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Microeconomics
Lecture 1
Institute of Economic Theories - University of Miskolc
Mónika Kis-Orloczki
Assistant [email protected]
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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.
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