Micro Economic 1

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Microeconomic

TheoryDr.Ch.Yekti.P.SE.,MSi


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What’s the difference betweenMicroeconomics & Macroeconomics?

Microeconomics eamines small economicunits, the com!onents of the economy.

"or eam!le# indi$iduals, households,firms, industries

Macroeconomics looks at a%%re%ates.

"or eam!le# national out!ut, o$erall !ricele$el, a%%re%ate unem!loyment


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ow are economic theories formulated &economic models constructed?

1. 'efine the !roblem and !henomena to bein$esti%ated.

2. "ormulate a hy!othesis about the relationshi!samon% the rele$ant $ariables.

(. 'etermine testable !redictions from thehy!othesis.

). *est the accuracy of the !redictions usin% realworld data.

+. cce!t or re$ise the theory on the basis of thetests conducted.


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When de$elo!in% a model, some sim!lifyin%assumptions are usually made.

*he assum!tions should be easy to handle,sufficiently realistic, and not o$erly restricti$e.

Without the sim!lifyin% assum!tions, the analysis

can be unmana%eable.-f the assum!tions are o$erly sim!listic, the model

may fail to e!lain reallife beha$ior.

*he test of a theory is whether it e!lains what it is

desi%ned to e!lain. *he !redictions should beconsistent with reality.

*he world acts as if the assum!tions held.

*he assum!tions need not hold !recisely.


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What is a market ?

*he interaction of buyers & sellers of a%ood or ser$ice


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/uestions rele$ant to all economies,

marketoriented or not1. What %oods & ser$ices should be

!roduced and how much?

2. ow should the %oods & ser$ices be!roduced?

(. Who %ets the %oods & ser$ices?

). ow do chan%es in the !roduction &distribution mies take !lace?


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-n a market economy, these 0uestions arehandled by the market.

What & how much to !roduce#determined by demand & su!!ly conditions,indi$idual choices, & !ursuit of !rofit.

ow to !roduce#determined by technolo%y & resource costs.

'istribution#based on ability & willin%ness to !ay the !rice.

What if consumer wants or technolo%y chan%e?*hose chan%es alter demand & su!!ly, whichchan%es !rices, !rofits, & conse0uently out!utle$els & distribution.


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*he ircular "low

ouseholds &esource 3wners

"irms

4roduct Markets

esource or "actor Markets

money to pay for goods & services

goods & services

labor & other resources

resource payments such as wages, rents, & interest


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*he market is not the only way that thebasic 0uestions of economics can be

answered.

-n some less de$elo!ed nations, a

traditional economic system is used.ustom & tradition determine the answers.

Social arran%ements & culture dictate the

solutions.han%e occurs only $ery %radually.


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istorically the former So$iet 5nion had acommand economy.

esources are %o$ernment6!ublicly

owned and centrali7ed control is used todetermine what is !roduced, how it is!roduced, and how it is distributed.


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8o country in the world hasa !urely market or !urely command economy.

*hey ha$e mied economies with bothmarket and %o$ernment sectors.

-n this course, we will deal !rimarily withthe market system.


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The Market:

Suppy andDemand


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What is the law of demand?

*he lower the !rice of a %ood, the lar%er

the 0uantity consumers will buy.So the demand cur$e slo!es downward

from left to ri%ht.


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What is the difference between

demand & quantity demanded ?

Demand is the entire cur$e that shows the

relation between !rice & 0uantity!urchased.

Quantity demanded is one !articular

0uantity on the demand cur$e.


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9am!le# !!le Market

4rice of a!!les

:in dollars;

/uantity of a!!les:in thousands of bushels;

'

< =.2+

>

*he demand for a!!les is the cur$e D.

*he 0uantity demanded of a!!les whenthe !rice is 2+ cents is > thousand

bushels.


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What factors chan%e demand

:that is, shift the entire cur$e;?

1. onsumer income

2. 4rices of substitutes and com!lements(. *astes

). onsumer e!ectations


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9am!le# !!le Market

4rice of a!!les

:in dollars;


'1

-f income increases, !eo!lewill buy more a!!les ate$ery !rice & the entirecur$e will shift to the ri%ht.

'2


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What makes the 0uantity demanded of

a!!les chan%e?

-n other words, what causes a mo$ementalon% the demand cur$e for a!!les?

chan%e in the !rice of a!!les.

*hat’s it, only a chan%e in the !rice ofa!!les.


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9am!le# !!le Market

4rice of a!!les

:in dollars;


'

< =.2+

>

Su!!ose the !rice of a!!lesfalls from 2+ cents to 2= cents.

*hen the 0uantity demanded ofa!!les rises from > thousandbushels to thousand bushels.

< =.2=


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What is the law of su!!ly?*he hi%her the !rice of a %ood, the lar%er

the 0uantity firms will be willin% to !roduceand sell.

So the su!!ly cur$e slo!es u!ward from left

to ri%ht.


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What is the difference between

supply & quantity supplied ?

Supply is the entire cur$e that shows the

relation between !rice & 0uantity !ro$ided.Quantity supplied is one !articular 0uantity

on the su!!ly cur$e.


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9am!le# !!le Market

4rice of a!!les

:in dollars;


S

< =.22

@

*he su!!ly of a!!les isthe cur$e S.

*he 0uantity su!!lied ofa!!les when the !rice is

22 cents is @ thousandbushels.


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What factors chan%e su!!ly

:that is, shift the entire cur$e;?

1. *echnolo%y2. 4rices of in!uts :for eam!le# land, labor,

machinery, raw materials;

(. Weather :in the case of a%riculture;


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9am!le# !!le Market

4rice of a!!les

:in dollars;


S1

-f rainfall is low, thesu!!ly of a!!les will bereduced. t each !rice,there will be fewer

a!!les !ro$ided.

S2


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What makes the 0uantity su!!lied of

a!!les chan%e?

What causes a mo$ement alon% the su!!lycur$e for a!!les?

Aust a chan%e in the !rice of a!!les.


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9am!le# !!le Market

4rice of a!!les

:in dollars;


S

< =.22

@

When the !rice of a!!lesfalls from 22 cents to 2=cents, the amount !ro$idedfalls from @ thousandbushels to > thousandbushels.

< =.2=

>


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What is e0uilibrium?

-t is a state of balance, where there is notendency for thin%s to chan%e.


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4 /' /S condition!rice

!ressure

=.2+ > ecesssu!!ly

=.22 @ @ /' /S =

=.2= >ecess

demand

90uilibrium occurs where the 0uantity demanded e0ualsthe 0uantity su!!lied, which is at the intersection of thesu!!ly and demand cur$es.


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9am!le# !!le Market

4rice of a!!les

:in dollars;


'

ere the e0uilibrium!rice is 22 cents & thee0uilibrium 0uantity is@ thousand bushels.

7

$ 0.22

S

S h i i i


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quantity

D1

Suppose there is an increase in

the price of pears

(a substitute for apples).

Then the demand for appleswill increase.

Equilibrium price increases &

equilibrium quantity increases.

price

S

Q1 Q

!

!1

D


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price

quantity

D1

S

S1

Q1

D

So S & D both decrease.

The equilibrium quantity

decreases. Equilibrium

price may increase#decrease or stay the same.

'n this e$ample# the price

remained the same.

!1 !

Q

Micro Economic 1

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