Microeconomics: Theory and Applications

with Calculus
Fifth Edition, Global Edition

Chapter 1

Introduction

I’ve often wondered what goes into a

hot dog. Now I know and I wish I
didn’t.
William Zinsser

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 small group market
Focus
Chapter 1 Outline
on one ,

Is
Indi decision

1.1 Microeconomics: The Allocation of Scarce Resources

1.2 Models
1.3 Uses of Microeconomic Models in Your Life and Career

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1.1 Microeconomics: The Allocation of
Scarce Resources (1 of 2) → FEEL
ERE we don't have enough resources

• Scarcity implies trade-offs ¥¥,

– Which goods and services to produce?
▪ Because resources are limited
– How to produce?
– Who gets to consume the goods and services?

• Decision-makers → In Microeconomics
– Individuals (consumers)
– Firms +4¥ Price
– Government
build national defense
highway ,
,
etc .

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 lot of labour in
wage in China cheap Apple use
,
a

China instead

1.1 Microeconomics: The Allocation of of us A

Price T of ppl
Scarce Resources (2 of 2) buy : a lot can't it
,

demand +3 .

Apple inc → iphone imac

• Prices determine resource allocation
.
, .

¥E iphone 1- #¥-2¥ , resource imac

– Which goods? How to produce? Who gets them?

– Prices answer these important questions by influencing
decision-makers.
→
physical market
• Markets virtual market
→

– A market is where interactions between consumers,

firms, and the government occur.
– Prices of goods and services are determined in a
market. → Gov can't set price but using policy to affect
,
the price

d
• Applications
– Twinkie tax → Fat tax

Hattie ☐ 418
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 ¥y
"
"

TW lower birthrate pis neatly related to Qd p

model of
why ? → build model
to understand problem "Qd=a-Qs=Ct①"TELaId
1.2 Microeconomic Models Demand

Qd
→ things
simplify real
• A model is a description of the relationship between two or more economic
variables.
– Understanding this relationship allows economists to predict how a
change in one variable will affect another variable. 'Et¥ÉtÉ¥¥¥¥
- -
-

econometric
-

• Economic models:
>

IÉ¥=¥
HEIER
→
using data test
– have assumptions that simplify things relative to the real world prediction

t-bi-E.EE#.FI231EE
– make theoretical predictions that we can test empirically
– involve maximizing something (e.g. consumer satisfaction, firm profits)
±x¥Zsubject to resource constraints P¥¥J
¥¥¥¥FL¥u.IE#ttrcankbetested- *t¥¥H¥4⑦¥¥
– are used to make positive rather than normative
-
statements
▪ The truth of a positive statement can be tested. → 27°C room

▪ A normative statement contains a value judgment that can’t be tested.

• New Theories: more

-

head
"
refute _HÉ¥7F
– Economists are always trying to improve their understanding of the world.

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1.3 Uses of Microeconomic Models in
Your Life and Career (1 of 4)
• Predicting individual decisions
– Why do Americans buy e-books and Germans do not?
(Ch. 3)
– How does inflation affect the decision whether to rent
an apartment? (Ch. 4)
– Is going to college a good investment? (Ch. 15)
– Should a homeowner purchase insurance? (Ch. 16)
– Should you pay a lawyer by the hour or as a
percentage of winnings? (Ch. 19)

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1.3 Uses of Microeconomic Models in
Your Life and Career (2 of 4) housing in TW tax

• Predicting government decisions →

policy
– What is the impact of a new tax on tax revenues raised? (Ch. 2)
– For a given government expenditure on child-care services, does a
price subsidy or a lump-sum subsidy provide greater benefit to
recipients? (Ch. 5)=E±
– What is the effect of new government trucking fees on the industry’s
market price and quantity? (Ch. 8) policy implications
– What is the effect of trade policies such as tariffs on markets? (Ch.
9) ban not ban
or US beat

– What are the effects on collusion of governments posting the results

of bidding? (Ch. 14) mobile firm bidding 54 licences
– How can governments use economics to reduce global warming?
(Ch. 17) to
produce
potation → econ
policy
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1.3 Uses of Microeconomic Models in
Your Life and Career (3 of 4)
• Predicting firm decisions
– If we know about a firm’s production process, can we
predict whether output produced per worker will rise or
HEE
fall with each additional layoff? (Ch. 6)
-

– Will a firm’s technology continue be cost minimizing if it

moves production abroad? (Ch. 7) wage China
– Does price discrimination increase a firm’s profits? (Ch.
12) ametren-
price

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1.3 Uses of Microeconomic Models in
Your Life and Career (4 of 4)
• Predicting firm decisions
– Using game theory to analyze, what are firms’ strategic
decisions concerning pricing, advertising, quantities,
and whether to enter a market? (Ch. 13)
– How do American Airlines and United Airlines compete
on the Chicago-Los Angeles route? (Ch. 14) Application game to

theory
– How does a mining company’s extraction decision
depend on interest rates? (Ch. 15) usually not
→ cover

– Does a firm offer employees deferred payments to

pension system
ensure they work hard? (Ch. 19) fund pension .

moral hazard problem shirk

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