Lecture 1 The Subject Matter of Microeconomics Main

Lecture 1 The Subject Matter of Microeconomics

Main questions 1. The Subject Matter of Microeconomics n 2. The use and limitation of Microeconomic theory. Economic methodology n ¨ 2. 1. Microeconomic models ¨ 2. 2. Positive and Normative Analysis

Microeconomics - is a branch of economics that studies how individuals, households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold - studies the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets

Purpose of the course: n forming of a market-oriented economic outlook and knowledge about the correct economic choice and evaluate the use of scarce productive resources that constitute multiple-level optimal economic decisions structural elements of the national economy

By individual we mean an individual decision making unit or a group like a household, a firm or any other organization

Goods means physical, tangible objects used to satisfy people’s wants and needs The term ‘goods’ should be contrasted with the term ‘services’, which captures the intangible satisfaction of wants and needs. As compared to food items and clothes, which are examples of goods, we can think of the tasks that doctors and teachers perform for us as examples of services. n n n We can differ: – economic good (scarce good) - the quantity demanded exceeds the quantity supplied at a zero price – free good - the quantity supplied exceeds the quantity demanded at a zero price – economic bad - people are willing to pay to avoid the item

Resources ("factors of production" ) n Land are limited n Labor can replace each other n Capital can complement each other n Entrepreneurship can be recoverable or irreplaceable

n n Land - the "original and indestructible powers of the soil" and natural resources, such as coal, oil, and metallic ores. Labor - is the most important resource. It can be determined as human’s ability to directed action and thus requires that the human being have some motivation. Capital consists of all goods produced by human labor (with other resources) and used in the production of still more goods and services; in other words, produced means of production. Some examples are: machinery, houses and other buildings, grapevines, fruit trees and hogs on the hoof, and human capital Entrepreneurs – are individuals who start a new business or bring a product to market

A market is a group of buyers and sellers of a particular good or service

Economic methodology n In simple words scientific method means that we have to occupy next stages: I. observe a phenomenon, II. make simplifying assumptions and formulate a hypothesis, III. generate predictions, and IV. test the hypothesis.

Microeconomic models Purpose - to explain the reasons underlying observed economic phenomena A model is a description of the interdependencies in terms of mathematics, pictures, a computer programming language, or some similar descriptive language, together with a theory of the dynamics of the subsystem.

The essential components of a microeconomic model: – The economic actors – Motivation (most microeconomic models assume that somewhere deep in the mechanism is the driving force of self-interest ) – The economic environment (“rules of the game” ) – Assumptions and axioms (Axioms are just formally stated assumptions )

Assumptions Neoclassical economists share some assumptions that they make as a starting point: n People act "as if" they were rational, i. e. maximizing benefits. n People act "as if" they were self-interested.

Production possibilities frontier (PPF) n is an economic model which shows all the combinations of two goods that can be produced under available quantity of resourses and given technology. This model describes scarcity problem and shows maximum quantities of two goods that can be effectively produced within a country (or a firm)

At any given time, a country cannot produce more of one good without producing less of something else. So we can express this by a model based on the relationship between the amounts produced of the two goods.

Demonstration of the Production Possibilities Frontier machines food 0 2000 1980 2000 1920 3000 1820 4000 1680 5000 1500 6000 1280 7000 1020 8000 720 9000 380 10000 0

Opportunity Cost ¨ of any good or service is the value of all the other goods or services that we must give up in order to produce it. ¨ A key point here is the trade-off between gadgets and food. Whenever we increase the output of gadgets we must decrease the output of food. This is a cost: it is the "opportunity cost" of the increase in production of gadgets.