Lecture 1

Introduction

2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

Themes of Microeconomics
Microeconomics deals with limits that economic agents (consumers, workers, firms, etc) face:
Limited budgets Limited time Limited ability to produce

How do we make the most of limits? How do we allocate scarce resources?

2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 2

Themes of Microeconomics

Limited resources (constraints)

Choices must be made

Unlimited wants

Maximizing your objective (e.g. utility & profits)

2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

Themes of Microeconomics
Workers, firms and consumers must make trade-offs
Do I work or go on vacation? Do I purchase a new car or save my money? Do we hire more workers or buy new machinery?

How are we going to manage these trade-offs?

2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 4

Themes of Microeconomics
Consumers Limited incomes How consumers maximize their well-being (utility), using their preferences, to make decisions about trade-offs.

E.g. How do consumers make decisions about consumption (what to consume and how much? and savings?)
Consumer demand can be derived.
2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 5

Themes of Microeconomics
Workers
Individuals decide when and if to enter the work-force
Trade-offs

of working now or obtaining more education/training

What choices do individuals make in terms of jobs or work places? How many hours do individuals choose to work? Trade-off of labor and leisure

Labor supply can be derived.

2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 6

Themes of Microeconomics
Firms
What types of products do firms produce?
Constraints

on production capacity & financial resources create trade-offs. supply can be derived.

Product

How many workers to employ in the production?

Labor
2005 Pearson Education, Inc. & Y.E.Riyanto

demand can be derived.

Lecture 1 7

Themes of Microeconomics
Prices
Trade-offs are often based on prices faced by consumers and producers
Workers made decisions (labor supply) based on prices for labor wages Firms make decisions based on wages (labor demand) and prices for inputs (input demand) and on prices for the goods they produce (product supply)
2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 8

Themes of Microeconomics
Prices determines allocation!
How are prices determined?
Centrally

planned economies -governments control prices Market economies prices determined by interaction of market participants

Markets collection of buyers and sellers whose interaction determines the prices of goods.
2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 9

What is a Market?
Markets
Collection of buyers and sellers (physical or virtual), through their actual or potential interaction, determine the prices of products
Buyers:

consumers purchase goods, companies purchase labor and inputs

consumers sell labor, resource owners sell inputs, firms sell goods

Sellers:

2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

10

What is a Market?

2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

11

What is a Market?
Defining the Market
Many of the most interesting questions in economics concern the functioning of markets
Why

are there a lot of firms in some markets and not in others? consumers better off with many firms? the government intervene in markets?

Are

Should What
2005 Pearson Education, Inc. & Y.E.Riyanto

sets of rules governing the market?

Lecture 1 12

Types of Markets
Perfectly competitive markets
Because of the large number of buyers and sellers, no individual buyer or seller can influence the price.
Example:

Most agricultural markets

Fierce competition among firms can create a competitive market not always necessary to have many buyers and sellers.
2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

13

Types of Markets

2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

14

Types of Markets
Noncompetitive Markets
Markets where individual producers can influence the price.
Cartel

groups of producers who act collectively. OPEC dominates with world oil market

Example:

More on this later.

2005 Pearson Education, Inc. & Y.E.Riyanto Lecture 1 15

My Personal Wish

2005 Pearson Education, Inc. & Y.E.Riyanto

Lecture 1

16