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Transcript of Introduction
Dr. Helga Habis
Forms of instuction:
discussion of homeworks
! prepare in advance !
How to pass?
Midterm test (30 points)
answering theoretical questions
Final exam (50 points or 80...)
similar to the midterm test
covers the material of the WHOLE semester
Homeworks (20 points)
can be downloaded from moodle
to be handed in at class (8:00 sharp!)
slides on moodle
collect at least 50 points
Varian: Intermediate Microeconomics
trial exams on moodle
= the level of aggregation
we start from the individual elemnts: consumers and producers
examine how they make decisions individually
then, analyze how they interact: market mechanism
= we work 'from the bottom up'
'large' = again, refers to the level of aggregation
analyze aggregate quantities: GDP, inflation, unemployment, etc.
and their interaction
= work: 'top-down'
What is Microeconomics?
(limited or scarce)
how to make most of our limited means?
how are scarce resources allocated?
1) Which goods and services to produce? “what”
2) How to produce those goods and services? “how”
3) Who gets the goods and services? “for whom”
objective: maximize well-being
constraint: a.o. prices, income
objetive: maximum profit
constraint: a.o. demand, technology
Modern society has three main allocation mechanisms
producers and consumers take independent decisions
they interact in markets
“market”: abstract concept, not physical location
prices are crucial in coordinating their behaviour
what, how, for whom, “price theory”
government takes allocation decisions
e.g.: Soviet Union
clearly, mixes the elements of the above 2
USA: clearly the government plays an important role
D: “soziale Marktwirtschaft”
Most of this course is about how a market economy deals with the three key trade-offs
Our basic tool: economic models
Model: “a description of the relation between two or more economic variables”
e.g. the relation between beer demand and beer price
verbal: “a higher price means less demand”
with a graph:
mathematical: D: Q = 80 – 2P
beer demand depends on many other things
(e.g. income, other prices, carnival, weather, … )
a model necessarily makes simplifying assumptions (depending on our purpose)
model seems unrealistic / abstract, but maybe still useful (compare a road map)
“models must be as simple as possible, but not simpler” (Albert Einstein)
Fundamental assumption in most microeconomic models:
Our basic tool: economic models
“individuals try to optimize, subject to constraints”
The purpose of models
1. to explain
“why did the oil price start to shoot up in the 1st half of 2004?”
“why does David Beckham earn so much?”
2. to predict
“what will happen to the oil price when the world economy picks up?”
“what will happen if the price war among supermarkets is strengthened?”
the match between our predictions and the actual events will help us
to test our models
Part I: The supply and demand model
“the workhorse of microeconomics”
Part II: Consumer theory
“theoretical underpinning of demand”
Part III: Producer theory
“theoretical underpinning of supply”
Part IV: Perfect competition
“bringing demand and supply together”
“part I, formalized”
Part V: Market power and market structure
“markets which are not well-described with the supply-and-demand model”
Structure of the course
Typical questions that can be answered by economic reasoning
strictly economic issues
in a broader sense...
The director of a comany should decide either to expand capacity (of production) or to build a new reserach laboratory.
You inherited a larger sum of money. Would you invest in stocks or into real estate?
A city council may use an EU-subsidy to build a new school or a pension house. Which one should one choose?
Will you work for a mulnitanional company or start up your own business?
Should one study medicine, law or economics?
Who should I marry?
Should I go out for a beer with my friends or should I study for tomorrow's exam?
Should I buy a ticket for the bus or just freeride?
Should I buy the Microeconomics textbook or just get/read it from/in the library?
What do you base your decisions on?
we are weighting advantages and disadvantages in a broader sense
we are talking about limited resources
hence we have to make choices
we have to consider alternatives (opportunity costs)
we disregard unimportant factors
economics provides a toolbox, a particular logic
e.g. buying a loaf of bread have many unintended effects:
increasing the profit of the baker (now he can buy new clothes)
increasing the GDP
increasing the tax income of the government, providing social benefits for the ones in need