferences" which we'll get to shortly.

PPF Questions … Q 3: Why not either devote more resources to production or improve technology to attain greater amounts of BOTH goods? A 3: Can't! In the short run, resources & technology are both FIXED.

Opportunity Cost • Economic or opportunity cost of given action or choice comprised of both: – EXPLICIT (or accounting) Cost • defined typically in terms of monetary costs; – IMPLICIT (or non-monetary) Cost • imputed value of alternative use of resources • “Value of resource in its best alternative use", includes both explicit (monetary) and implicit (or non-monetary) costs – Key concept in micro & policy analysis – Numerous applications, e. g. , benefit/cost analysis

Discussion Significance of accounting v. economic costs, in terms of: – Education & career choices? – The environment? – Welfare reform and related interventions? What of "sunk costs"? – Already incurred, can't recoup. So, forget them.

Demand Schedules & Curves Demand – Schedule of prices & associated quantities of goods/services consumers willing & able to Prices purchase. Demand Schedule, for example: – Functionally Q 1 = a + b. P 1 Quantities $7 2 $6 3 $5 4 Etc. . .

Demand Schedules & Curves Law of Demand – The lower the price of a good or service, the larger the quantity consumers wish to purchase (demand), ceteris paribus. • Law of D —> negative slope for D curve! • NOTE TERMS! Distinguish carefully between: – ∆Qd (movement along) versus – ∆ in D, a shift in D Curve – Ceteris paribus — tastes, incomes, prices of other goods. E. g. i. Pods. . .

Demand Schedules & Curves Demand for i. Pods Price D 1 Quantity

Demand Schedules & Curves Demand for i. Pods Price D 1 Quantity D 2

Demand Depends On. . . Incomes: Response depends very much on TYPE of good/service! – If “normal” good, increase in average household income, Y • With P unchanged, leads to increased consumption of i. Pods • That is, demand shifts from D 1 to D 2 – If "inferior" good, increase in Y • With P unchanged, leads to decreased i. Pod consumption, again a demand shift.

Inferior Goods? Inferior goods: – Spam – Texas wines – Hamburger – Others? *Most goods = Normal*

Demand Depends On. . . Prices of Other Goods – Depends very much on WHICH other goods! Examples. . . – CD Prices? Sharp drop in P of CDs leads to increased consumption of CD players • A shift out in demand, from D 1 to D 2. • Complements in consumption, I. e. , their consumption "goes together". . .

Demand Depends On. . . Prices of Other Goods • another example – VCRs? Sharp drop in P of DVD players leads to decreased consumption of VCRs • a shift in demand from D 2 to D 1. • Substitutes in consumption, alternatives for meeting same needs. . . • “Either/or” goods.

Demand Depends On. . . Tastes & Preferences – Can deal with these any number of ways: Consider introduction of new alternatives – growth of live music venues, DATs & DAT players, i. Pods, "retro" (vinyl) movement – E. g. , the Wine Industry

Supply Schedules & Curves SUPPLY, the producer side of the market: – schedule of prices & associated quantities producers willing & able to produce & sell at point in time. LAW of SUPPLY: – Higher the price, the larger the quantity producers will want to produce (supply) at any point in time, cet. par. So, positive slope! P as "reward for production": – As more produced, per-unit opportunity cost of production tends to increase. Higher Ps needed to elicit greater Qs. Ceteris paribus: – Technology/production techniques, input factor prices/availability generally. Try same e. g. , i. Pods. . .

Supply Schedules & Curves Supply of i. Pods Price S 1 Quantity

Supply Schedules Consider: • Technology of Production – Intro of new, more efficient production techniques (e. g. HPWO) allows producers to produce more at every P. So, supply shifts out from S 1 to S 2 • Input Supply Conditions – Increase in labor costs—one NOT offset by productivity increases—leads to reduced supply, a shift from S 2 to S 1.

Supply Schedules & Curves Supply of i. Pods Price S 1 S 2 Quantity

Market Equilibrium, Disequilibrium Equilibrium P & Q —> no forces acting to make them different! – Static, not really dynamic. Example? – Try the market for Applied Microeconomics textbooks. . .

Market Equilibrium Applied Microeconomics Textbook Market Price S D Quantity

Market Equilibrium Applied Microeconomics Textbook Market Price Pe $125 S D Qe Quantity

Market Equilibrium Applied Microeconomics Textbook Market Price Surplus P 1 $200 Pe $125 S D Q 1 Qe Q 2 Quantity

Market Equilibrium Applied Microeconomics Textbook Market Price Surplus P 1 $200 Pe $125 P 2 Shortage $75 S D Q 1 Qe Q 2 Quantity

Government Interventions. . . • NYC rent controls, minimum wage hikes (1977 -81, 1989, 1995) – classic illustrations of impact of market interventions – wage/price controls (1971 -74) Q: Are such interventions “bad”? – Maybe, if you're a market worshiper • Otherwise, depends upon your values & other non-market considerations. . . • Some adverse market & non-market responses — – Non-price rationing – Quality deterioration – Black markets