MicroEconomics theory and application 12th by browning an zupan chapter 01

 Describe the basic assumptions economists make about market participants..  Introduce the concept of opportunity cost and explain how economic costs differ from accounting costs..  S

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MICROECONOMICS: Theory & Applications

By Edgar K Browning & Mark A Zupan

John Wiley & Sons, Inc.

Chapter 1: An Introduction to Microeconomics

Prepared by Dr Della Lee Sue, Marist College

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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.

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1.1 THE SCOPE OF MICROECONOMIC THEORY

Convey the scope of microeconomic theory.

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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”

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1.2 THE NATURE AND ROLE OF

THEORY

Explain why theory, is essential to understanding and predicting real-world outcomes.

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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.

predicts the phenomena that it is intended to explain and predict.

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1.3 POSITIVE VERSUS NORMATIVE ANALYSIS

Distinguish between positive and normative analyses.

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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

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1.4 MARKET ANALYSIS AND REAL

VERSUS NOMINAL PRICES

Differentiate between real and nominal prices.

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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

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Table 1.1

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1.5 BASIC ASSUMPTIONS ABOUT

MARKET PARTICIPANTS

Describe the basic assumptions economists make about market

participants.

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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

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1.6 OPPORTUNITY COST

Introduce the concept of opportunity cost and explain how economic costs differ from accounting costs.

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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

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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

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1.7 PRODUCTION POSSIBILITY

FRONTIER

Show how a production possibility frontier graphically depicts the basic assumptions economists make about market actors as well as the concept

of opportunity cost.

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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

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Figure 1.1 - A Production Possibility

Frontier (PPF)

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Figure1.2 - The Typical-Case PPF:

Concave to the Origin

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