Prepared by Dr Della Lee Sue, Marist College MICROECONOMICS: Theory & Applications Chapter 1: An Introduction to Microeconomics By Edgar K Browning & Mark A Zupan John Wiley & Sons, Inc 12th Edition, Copyright 2015 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives        Convey the scope of microeconomic theory Explain why theory, is essential to understanding and predicting real-world outcomes Distinguish between positive and normative analyses Differentiate between real and nominal prices Describe the basic assumptions economists make about market participants Introduce the concept of opportunity cost and explain how economic costs differ from accounting costs Show how a production possibility frontier graphically depicts the basic assumptions economists make about market actors as well as the concept of opportunity cost Copyright © 2015 John Wiley & Sons, Inc All rights reserved Convey the scope of microeconomic theory 1.1 THE SCOPE OF MICROECONOMIC THEORY Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Scope of Microeconomic Theory  “micro-” derives from the Greek word “mikros-”  Microeconomics  the study of the behavior of small economic units such as consumers and firms  focuses on individuals as fundamental decision makers in a society  also referred to as “price theory” Copyright © 2015 John Wiley & Sons, Inc All rights reserved Explain why theory, is essential to understanding and predicting realworld outcomes 1.2 THE NATURE AND ROLE OF THEORY Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Nature and Role of Theory    A theory shows how facts are related to one another Theory  is based on certain assumptions  can be used to predict as well as explain real-world outcomes “Good” theory – a theory that successfully explains and predicts the phenomena that it is intended to explain and predict Copyright © 2015 John Wiley & Sons, Inc All rights reserved Distinguish between positive and normative analyses 1.3 POSITIVE VERSUS NORMATIVE ANALYSIS Copyright © 2015 John Wiley & Sons, Inc All rights reserved Positive versus Normative Analysis  Positive analysis – assessment of expected objective outcomes; draws on accepted rules of logic and evidence  Normative analysis – a nonscientific value judgment; subjective Copyright © 2015 John Wiley & Sons, Inc All rights reserved Differentiate between real and nominal prices 1.4 MARKET ANALYSIS AND REAL VERSUS NOMINAL PRICES Copyright © 2015 John Wiley & Sons, Inc All rights reserved Market Analysis and Real versus Nominal Prices    Markets – the interplay of all potential buyers and sellers of a particular commodity or service Nominal price – absolute price, not adjusted for the changing value of money Real price - nominal price adjusted for the changing value of money Copyright © 2015 John Wiley & Sons, Inc All rights reserved 10 Table 1.1 Source Copyright © 2015 John Wiley & Sons, Inc All rights reserved 11 Describe the basic assumptions economists make about market participants 1.5 BASIC ASSUMPTIONS ABOUT MARKET PARTICIPANTS Copyright © 2015 John Wiley & Sons, Inc All rights reserved 12 Basic Assumptions about Market Participants  Goal-oriented – market participants are interested in fulfilling their own personal goals  Rational behavior – behavior is based on a careful, deliberate process that weighs expected benefits and costs  Scarce resources – availability of resources is insufficient for individuals to satisfy all desires Copyright © 2015 John Wiley & Sons, Inc All rights reserved 13 Introduce the concept of opportunity cost and explain how economic costs differ from accounting costs 1.6 OPPORTUNITY COST Copyright © 2015 John Wiley & Sons, Inc All rights reserved 14 Opportunity Cost  Explicit costs – money used in the pursuit of a goal that could otherwise have been spent on an alternative objective  Implicit costs – costs associated with the individual’s use of his or her own time and other resources in pursuit of a particular activity  Economic cost (aka “opportunity cost”) = explicit costs + implicit costs Copyright © 2015 John Wiley & Sons, Inc All rights reserved 15 Other Costs  Accounting costs = costs reported in companies’ net income statements generated by accountants  Sunk costs = costs that have already been incurred and are beyond recovery Copyright © 2015 John Wiley & Sons, Inc All rights reserved 16 Show how a production possibility frontier graphically depicts the basic assumptions economists make about market actors as well as the concept of opportunity cost 1.7 PRODUCTION POSSIBILITY FRONTIER Copyright © 2015 John Wiley & Sons, Inc All rights reserved 17 Production Possibility Frontier  PPF - a depiction of all the different combinations of goods that a rational actor with certain personal goals can attain with a fixed amount of resources  Constant versus increasing per-unit opportunity cost – effect on shape of PPF  Constant opportunity costs: linear  Increasing opportunity costs: concave to the origin Copyright © 2015 John Wiley & Sons, Inc All rights reserved 18 Figure 1.1 - A Production Possibility Frontier (PPF) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 19 Figure1.2 - The Typical-Case PPF: Concave to the Origin Copyright © 2015 John Wiley & Sons, Inc All rights reserved 20 ... microeconomic theory Explain why theory, is essential to understanding and predicting real-world outcomes Distinguish between positive and normative analyses Differentiate between real and nominal... “price theory Copyright © 2015 John Wiley & Sons, Inc All rights reserved Explain why theory, is essential to understanding and predicting realworld outcomes 1.2 THE NATURE AND ROLE OF THEORY. .. Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Nature and Role of Theory    A theory shows how facts are related to one another Theory  is based on certain assumptions  can be