Microeconomics Course Notes PDF

COURSE OF MICROECONOMICS 1.INTRODUCTION TO MICROEOMICS. GENERAL PRINCIPLES OF MICROECONOMICS Dr. Richard BOUGEROL Dr. Viktoriya ONEGINA [email protected] Of. A2-17 Outline Learning objectives ...

COURSE OF MICROECONOMICS 1.INTRODUCTION TO MICROEOMICS. GENERAL PRINCIPLES OF MICROECONOMICS Dr. Richard BOUGEROL Dr. Viktoriya ONEGINA [email protected] Of. A2-17 Outline Learning objectives  Content of the course Lecture 1 : Lecture 2 : Lecture 3 : Market Microeconomics and Demand, supply its general principles structures and elasticity Lecture 5 : Lecture 6 : Lecture 4 : The challenges of Market failures and Strategies in competition regulation imperfect markets State intervention Presentation of study cases Revision and final exam  Course assessment ► Oral presentation (40 % overall grade) Maximum 4 students in a team. Make a Team. Choose a firm. Use Framapad to submit the findings of analysis of the firm with contribution of all Team’s members. Use the concepts that were studied during the class session. Do it for each session. The final study case presentation must be carried out on power point. ► Routine class participation : read, ask questions, discussions (10 % overall grade) It’s essential that you prepare the classes in advance. On-class and after-class exercises. The Overview of your team’s case should be written on framapad (collaborative software). ► Final written exam 1,5 hour (50% overall grade)  LMS platform Log in to the LMS platform to get more information about the course of microeconomics : - The syllabus. - Examples of final exams. - Lessons, exercises, online documentaries… Books: Mankiw N.G. Principles of Microeconomics. - McConnell K., Brue S. Economics: Principles, Problems, and Policy  What is economics ? Economics and economy  The science which studies scarcity and choice, how individuals, institutions, and society manage and use its scarce resources that have alternative Economics uses to satisfy needs.  Why ? Since most resources are limited whereas wants are often unlimited  Economics is a social science concerned with the description and analysis of the production, exchange, distribution and consumption of goods and economic resources.  What is economics ? Economics and economy  What is economy ? Economics and economy  The economic activities, system of a particular area, country…  It concerns with the relationship between production, trade Economy and the supply of money in a particular area. The economy of a society determines…  what goods are produced,  how they are produced,  who gets them,  how to accommodate change, and how to promote technological progress.  What is an economy ? The economic system (economy) – a particular set of What Is Another Name For Free Market Economy institutional arrangements and a coordinating mechanism to organize relationship between agent, and to respond to the economizing problem. Economic systems differ as to who owns the factors of production; and the method used to motivate, coordinate, and direct economic activity. The modern economic systems are organized according to following main models : Centrally Planned Economy - Definition, Examples, Characteristics Planned economies in which production is determined by a central or state authority (but sometimes supply doesn’t match with demand). Market economies in which production is determined by the market, the freedom of business dominate, and the public authorities have less power. Mixed economies in which both free markets and governments have an importance on the allocation of resources, economy functioning, but with different roles and scope.  What is economics ? Source : Calina and Gisca, « ENGLISH FOR ECONOMIC STUDIES », Asem 2010  Micro and macroeconomics Microeconomics is the part of economics that studies the  The science which studies scarcity and behavior of economic actors (individuals, choice at the individual units such as a firms…) person, a household, a firm, or an These actors are taken individually as if industry. economist studies them with a  Why ? Since most resources are microscope. limited whereas wants are often The economist is especially interested in unlimited decisions of economic agents.  Microeconomics is a social science directed to the theoretical explanation Microeconomics determines the price of of satisfaction of needs and wants a particular commodity along with the through the allocation of scarce prices of complementary and the resources which have alternative use substitute goods.  What is economics ? Micro and macroeconomics Macroeconomics studies an economy as whole Economist is interested in the relations between aggregate variables. An aggregate is a collection of specific economic units treated as if they were one unit. Macro- uses the indictors which collect results of economic activities of all agents of national economy (GDP, inflation…) Macro- explains the equilibrium of the aggregate demand and supply. It’s useful to give information to policy makers and their economic policies. It focuses on growth of entire economy  What is economics ? Adam Smith is a Scottish philosopher John Maynard Keynes is an English and economist who is the funder of economist whose ideas fundamentally changed the theory and practice of Economics («An Inquiry into the macroeconomics and the economic Nature and Causes of the Wealth of policy of governments Nations», 1776) (« The General Theory of Employment, Interest, and Money”, 1936)  What is economics ? Microeconomics Johann Heinrich von Thünen («Der isolirte Staat in Beziehung auf Landwirtschaft und Nationalokonomie», 1826) Antoine Augustin Cournot («Recherches sur les principes mathématiques de la théorie des richesses», 1838) Carl Menger («Principles of Economics», 1871) Léon Walras ( «Elements of Pure Economics», 1874) Alfred Marshall («Principles of Economics», 1890)  The principles of microeconomics are : → Efficiency since an efficient economy achieve to an optimal allocation of resources, it produces the maximum of wealth under the scarce resources. The concept of social optimum (Pareto) : it’s a situation where the well being is maximum, you can’t improve one’s wellbeing without deterioration of someone else’s. → Equity since wealth from these resources are fairly distributed between agents of the economy ? → Freedom since agents must have the widest possible range of choices available.  What is economics ? Positive and normative economics Positive economics Normative economics answers to the question « what is ? » answers to the question « What ought to be ? » describes of market economy tries to show the perfect operation. functioning. No value judgments. Value judgements. The goal is to give an objective The goal is to propose the ways of description for understanding and ideal development of economy. rational decision making (public and https://youtu.be/AV_p_QntywA?li private). st=PL336C870BEAD3B58B  Economics is based on rationality Homoeconomicus … rational They seek to maximize their satisfaction and minimize their costs. … selfish The conditions for the rational behavior of They pursuit their self-interest and free the agents: trade leads to an outcome that is good for they know all choices (perfect the society as a whole, it’s the concept of information). “invisible hand”. foresee all the consequences of each According to Adam Smith, “It is not from possible choice. the benevolence of the butcher, the rank the consequences and the choices brewer, or the baker that we expect our according to a scale of preference. dinner, but from their regard to their own interest.”  Economics is based on rationality Economic agents make choices that they expect will create the maximum value of some objective, given the constraints they face The consumer seeks to maximize his satisfaction and faces to his budget constraint. The firm seeks to maximize its profits, evaluating its production costs. Research how firms could maximize their profits.  Economics is the science of the choices If the resources were unlimited, we would have what we want. Economics doesn’t focus on free goods that are available without limit in the nature. However, resources are limited (scarcity) and market agents have to define the best use of them (maximization). → Firms with their inputs (labor, capital, intermediate goods…) → Individuals / households with incomes, time… → State with human resources and its budget. https://www.youtube.com/watch?v=0PgP0dXAGAE&list=PL336C870BEAD3B58B&index=2  Economics is the science of the choices Scarcity characterizes almost everything. → Evidents for most goods. → Even for other goods which are deteriorated by the human activity. Ex : natural capital (air with pollution, drinking water…). To made a choice, we need to know the degree of scarcity since it affects the price. → The scarcity of water in France depends on level of dryness (the price is often not expensive) → at the opposite in the desert, water is scarce, so agents are incited to scrimp it. Scarcity is not always reflected in price (it depends on the demand level).  The economic resources that are involved in production – factors of production Land includes all natural resources used in the production process, such as arable land, forests, mineral and oil deposits, and water resources. Labor consists of the physical and mental talents of individuals used in producing goods and services. Capital (or capital goods) includes all manufactured aids used in producing consumer goods and services: all factory, storage, transportation, and distribution facilities, tools and machinery. The purchase of capital goods is considered as investment. Entrepreneurial Ability Information and science  Economics is the science of the choices Because of scarcity of the resources the market agents must make choice, this choice means renounce the alternatives The opportunity cost – the cost of giving up the best alternative.  Economics is the science of the choices Consider you are studying economics and you just have finished your bachelor; you have to take a decision and a choice : - Either continue in an MBA program for two years at HEC Paris which leads to extra costs. - Or stop studying and starting your professional career (you earn 2800 euros a month). 1. Calculate the explicit costs and the implicit costs (opportunity cost) of carrying on further education. 2. Explain if you rationally have to stop or carry-on education. Production Possibilities Curve (Model) reflects possible choices of production of two goods under conditions of scarce resources Define, what opportunity cost of production 7000 of good C is. W 5000 7000 C  The importance of marginal variables Economists argue that most choices are made « at the margin » A choice at the margin is a decision Economists argue that the value of to do a little more or a little less of goods depends on their arginal something utility more precisely → the value of production of one The consumer doesn’t wonder how more unit. much food he needs in total but at one point, whether an additional unit → the product of one more hour of will provide him more utility than work. cost → Utility of eating one more piece of your favorite cake  Marginal utility (MU) & Marginal Costs (MC) Total utility (TU) is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity of a good or service. Marginal utility (MU) is the extra satisfaction a consumer realizes from an additional unit of that product. Alternatively, marginal utility is the change in total utility that results from the consumption of 1 more unit of a product. Δ𝑇𝑈 𝑀𝑈 = Δ𝑄 , where MU – marginal utility, ΔTU – change of total utility, ΔQ – change of quantity of commodity Marginal cost (MC) is the extra, or additional, cost of producing 1 more unit of output. MC can be determined for each added unit of output by noting the change in total cost which that unit’s production entails: Δ𝑇𝐶 MC = change in TC : change in Q =∆ TC : ΔQ = Δ𝑄 Optimal output is reached at: MU= MC. Total Utility (TU). Marginal Utility (MU) Source: McConnell, Campbell R., Brue Stanley L. Economics : Principles, Problems, and Policies  Calculate marginal utility (MU) Δ𝑇𝑈 MU = 𝑄 Δ Quantity of good, Q Total Utility, TU Marginal utility, MU 100 500 200 900 300 1200 400 1400 500 1500  Example of marginal utility calculation Quantity of good, Total Utility, U Marginal utility, MU Q. 100 500 (500-0) : (100-0) =5 200 900 (900-500) : (200-100) = 4 300 1200 (1200 – 900) : (300 – 200) = 3 400 1400 (1400 – 1200) : (400 – 300) = 2 500 1500 (1500 – 1400) : (500 – 400) = 1  The choices of market agents are affected by incentives. Incentives concern costs or / and The price is determined by market laws benefits (to rational agents). or state interventions The strong variable impacting on the → Price modifies the behavior of agents agents' behavior is the price in the in a market economy to achieve to market economy. equilibrium between supply and demand (it’s a self regulation). According to Hayek, price is a signal that gives information about scarcity. → Government wants to increase wealth and welfare, so it uses regulation, taxes or publics subsidies to modify opportunity costs and the behavior of the agents.  Graph in Economics Many economic models are expressed in equations or graphically. A graph is a visual representation of the relationship between two variables (independent and dependent) The independent variable is the cause or source; it is the variable that changes first. The dependent variable is the effect or outcome; it is the variable that changes because of the change in the independent variable. I the case of a direct relationship (or positive relationship) two variables change in the same direction. When two sets of data are positively or directly related, they always graph as an upsloping line. In case of two variables change in opposite directions (inverse relationship or negative relationship) graphs is a downsloping line. https://www.youtube.com/watch?v=uvnHPeQrk0E&list=PL336C870BEAD3B58B&i ndex=6  Study time (hours) Exams score 2 30 Exercise 1 4 50 Construct a graph from the shown table. Which is the 6 70 dependent variable and which the independent 8 95 variable? Summarize the data in the equation form.  Homework exercise (for the math lovers) Observations showed that: 1000 computers were bought at a price $800. 1200 computers were bought at the price $700. Construct the model of the demand dependence on the price of computer, assume that there is a linear relationship between the demand and the price of computers. Give this dependence as an equation and as a graph. Using the obtained model (equation), calculate the quantity of sold (demanded) product, if the price of computer is 1) $500, 2) $450. Calculate total revenues (TR=P*Q) from computers sales, if computer’s price is $600, $900. THANK YOU VERY MUCH