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Microeconomics

Lecture 1

Institute of Economic Theories - University of Miskolc

Mónika Kis-Orloczki

Assistant lecturerorloczki.monika@uni-miskolc.hu

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Four main reasons to study economics:

• to learn a way of thinking,

• to understand society,

• to understand global affairs, and

• to be an informed voter.

The nature and scope of economics

Economics is a social science which seeks to explain the economic basis of human societies.

Economics deals with the decision alternatives of economic actors and with the social consequences of each decision.

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Cause of decision: necessity ≠ possibility

• Necessity: need for the consumption and use of goods and services, which appears as a lack.

• Need: Need and necessity are not the same concepts. Needs may include desires as well, which cannot be satisfied under existing economic conditions..

• Possibilities: are resources, which are available for satisfying needs. Possibilities in economics are determined by economic resources..

NECESSITY > POSSIBILITYalmost limitedunlimited scarce

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Economics = science of choices and decisions

• Economics is the study of how scarce resources are allocated among competing uses.

• Basic questions:

– What to produce

– How we produce it

– For whom to produce

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To learn a way of thinking

• Opportunity cost: The best alternative that we forgo, or give up, when we make a choice or a decision.

• Marginalism: The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.

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Place of economics in the system of sciences

Main aspects for the classifications of sciences:According to verificationverification

– logical,– empirical (e.g. economics).

According to topictopic– nature,– society (e.g. economics).

According to functionfunction– theoretical (e.g. microeconomics, macroeconomics and

international economics),– applied: - functional (e.g. finance), - sectorial (e.g. industrial economics).

According to relationship with politicsrelationship with politics• normative• positive economics

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Levels:• Microeconomics analyses the individual

decision alternatives of the economic actors (consumers, firms, workers, and investors)

• Macroeconomics analyses the economy as an aggregate, on national economy level. (the level and growth rate of national output, interest rates, unemployment, and inflation.)

• International economics analyses causes and effects of real and financial relationships between national economies.

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Most important methods of economics

Measurement: It means the description of processes, drawing conclusions, generally aimed at quantification.

Modelling: Models show the most typical features and working mechanisms of economic processes using an analogy in a different medium. Simplified representations of the real world. Economic models attempt to focus on what is relevant to the problem at hand and omit what is not.– Assumptions: The set of circumstances in which a model is

applicable. Every model, or theory, must be based on a set of assumptions.

– Ceteris paribus assumption (all else equal) A device used to analyze the relationship between two variables while the values of other variables are held unchanged.

Analysis,testing and evaluation.

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The market

System of exchange relationships between potential buyers and sellers. The area where buyers and sellers meet, where the exchange happens.

• Market actors:– Buyers

– Sellers

• Features of the market– A democratic institute,

– Measurement by equal standards,

– Competition, concurrence,

– Participants depend on each other.

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According to market characters• market of goods, • market of labour, • money and capital market.

According to market area• local, • national ,• international or world market.

According to market formations• free trade where norms are established • norm-follower market, which is not a perfectly competitive market

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Modelling the market• D= demand function: shows the quantities demanded by

the buyers belonging to different prices and a given income. Formula: D = f / P /

• S= supply function: shows the quantities offered by producers for selling at different prices. Formula: S = f / P /

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Deducting the market demand curve

Conditions of the model

• Income is given and will not change at the beginning,

• Market price influences the demanded quantities; price and quantity are in inverse relationship,

• We examine the demand of one product and of one /ordinary/ consumer,

• We assume that the consumer will raise his purchases by one unit as the price falls..

Price, P

Quantity, Q

D

P1

Q1

P2

Q2

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Deducting the market supply curveDeducting the market supply curve

Conditions Conditions • the quantity to

be sold is given,

• the owners are not willing to sell their products at any price,

• we analyse the market supply of one product at

first.

S

Price, P

Quantity, Q

P1

Q1

P2

Q2

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Conclusions• Market supply can be modelled in the dimension of the quantity of one product and the price. • Supply function can be used to model the aggregate market supply as well.• Between the market price and the quantity to be sold there is a direct proportionality as far as normal goods are concerned.

• An individual’s demand for a product and the market demand for a group of products and their relationship with the price can be modelled by the demand function.

• We assume a continuous change of the price, and that a demanded quantity belongs to every price, which results in a continuous demand curve ,• The function shows an inverse proportionality between the changing of the price and the demanded quantities as far as normal goods are concerned. • If the consumer’s income changes, we will arrive at another demand function ..

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Market equilibrium

Model of the market’s working mechanism • In a market in

the state of oversupply the equilibrium will be established by a fall in the market price.

• In a market in the state of excess demand the equilibrium will be established by an increase in the market price.

P1

S

Price, P

Quantity, Q

D

P*

Q*

P2

Excess supply

Excess demand

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The price’s role in the market’s working mechanism

• orientation of market actors,

• provides buyers with information about the price ratios of substituting products,

• inspires market actors to rational decision-making,

• keeps the market moving.

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Shifts of the demand and supply curves

• A variety of other factors may change the entire price–quantity relationship:

– Consumers’ income

– Prices of related goods (Substitutes and complements)

– Tastes and preferences

– Expectations about future prices

– The number of consumers in the market

• Factors that affect the supply of a good:

– Prices of inputs (such as wages)

– Technology

– Natural disruptions (such as bad weather)

– The number of firms in the market

– Expectations

– Government policies

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• Changes in the market resulting from an increase (decrease) of demand by an unchanged supply function the equilibrium price will rise (fall),

• producers’ income will rise (fall),

• buyers’ expense will rise (fall) considering the product.

• By an increase in supply and an unchanged demand the new market equilibrium price will be established at a lower price,

• by a decrease in supply and an unchanged demand the new market equilibrium price will be established at a higher price.

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a

bP1

P2

D

Price, P

Quantity, QQ2Q1

Geometry of Consumer Surplus

It measures the amount a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay.It can be derived from the market demand curve.