Econ 2G03/2X03

Intermediate
Microeconomic I
Applied Business
Economics

Did You Know That

Economics is a rapidly growing college
major?
Economics majors typically earn more than
students who major in management,
chemistry, or psychology?

Primary Goal Is to get you to think

like an economist.
Questions:
If water is needed to survive, and diamonds are simply for
jewelry, then why are diamonds so expensive, and water so
inexpensive?

How do minimum wages affect wages,

employment, and unemployment?
Why do stores offer coupons instead of simply reducing the
price by the value of the coupon?
3

 Why is the price of electricity regulated in most areas?

Agree or disagree: we should strive to be a

zero pollution society.
Why do some workers prefer set wages rather than
commissions, even if they might make more working on
commission?

How to do well in this course?

Success in the class is heavily dependent on your approach to the

material. Memorization is an extremely ineffective tool for studying
Economics.

Understanding usually comes only through active engagement with the

material, both in class and out.

Importance of class attendance:

Do students go to class? Should They? David Romer, Journal of
Economic Perspectives, Vol.7, no.3, Summer 1993:167-74

Draw graphs!

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?

Preliminaries
microeconomics deals with the behavior of individual
economic unitsconsumers, firms, workers, as well
as the markets that these units comprise.
e.g.: individual markets (wheat, smart phone), wages,
prices
macroeconomics deals with aggregate economic
variables, such as the level and growth rate of national
output, interest rates, unemployment, and inflation.

1.1

THE THEMES OF MICROECONOMICS

Trade-Offs you cant have it all!

Consumers
limited incomes to be spent on a wide variety of goods
and services, or saved for the future.
Workers
Whether and when to enter the workforce;
Choice of employment;
Working time/leisure;
Firms
What kinds of products to produce with the limited
resources available to produce them.

Prices and Markets

Microeconomics describes how prices are determined.

In a centrally planned economy, the government economic
planners set prices.
In a market economy, prices are determined by the interactions of
consumers, workers, and firms.

 Clearly, the pure centrally planned economy and the

pure market economy are two ends of a spectrum.
Most countries chose a system somewhere between
these two extremes, the mixed economy.
In Canada we have a mixed economy. We use
the market system but the government guides
the market through the use of government
regulations.

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Theories and Models

Economic theories: explain observed phenomena in terms of a set
of basic rules and assumptions.
A model is a mathematical representation, based on economic
theory, of a firm, a market, or some other entity.

Positive versus Normative Analysis

positive analysis Concerned with explaining what is
and predicting what will be.
normative analysis

Describes what ought to be.

A positive statement can be tested by checking it

against facts.
e.g.: If the price of coffee rises, people will buy less
coffee.

A normative statement expresses an opinion and

cannot be tested.
e.g.: Taxes should be used to redistribute income
from high income groups to low income groups.

1.2

WHAT IS A MARKET?

market

Collection of buyers and

sellers that, through their actual or
potential interactions, determine the
price of a product or set of products.

market definition Determination of

the buyers, sellers, and range of
products that should be included in a
particular market.

Competitive versus Noncompetitive Markets

perfectly competitive market Market with many buyers
and sellers, so that no single buyer or seller has a
significant impact on price.
Market Price
market price

Price prevailing in a competitive market.

Market DefinitionThe Extent of a Market

extent of a market Boundaries of a market, both
geographical and in terms of range of products produced
and sold within it.
Market definition is important for two reasons:

A company must understand who its actual and potential

competitors are for the various products that it sells or
might sell in the future.

Market definition can be important for public policy

decisions.

1.3

REAL VERSUS NOMINAL PRICES

nominal price Absolute price of a good, unadjusted for

inflation. ( current-dollar price)
real price Price of a good relative to an aggregate
measure of prices; price adjusted for inflation. (constantdollar price)

Consumer Price Index

Measure of the aggregate price level.

Producer Price Index Measure of the aggregate price level

for intermediate products and wholesale goods.

REAL VERSUS NOMINAL PRICES

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

1970

1980

1990

2000

2007

38.8

82.4

130.7

172.2

205.8

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

Grade A Large Eggs

$0.61

$0.40

$0.30

$0.21

$0.31

College Education

$2,530

$2,313

$3,568

$4,548

$5,196

Consumer Price Index

Nominal Prices

Real Prices ($1970)

The real price of eggs in 1970 dollars is calculated as follows:

Re al price of eggs in 1980

CPI1970
38.8
nominal price in 1980
$0.84 $0.40
82.4
CPI1980

Re al price of eggs in 1990

38.8
CPI1970
$1.01 $0.30
nominal price in 1990
130.7
CPI1990

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

1970

1980

1990

2000

2007

38.8

82.4

130.7

172.2

205.8

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

Grade A Large Eggs

$2.05

$1.33

$1.01

$0.69

$1.04

College Education

$2,530

$2,313

$3,568

$4,548

$5,196

Consumer Price Index

Nominal Prices

Real Prices ($1980)

The real price of eggs in 1990 dollars is calculated as follows:

Re al price of eggs in 1970

CPI1990
130.7
nominal price in 1970
$0.61 $2.05
38.8
CPI1970

Re al price of eggs in 2007

CPI1990
130.7
$1.64 $1.04
nominal price in 2007
205.8
CPI 2007

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

1970

1980

1990

2000

2007

38.8

82.4

130.7

172.2

205.8

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

Grade A Large Eggs

$2.05

$1.33

$1.01

$0.69

$1.04

College Education

$2,530

$2,313

$3,568

$4,548

$5,196

Consumer Price Index

Nominal Prices

Real Prices ($1980)

The percentage change in real price is calculated as follows:

Percentage change in real price

real price in 2007 real price in 1970

1.04 2.05

0.49
real price in 1970
2.05

Figure 1.1
The Minimum Wage

In nominal terms,
the minimum wage
has increased
steadily over the
past 70 years.
However, in real
terms its expected
2010 level is below
that of the 1970s.

1.4

WHY STUDY MICROECONOMICS?

Corporate Decision Making: Fords Sport Utility Vehicles (SUV)

First, public reaction?

Next, manufacturing cost?
Finally, the effects of regulatory policies?

Public Policy Design: Fuel Efficiency Standards for

the Twenty-First Century
In 1975, the U.S. government imposed regulations designed to improve the
average fuel economy of domestically-sold cars and light trucks. The CAFE
(Corporate Average Fuel Economy) standards have become increasingly
stringent over the years.
A number of important decisions have to be made when designing a fuel
efficiency program, and most of those decisions involve economics.
First, the government must evaluate the monetary impact of the program on
consumers.
Before imposing CAFE standards, it is important to estimate the likely
impact those standards will have on the cost of producing cars and light
truck.
The government must also ask why problems related to oil consumption are
not solved by our market-oriented economy.