CHAPTER1OUTLINE1.1 TheThemesofMicroeconomics1.2 WhatIsaMarket?1.3 RealversusNominalPrices1.4 WhyStudyMicroeconomics?Preliminaries●

microeconomicsBranchofeconomicsthatdealswiththebehaviorofindividualeconomicunits—consumers,firms,workers,andinvestors—aswellasthemarketsthattheseunitscomprise.●

macroeconomicsBranchofeconomicsthatdealswithaggregateeconomicvariables,suchasthelevelandgrowthrateofnationaloutput,interestrates,unemployment,andinflation.THETHEMESOFMICROECONOMICS1.1Trade-OffsConsumersWorkersFirmsConsumershavelimitedincomes,whichcanbespentonawidevarietyofgoodsandservices,orsavedforthefuture.Workersalsofaceconstraintsandmaketrade-offs.First,peoplemustdecidewhetherandwhentoentertheworkforce.Second,workersfacetrade-offsintheirchoiceofemployment.Finally,workersmustsometimesdecidehowmanyhoursperweektheywishtowork,therebytradingofflaborforleisure.Firmsalsofacelimitsintermsofthekindsofproductsthattheycanproduce,andtheresourcesavailabletoproducethem.1.1PricesandMarketsMicroeconomicsdescribeshowpricesaredetermined.Inacentrallyplannedeconomy,pricesaresetbythegovernment.Inamarketeconomy,pricesaredeterminedbytheinteractionsofconsumers,workers,andfirms.Theseinteractionsoccurinmarkets—collectionsofbuyersandsellersthattogetherdeterminethepriceofagood.THETHEMESOFMICROECONOMICS1.1TheoriesandModelsIneconomics,explanationandpredictionarebasedontheories.Theoriesaredevelopedtoexplainobservedphenomenaintermsofasetofbasicrulesandassumptions.Amodelisamathematicalrepresentation,basedoneconomictheory,ofafirm,amarket,orsomeotherentity.PositiveversusNormativeAnalysis●

positiveanalysisAnalysisdescribingrelationshipsofcauseandeffect.●

normativeanalysisAnalysisexaminingquestionsofwhatoughttobe.THETHEMESOFMICROECONOMICSWHATISAMARKET?1.2●

marketCollectionofbuyersandsellersthat,throughtheiractualorpotentialinteractions,determinethepriceofaproductorsetofproducts.●

marketdefinitionDeterminationofthebuyers,sellers,andrangeofproductsthatshouldbeincludedinaparticularmarket.●

arbitragePracticeofbuyingatalowpriceatonelocationandsellingatahigherpriceinanother.1.2CompetitiveversusNoncompetitiveMarketsMarketPrice●

perfectlycompetitivemarketMarketwithmanybuyersandsellers,sothatnosinglebuyerorsellerhasasignificantimpactonprice.●

marketprice

Priceprevailinginacompetitivemarket.WHATISAMARKET?1.2MarketDefinition—TheExtentofaMarket●

extentofamarketBoundariesofamarket,bothgeographicalandintermsofrangeofproductsproducedandsoldwithinit.Marketdefinitionisimportantfortworeasons:Acompanymustunderstandwhoitsactualandpotentialcompetitorsareforthevariousproductsthatitsellsormightsellinthefuture.Marketdefinitioncanbeimportantforpublicpolicydecisions.WHATISAMARKET?1.2Marketsareusuallydefinedintermsoftherapeuticclassesofdrugs.Forexample,thereisamarketforantiulcerdrugsthatisveryclearlydefined.Sometimes,however,pharmaceuticalmarketboundariesaremoreambiguous,likepainkillers.Therearemanytypesofpainkillers,andsomeworkbetterthanothersforcertaintypesofpain.WHATISAMARKET?1.2In1990,theArcher-Daniels-MidlandCompany(ADM)acquiredtheClintonCornProcessingCompany(CCP).TheU.S.DepartmentofJustice(DOJ)challengedtheacquisitiononthegroundsthatitwouldleadtoadominantproducerofcornsyrupwiththepowertopushpricesabovecompetitivelevels.ADMfoughttheDOJdecision,andthecasewenttocourt.Thebasicissuewaswhethercornsyruprepresentedadistinctmarket.ADMarguedthatsugarandcornsyrupshouldbeconsideredpartofthesamemarketbecausetheyareusedinterchangeablytosweetenavastarrayoffoodproducts.WHATISAMARKET?REALVERSUSNOMINALPRICES1.3●

nominalpriceAbsolutepriceofagood,unadjustedforinflation.●

realpricePriceofagoodrelativetoanaggregatemeasureofprices;priceadjustedforinflation.●

ConsumerPriceIndexMeasureoftheaggregatepricelevel.●

ProducerPriceIndexMeasureoftheaggregatepricelevelforintermediateproductsandwholesalegoods.Table1.1TheRealPriceofEggsandofaCollegeEducation19701980199020002007ConsumerPriceIndex38.882.4130.7172.2205.8NominalPricesGradeALargeEggs$0.61$0.84$1.01$0.91$1.64CollegeEducation$2,530$4,912$12,018$20,186$27,560RealPrices($1970)GradeALargeEggs$0.61$0.40$0.30$0.21$0.31CollegeEducation$2,530$2,313$3,568$4,548$5,1961.3Therealpriceofeggsin1970

dollarsiscalculatedasfollows:REALVERSUSNOMINALPRICESREALVERSUSNOMINALPRICESTheRealPriceofEggsandofaCollegeEducation(continued)19701980199020002007ConsumerPriceIndex38.882.4130.7172.2205.8NominalPricesGradeALargeEggs$0.61$0.84$1.01$0.91$1.64CollegeEducation$2,530$4,912$12,018$20,186$27,560RealPrices($1980)GradeALargeEggs$2.05$1.33$1.01$0.69$1.04CollegeEducation$2,530$2,313$3,568$4,548$5,1961.3Therealpriceofeggsin1990

dollarsiscalculatedasfollows:REALVERSUSNOMINALPRICESTheRealPriceofEggsandofaCollegeEducation(continued)19701980199020002007ConsumerPriceIndex38.882.4130.7172.2205.8NominalPricesGradeALargeEggs$0.61$0.84$1.01$0.91$1.64CollegeEducation$2,530$4,912$12,018$20,186$27,560RealPrices($1980)GradeALargeEggs$2.05$1.33$1.01$0.69$1.04CollegeEducation$2,530$2,313$3,568$4,548$5,1961.3Thepercentagechangeinrealpriceiscalculatedasfollows:REALVERSUSNOMINALPRICES1.3TheMinimumWageInnominalterms,theminimumwagehasincreasedsteadilyoverthepast70years.However,inrealtermsitsexpected2010levelisbelowthatofthe1970s.Figure1.1WHYSTUDYMICROECONOMICS?1.4CorporateDecisionMaking:Ford’sSportUtilityVehiclesThedesignandefficientproductionofFord’sSUVsinvolvednotonlysomeimpressiveengineering,butalotofeconomicsaswell.First,Fordhadtothinkcarefullyabouthowthepublicwouldreact