Macroeconomics- 1 - Introduction

8/11/2019 Macroeconomics- 1 - Introduction

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Fernando & Yvonn Quijano

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Preliminaries

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Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.


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2 of 18Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.

CHAPTER 1 OUTLINE

1.1 The Themes of Microeconomics

1.2 What Is a Market?

1.3 Real versus Nominal Prices

1.4 Why Study Microeconomics?


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Preliminaries

microeconomics Branch of economics that deals withthe behavior of individual economic unitsconsumers,

firms, workers, and investorsas well as the markets that

these units comprise.

macroeconomics Branch of economics that deals with

aggregate economic variables, such as the level and

growth rate of national output, interest rates,

unemployment, and inflation.


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THE THEMES OF MICROECONOMICS1.1

Trade-Offs

Consumers

Workers

Firms

Consumers have limited incomes, which can be spent on awide variety of goods and services, or saved for the future.

Workers also face constraints and make trade-offs. First,people must decide whether and when to enter theworkforce. Second, workers face trade-offs in their choice ofemployment. Finally, workers must sometimes decide howmany hours per week they wish to work, thereby trading off

labor for leisure.

Firms also face limits in terms of the kinds of products thatthey can produce, and the resources available to producethem.


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1.1

Prices and Markets

Microeconomics describes how prices aredetermined.

In a centrally planned economy, prices are set by

the government.

In a market economy, prices are determined by theinteractions of consumers, workers, and firms.These interactions occur in marketscollections ofbuyers and sellers that together determine the price

of a good.

THE THEMES OF MICROECONOMICS


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1.1

Theories and Models

In economics, explanation and prediction are based ontheories. Theories are developed to explain observedphenomena in terms of a set of basic rules and assumptions.

A modelis a mathematical representation, based oneconomic theory, of a firm, a market, or some other entity.

Positive versus Normative Analysis

positive analysis Analysis describing relationships ofcause and effect.

normative analysis Analysis examining questions ofwhat ought to be.

THE THEMES OF MICROECONOMICS


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WHAT IS A MARKET?1.2

market Collection of buyers and sellers that, throughtheir actual or potential interactions, determine the price ofa product or set of products.

market definition Determination of the buyers, sellers,and range of products that should be included in aparticular market.

arbitrage Practice of buying at a low price at onelocation and selling at a higher price in another.


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1.2

Competitive versus Noncompetitive Markets

Market Price

perfectly competitive market Market with many buyersand sellers, so that no single buyer or seller has asignificant impact on price.

market price Price prevailing in a competitive market.

WHAT IS A MARKET?


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1.2

Market DefinitionThe Extent of a Market

extent of a market Boundaries of a market, bothgeographical and in terms of range of products producedand sold within it.

Market definition is important for two reasons:

A company must understand who its actual and potentialcompetitors are for the various products that it sells ormight sell in the future.

Market definition can be important for public policydecisions.

WHAT IS A MARKET?


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1.2

Markets are usually defined interms of therapeutic classesofdrugs.

For example, there is a marketfor antiulcer drugs that is veryclearly defined.

Sometimes, however, pharmaceutical market boundariesare more ambiguous, likepainkillers.

There are many types of painkillers, and some work betterthan others for certain types of pain.

WHAT IS A MARKET?


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1.2

In 1990, the Archer-Daniels-Midland Company (ADM)acquired the Clinton Corn Processing Company (CCP).

The U.S. Department of Justice (DOJ) challenged theacquisition on the grounds that it would lead to a dominant

producer of corn syrup with the power to push prices abovecompetitive levels.

ADM fought the DOJ decision, and the case went to court.The basic issue was whether corn syrup represented adistinct market.

ADM argued that sugar and corn syrup should beconsidered part of the same market because they are usedinterchangeably to sweeten a vast array of food products.

WHAT IS A MARKET?


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REAL VERSUS NOMINAL PRICES1.3

nominal price Absolute price of a good, unadjusted forinflation.

real price Price of a good relative to an aggregatemeasure of prices; price adjusted for inflation.

Consumer Price Index Measure of the aggregate pricelevel.

Producer Price Index Measure of the aggregate pricelevel for intermediate products and wholesale goods.


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38.8$1.01 $0.30

130.7

Table 1.1 The Real Price of Eggs and of a College Education

1970 1980 1990 2000 2007

Consumer Price Index 38.8 82.4 130.7 172.2 205.8

Nominal Prices

Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64

College Education $2,530 $4,912 $12,018 $20,186 $27,560

Real Prices ($1970)



1.3

1970

1980

Real price of eggs in 1980 nominal price in 1980CPI

CPI

1970

1990


CPI

38.8$0.84 $0.40

82.4

The real price of eggs in 1970dollarsis calculated as follows:

REAL VERSUS NOMINAL PRICES


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The Real Price of Eggs and of a College Education (continued)

1970 1980 1990 2000 2007


Nominal Prices



Real Prices ($1980)



1.3

1990

1970


CPI

1990

2007


CPI

The real price of eggs in 1990dollarsis calculated as follows:

130.7$1.64 $1.04

205.8

130.7$0.61 $2.05

38.8


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The Real Price of Eggs and of a College Education (continued)

1970 1980 1990 2000 2007


Nominal Prices



Real Prices ($1980)



1.3

real price in 2007 real price in 1970Percentage change in real price

real price in 1970

The percentage change in real price is calculated as follows:

1.04 2.050.49

2.05


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REAL VERSUS NOMINAL PRICES1.3

The Minimum Wage

In nominal terms, theminimum wage has

increased steadilyover the past 70years.

However, in realterms its expected2010 level is belowthat of the 1970s.

Figure 1.1


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WHY STUDY MICROECONOMICS?1.4

Corporate Decision Making: Fords Sport Utility Vehicles

The design and efficient production of Fords SUVs involved

not only some impressive engineering, but a lot of economicsas well.

First, Ford had to think carefully about how the public wouldreact to the design and performance of its new products.

Next, Ford had to be concerned with the cost ofmanufacturing these cars.

Finally, Ford had to think about its relationship to thegovernment and the effects of regulatory policies.


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WHY STUDY MICROECONOMICS?1.4

Public Policy Design: Automobile Emission Standards forthe Twenty-First Century

The design of a program like the Clean Air Act involves agood deal of economics.

First, the government must evaluate the monetary impact of

the program on consumers.

The government must determine how new standards willaffect the cost of producing cars.

Finally, the government must ask why the problems related to

air pollution are not solved by our market-oriented economy.

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Macroeconomics- 1 - Introduction