Ekonomi Bisnis dan Manajerial

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What is MICROECONOMICS?
MICRO:
study of economic behavior of (relatively) "small" units, e.g., workers, firms

Versus MACRO:
study of economy as a whole, aggregate actor behavior

Remarkable consensus on micro's underlying principles

"laws" and tools of analysis, but vast differences in terms of what to do with the analysis.

Micro inherently conservative (?!).

Role of Theory
Microeconomic theory evolved gradually
1700s & late 1800s. Marshalls famous "scissors" Few changes to core of micro theory in many decades.
Basic Supply and Demand Curves
Price

"Theory provides means or framework for explaining complex reality

Simplifies/abstracts from reality

D
Quantity

Need not fully or precisely describe reality

Role of Theory
Best test of 'good' theory?
Whether it explains/predicts what it's designed to, NOT whether its assumptions are correct or reflect reality

CAVEAT:
Many controversies & issues here Can have seemingly good theory, but as result of non-modeled events or other supporting circumstances, lousy results

Positive v. Normative Analysis

Economists & others often called on to assess best policy approach.
Positive analysis "WHAT IS Normative analysis "WHAT SHOULD BE"

Important Distinction
Much of micro in realm of positive analysis, dealing w/propositions that can be tested in terms of underlying logic (qualitative analysis) & empirical evidence (quantitative analysis)

Positive v. Normative Analysis

Qualitatively determining expected effects of particular policy, based on micro theory
Likely effects on employment, production, prices

Quantitatively determining size of actual effects of particular policy.

Stats./econometrics & statistical significance

Then, go further (Steps 1 & 2). Use value judgments to decide whether or not such effects are desired realm of normative analysis.
Economists no better than anyone else at making these

Value Judgments
"When analysis comes in conflict with [strongly held] values, values trump analysis every time."
Theda Skocpol (1997 Harvard) on 'welfare devolution

Continuing debate on the success of welfare reform in U.S. CEA, Bill Clinton, Al From, Bush, others:
Was it policy or the economy & how much of each? J. Bishops 1998 & R. Blanks 2002 analysis of impacts v. CEAs

Welfare Reforms Success?

Consider Blank (2002)
Figure 3-1
0.800

Labor Force Participation Rates for Women by Marital Status and Presence of Children, 1989-2001

0.780

0.760

Single w/ no kids

0.740

0.720
Single w/ kids under 18

0.700

0.680

0.660
Married w/ kids under 18

0.640

0.620

Married w/ no kids

0.600 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source : Authors' tabulations of M arch Curre nt Population Surv e y data, for

Why POLITICAL ECONOMY?

Why not just microeconomics taught by UTs econ tribe?
Cheaper, easier? Why not? For starters, check out stark contrast in treatments by B&Z, Kuttner, Blank & McGurn

QUESTIONS
Do free markets exist? Yes & No. So what? What share of GDP produced & sold in free markets?

Considerations
Influence of laws, institutions & rules of the game Effects of power & influence on market outcomes Issues surrounding one-man/one vote, one-dollar/one-vote
The Endowment Issue

Effects of policies & policy shifts on markets & on market outcomes

Considerations
Question: How deterministic is market analysis? Question: Is there play in markets? If so, how much?
2001 Austin Equity Comm. & living wage issue; see J. Siedlecki piece, LBJ Journal (Spring/Summer 2005 Link to article)

Question: Do markets sometimes fail and, if so, whats to be done about it?

The Imperial Market

Considerable market worship Not just among economists, but policymakers of almost all stripes (Kuttner, ch. 2) Theory of Second Best i.e., where markets have multiple distortions, removing one to create purer market wont necessarily improve overall outcomes.

Market Analysis: Terms & Concepts

Market defined as " Area where potential buyers & sellers of a good/service interact "interplay of all potential buyers & sellers involved in Prices (to economists) Relative (or real) prices, i.e., price relative to prices of all other goods/services at point in time. Issue more one of dynamics, change over time...

Market Analysis: Key Actors

Buyers/consumers
Theoretical abstraction largely ignores important market intermediaries, e.g., unions, trade associations.

Lost tribe of economists who emphasize institutions & their effects within a market economy.
Pure market analysis insufficient, per se

Galbraith

Marshall

Market Analysis: Time

Time
One of more important dimensions of market analysis S & D responses can & do vary enormously over the short- and longer-term!

Behavioral Assumptions
Critical foundation for what follows:
1. Self-interested behavior
actors pursue own goals & objectives actors weigh choices & actions and act deliberately or, as a famous (non-practicing) economist put it, "you can't always get what you want!

2. Rational behavior

3. Scarce resources

Note: 1 + 2 => generally prefer more to less

Behavioral Assumptions
THUS, Actors must choose among available options, pursuing desires rationally with limited resources
or

"Actors make choices subject to a resource constraint"

Production Possibilities Frontier

All possible combinations of goods/services a rational actor can attain with fixed resources Technology
[What does this mean?]

Illustrate with 2 choices

Say... research reports, R, and research proposals, P Might also view as Present v. Future

PPF

Research Reports (present)

Production Possibilities Curve

Research Proposals (future)

PPF

Research Reports (present)

Production Possibilities Curve

Research Proposals (future)

PPF

Research Reports (present)

Production Possibilities Curve

A B
Research Proposals (future)

PPF

Research Reports (present)

Production Possibilities Curve

A B

Research Proposals (future)

PPF

Research Reports (present)

Production Possibilities Curve

A B D

Research Proposals (future)

PPF
Opportunity Cost: Amount of one good that must be foregone to produce added unit of another PPF slope Marginal Rate of Transformation, MRT
Defined as: R / P Think "rise over run

PPF Questions
Q1: Why is PPF concave? A1: Efficiency of resource use dictates that as shift resources to producing more of one, less of another, become less efficient in doing so. Q2: Which goods combination = BEST? A2: Don't know (yet)! Depends on "preferences" which we'll get to shortly.

PPF Questions
Q3: Why not either devote more resources to production or improve technology to attain greater amounts of BOTH goods? A3: Can't! In the short run, resources & technology are both FIXED.

Opportunity Cost
Economic or opportunity cost of given action or choice comprised of both:
EXPLICIT (or accounting) Cost
defined typically in terms of monetary costs;

IMPLICIT (or non-monetary) Cost

imputed value of alternative use of resources

Value of resource in its best alternative use", includes both explicit (monetary) and implicit (or non-monetary) costs
Key concept in micro & policy analysis Numerous applications, e.g., benefit/cost analysis

Discussion
Significance of accounting v. economic costs, in terms of:
Education & career choices? The environment? Welfare reform and related interventions?

What of "sunk costs"?

Already incurred, can't recoup. So, forget them.

Demand Schedules & Curves

Demand
Schedule of prices & associated quantities of goods/services consumers willing & able to Prices purchase.

Quantities 2 3 4

Demand Schedule, for example:

Functionally Q1 = a + bP1

$7 $6 $5 Etc...

Demand Schedules & Curves

Law of Demand
The lower the price of a good or service, the larger the quantity consumers wish to purchase (demand), ceteris paribus.
Law of D > negative slope for D curve! NOTE TERMS! Distinguish carefully between:
Qd (movement along) versus in D, a shift in D Curve

Ceteris paribus tastes, incomes, prices of other goods. E.g. iPods...

Demand Schedules & Curves

Demand for iPods

Price

D1 Quantity

Demand Schedules & Curves

Demand for iPods

Price

D1 Quantity

D2

Demand Depends On...

Incomes: Response depends very much on TYPE of good/service!
If normal good, increase in average household income, Y
With P unchanged, leads to increased consumption of iPods That is, demand shifts from D1 to D2

If "inferior" good, increase in Y

With P unchanged, leads to decreased iPod consumption, again a demand shift.

Inferior Goods?
Inferior goods:
Spam Texas wines Hamburger Others?

*Most goods = Normal*

Demand Depends On...

Prices of Other Goods
Depends very much on WHICH other goods!

Examples...
CD Prices? Sharp drop in P of CDs leads to increased consumption of CD players
A shift out in demand, from D1 to D2. Complements in consumption, I.e., their consumption "goes together"...

Demand Depends On...

Prices of Other Goods
another example

VCRs? Sharp drop in P of DVD players leads to decreased consumption of VCRs

a shift in demand from D2 to D1. Substitutes in consumption, alternatives for meeting same needs... Either/or goods.

Demand Depends On...

Tastes & Preferences
Can deal with these any number of ways:

Consider introduction of new alternatives

growth of live music venues, DATs & DAT players, iPods, "retro" (vinyl) movement E.g., the Wine Industry

Supply Schedules & Curves

SUPPLY, the producer side of the market:
schedule of prices & associated quantities producers willing & able to produce & sell at point in time.

LAW of SUPPLY:
Higher the price, the larger the quantity producers will want to produce (supply) at any point in time, cet. par. So, positive slope!

P as "reward for production":

As more produced, per-unit opportunity cost of production tends to increase. Higher Ps needed to elicit greater Qs.

Ceteris paribus:
Technology/production techniques, input factor prices/availability generally. Try same e.g., iPods...

Supply Schedules & Curves

Price

Supply of iPods

S1 Quantity

Supply Schedules
Consider: Technology of Production
Intro of new, more efficient production techniques (e.g. HPWO) allows producers to produce more at every P. So, supply shifts out from S1 to S2

Input Supply Conditions

Increase in labor costsone NOT offset by productivity increasesleads to reduced supply, a shift from S2 to S1.

Supply Schedules & Curves

Price

Supply of iPods

S1

S2 Quantity

Market Equilibrium, Disequilibrium

Equilibrium P & Q > no forces acting to make them different!
Static, not really dynamic.

Example?
Try the market for Applied Microeconomics textbooks...

Market Equilibrium
Applied Microeconomics Textbook Market

Price

D Quantity

Market Equilibrium
Applied Microeconomics Textbook Market

Price

$125

Pe

S
Qe

D Quantity

Market Equilibrium
Applied Microeconomics Textbook Market
P1

Price Surplus
$200 $125

Pe

S
Q1 Qe Q2

D
Quantity

Market Equilibrium
Applied Microeconomics Textbook Market
P1

Price Surplus
$200 $125

Pe

$75

P2

Shortage

S
Q1
Qe

D
Q2

Quantity

Government Interventions...
NYC rent controls, minimum wage hikes (1977-81, 1989, 1995)
classic illustrations of impact of market interventions wage/price controls (1971-74)

Q: Are such interventions bad?

Maybe, if you're a market worshiper
Otherwise, depends upon your values & other non-market considerations ...

Some adverse market & non-market responses

Non-price rationing Quality deterioration Black markets