Introduction to Microeconomics

Economics – study of decisions when faced with scarcity, or the allocation of scarce resources.

Scarcity – Entities with unlimited wants but limited resources.  Imagine if resources were unlimited, everything would be free because it was unlimited (imagine someone charging for air).

Microeconomics – the study of the decisions that individuals and firms make when faced with scarcity, and the effects that those decisions have on the economy.

When faced with scarcity, entities must make trade-offs.

1. Which goods and services to produce (Why is this a trade-off, it is due to limits on production resources.)
2. How to produce these goods and services (Why? Because different mixtures of inputs can produce the same level of output and the prices of those inputs determine the trade-offs made.)
3. Who gets the goods and services (Why?  Remember, unlimited wants but limited resources, you consuming a private good affects another’s ability to consume that good.)

Who decides the allocation of goods and services is determined by the market structure. (Discuss the two main types of market structures (free market and command economies)).  Markets allocate these scarce resources.  (There is a trade off between efficiency and equity where the more equal you make society the smaller the whole pie will be, but if we want to be completely efficient then a few entities will control the majority of the resources).

Positive vs normative analysis– for example: Minimum wage raises production costs and therefore distorts the market equilibrium. (Positive – testable hypothesis) Minimum wages are bad public policy. (Normative – value judgment, good or bad.)

In Economics, models are used to predict how markets will function. They are a simplified version of reality like a map.

Why use them? Firms use them to analyze their production decisions (What and how much to produce based on consumer demand estimates, how to produce it base on cost structures and supply estimates.)  

Governments use them to estimate the effects of policy decisions as well as estimate tax revenue.

Individuals use them to make purchasing decisions (although not formally.)

Quantity demanded – quantity of a good that individuals will buy at any given price.

Demand Curve – the quantity demanded at each possible price, holding all other decision criteria constant.

Law of Demand – Price up, quantity demanded down, and vice-versa, holding all other factors constant.  This results in the downward sloping demand curve.

Building a demand curve – use basic demand schedule and build individual demand curve.

In order to get market demand, you need to horizontally sum each individual demand curve.

The Determinants of Demand

1. Income
2. Population
3. Tastes and preferences
4. Prices of related goods: Complements and Substitutes
5. Expectations of future prices

All of these can change irrespective to price changes.  

Quantity Supplied – amount of goods or services that a firm is willing to sell at a given price. (Holding other factors constant)

Supply Curve – the quantity supply at all possible prices holding other factors constant.

What is the really the firm’s supply curve?  (Review the ATC, AVC, AFC and MC curves).  Show shutdown point and short-run supply curve being the MC curve above the shutdown point.

The Determinants of supply

1. Prices of inputs
2. Technology
3. Number of firms
4. Prices of related goods: Complements and substitutes
5. Expectations of future prices