Intermediate Microeconomic Theory Ch 1 & 2.6 FIB PDF

Intermediate Microeconomic Theory Dear Students, It’s always best to write your own notes down as you watch the lecture and read the book. I actually recommend you use the Cornell Method for note-taking. For those of you that prefer to use PPTs, I’ve gone ahead and mad...

Intermediate Microeconomic Theory Dear Students, It’s always best to write your own notes down as you watch the lecture and read the book. I actually recommend you use the Cornell Method for note-taking. For those of you that prefer to use PPTs, I’ve gone ahead and made these “fill-in-the-blank” (FIB) PPTs. Any slide marked with * indicates you should be filling something in. Answers to embedded practice problems are on lectures only. -Dr. Reiser Intermediate Microeconomic Theory INTERMEDIATE MICROECONOMIC THEORY Intro to Intermediate Microeconomic Theory What is Microeconomics? Learning Objectives 1. Summarize the relationship between scarcity, trade-offs, and decision-making. 2. Describe the three key trade-offs every society faces. 3. Explain why price is fundamental to a market economy. Intermediate Microeconomic Theory What is microeconomics? Intermediate Microeconomic Theory What is Microeconomics? Microeconomics: Intermediate Microeconomic Theory a basic fact of life is scarcity. Intermediate Microeconomic Theory Scarcity, Trade-offs, & Getting What We Want Scarcity Intermediate Microeconomic Theory Scarcity, Trade-offs, & Getting What We Want Trade-off Facing trade-offs means decisions have to be made. Intermediate Microeconomic Theory The Bigger Picture – the What, How, and Who? Scarcity of resources means society as a whole makes choices Intermediate Microeconomic Theory Market Economies & the Price Mechanism Price mechanism: Price is "a signal wrapped in an incentive" (Tyler Cowen and Alex Tabarrok) Prices tell society which g/s to produce tell society how to produce g/s tell society how to allocate g/s Intermediate Microeconomic Theory INTERMEDIATE MICROECONOMIC THEORY Intro to Intermediate Microeconomic Theory Main Themes & Models Learning Objectives 1. Explain the usefulness and limitations of economic models. 2. Differentiate between positive and normative analysis. Intermediate Microeconomic Theory Main Themes Main theme #1: given limited resources, economic agents makes themselves as well off as possible *an economic agent can be a person, family, household, firm, government, etc. Main theme #2: price is really important Main theme #3: economists use theories, models, and empirics Intermediate Microeconomic Theory Main Theme #1 Main theme #1: given limited resources, make oneself as well off as possible Consumers: choose g/s that maximize happiness given limited purchasing power Firms: choose which and how much of g/s to produce to maximize profit; and choose how to produce them to minimize cost given factors of production, technology, budget, and market structure Governments: choose which and how much of g/s to produce, to regulate, or to subsidize/tax to maximize social welfare Intermediate Microeconomic Theory Main Theme #2 Main theme #2: price is really important When facing trade-offs and making decisions, economic agents look at price consumer: beef vs. chicken (preferences, income, relative prices) firm: worker vs. machine (output, technology, relative prices) worker: leisure vs. labor (preferences, time, wages) Intermediate Microeconomic Theory Main Theme #2 Main theme #2: price is really important Determination of price major topic Intro course: demand and supply This course: where does demand and supply come from?  Consumer Theory, Firm Theory, Market Structure Intermediate Microeconomic Theory Main Theme #3 Main theme #3: economists use models, theories, and empirics (economic) model: Intermediate Microeconomic Theory Main Theme #3 Main theme #3: theories, models, and empirics theory: development and use of a model to test hypotheses, which are predictions about cause and effect empirics: using data analysis and experiments to explore phenomena and test theories and models. 1. Model 2. Theory (use model to formulate hypotheses) 3. Collect appropriate data 4. Compare predictions from theory with evidence Intermediate Microeconomic Theory Example: The Economic Reward for Studying Economics Black, Dan A., Seth Sanders, and Lowell Taylor. "The Economic Reward for Studying Economics." Economic Inquiry 41, no. 3 (July 2003): 365 – 377  Theory: The wages of economic majors are higher than similar students that chose different majors.  Model: where yi: worker i's wage X: vector of worker i's demographic information (age, race, ethnicity, gender) M: vector of education characteristics  Empirics: 1993 National Survey of College Graduates (NSCG), U.S. Census  Result: Compared to demographically similar majors, economics majors earn  at least 13% more than majors in other social sciences  at least 15% more than humanities majors  at least 18% more than education majors  earn approximately the same as those in chemistry, math, and physics  earn, on average, 13% less than engineering majors. Intermediate Microeconomic Theory Normative vs. Positive Analysis Positive statement: Normative statement: Intermediate Microeconomic Theory Practice Problem Consider each of the following statements. Which are positive? Which are normative? 1. Cash transfers increase life satisfaction relative to in- kind transfers. 2. Tuition should be capped. 3. We should provide basic income instead of food stamps. 4. The cost of tuition has been rising relative to inflation. 5. As the price of burritos rises, Netflix subscriptions rise Intermediate Microeconomic Theory Do Economists Ever Agree on Anything?  Intermediate Microeconomic Theory Do Economists Ever Agree on Anything? Take a moment and pause the video – do you agree with any of the following statements? Proposition % Agreeing 1. Tariffs and import quotas usually reduce general economic welfare. 95% 2. Pollution taxes or marketable pollution permits are a more efficient approach to pollution 89% control than emission standards 3. Antitrust laws should be enforced vigorously. 87% 4. Fiscal policy (e.g., tax cut and/or expenditure increase) has a significant stimulative impact 81% on a less-than-fully-employed economy 5. The long-run benefits of higher taxes on fossil fuels outweigh the short-run economic costs 80% 6. Welfare reforms which place time limits on public assistance have increased the general 75% well-being of society. 7. A minimum wage increases unemployment among young and unskilled workers 74% 8. Easing restrictions on immigration will depress the average wage rate in the United States 53% 9. Lower marginal income tax rates increase the time spent at work and reduce time at leisure 43% 10. Reducing the regulatory power of the EPA would improve the efficiency of the U.S. 35% economy Source: D. Fuller and D. Gelde-Stevenson, “Consensus Among Economists – An Update,” The Journal of Economic Education (April 2014): 131 – 146. Intermediate Microeconomic Theory Do Economists Ever Agree on Anything? https://www.youtube.com/watch?v=_yANPYhvi-0 Intermediate Microeconomic Theory INTERMEDIATE MICROECONOMIC THEORY When to Use the Demand and Supply Model Learning Objectives 1. List the key assumptions of the demand and supply model. 2. Explain when (and when not) to use the demand and supply model. Intermediate Microeconomic Theory Models models: representation of a theory through a logical and simplified description verbal, visual, or mathematical art in modeling  assumptions Intermediate Microeconomic Theory Why is this so Important? You've seen demand and supply before! Rest of the semester: What's behind that demand curve? consumer theory! What's behind the supply curve? production and costs; aka producer theory! How are prices determined? consumer and producer theory together under different market structures Intermediate Microeconomic Theory Real World is Complex! The real world is complex! 7 billion people 10s of millions of businesses Economists simplify this complexity and interdependence through the demand and supply model For now: What is a market? What are the assumptions of the model? When can we use the model? Intermediate Microeconomic Theory What is a Market? Markets are central to the study of economics Typically, product (coffee) location (North America) time period (1980) The idea: Consumers (demand) and producers (supply) should be able to connect to each other Price is the signal Intermediate Microeconomic Theory Key Assumptions (Perfectly Competitive) Markets Intermediate Microeconomic Theory When to Use the Model When the assumptions hold, predictions on the effects of demand and supply shocks the influence of policy Proves useful in agriculture, finance, labor, construction, services, wholesale, and retail Benchmark Welfare Relaxing assumptions