Microeconomics lecture 1.pptx

Managerial Economics- An overview The Themes of Microeconomics What Is a Market? Real versus Nominal Prices Why Study Microeconomics?  microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets t...

Managerial Economics- An overview The Themes of Microeconomics What Is a Market? Real versus Nominal Prices Why Study Microeconomics?  microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise. macroeconomics Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation. The Themes of Microeconomics Much of microeconomics is about Limit and ways to make most of these limits. In a planned economy many of the tools and concepts of microeconomics are of limited relevance  THE THEMES OF MICROECONOMICS Trade-Offs Consumers Consumers have limited incomes, which can be spent on a wide variety of goods and services or saved for the future. Workers Workers also face constraints and make trade-offs. First, people must decide whether and when to enter the workforce. Second, workers face trade-offs in their choice of employment. Finally, workers must sometimes decide how many hours per week they wish to work, thereby trading off labor for leisure. Firms Firms also face limits in terms of the kinds of products that they can produce, and the resources available to produce them. Ex. Tata Motors producing car and trucks, but it does not have ability to produce Airplanes, computer, pharmaceuticals  THE THEMES OF MICROECONOMICS Prices and Markets Microeconomics describes how prices are determined. In a centrally planned economy, prices are set by the government. In a market economy, prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good. Equilibrium  THE THEMES OF MICROECONOMICS Theories and Models In economics, explanation and prediction are based on theories. Theories are developed to explain observed phenomena in terms of a set of basic rules and assumptions. A model is a mathematical representation, based on economic theory, of a firm, a market, or some other entity. Positive versus Normative Analysis positive analysis Analysis describing relationships of cause and effect. normative analysis Analysis examining questions of what ought to be. WHAT IS A MARKET? market Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. Ex. Market for Personal computer market definition Determination of the buyers, sellers, and range of products that should be included in a particular market. Ex. Market for Gold arbitrage Practice of buying at a low price at one location and selling at a higher price in another.  WHAT IS A MARKET? Competitive versus Noncompetitive Markets perfectly competitive market Market with many buyers and sellers, so that no single buyer or seller has a significant impact on price. Ex. Indian domestic airlines, OPEC Market Price market price Price prevailing in a competitive market. Market for wheat and Gold Not perfectly competitive- Prices differ  WHAT IS A MARKET? Market Definition—The Extent of a Market extent of a market Boundaries of a market, both geographical and in terms of range of products produced and sold within it. Ex. Hosing market- Distinct, Retail petrol market -Regional , Gold market- world Market definition is important for two reasons: A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future. Market definition can be important for public policy decisions. Ex: should Govt. allow M&A within same industry 1.2 WHAT IS A MARKET? Markets are usually defined in terms of therapeutic classes of drugs. For example, there is a market for antiulcer drugs that is very clearly defined. Sometimes, however, pharmaceutical market boundaries are more ambiguous, like painkillers. There are many types of painkillers, and some work better than others for certain types of pain.  WHAT IS A MARKET? In 1990, the Archer-Daniels-Midland Company (ADM) acquired the Clinton Corn Processing Company (CCP). The U.S. Department of Justice (DOJ) challenged the acquisition on the grounds that it would lead to a dominant producer of corn syrup with the power to push prices above competitive levels. ADM fought the DOJ decision, and the case went to court. The basic issue was whether corn syrup represented a distinct market. ADM argued that sugar and corn syrup should be considered part of the same market because they are used interchangeably to sweeten a vast array of food products.  WHY STUDY MICROECONOMICS? Corporate Decision Making: Ford’s Sport Utility Vehicles 1991- Explorer 1997- Expedition By 2002 - 6 SUV model and 6 others through subsidiaries 2005-07 – Higher gas prices & growing concern about global warming -> Profit turned into losses Developing new and small cars and also modified SUV Model The design and efficient production of Ford’s SUVs involved not only some impressive engineering, but a lot of economics as well. First, Ford had to think carefully about how the public would react to the design and performance of its new products.  Demand and Consumer Preference Next, Ford had to be concerned with the cost of manufacturing these cars.  Cost and Profit maximizing output Pricing strategy and Competition Large Investment Internal Pricing and Purchase from outside Finally, Ford had to think about its relationship to the government and the effects of regulatory policies.  Emission std and Health and Safety Norms  WHY STUDY MICROECONOMICS? Public Policy Design: Automobile Emission Standards for the Twenty-First Century The design of a program like the Clean Air Act involves a good deal of economics. First, the government must evaluate the monetary impact of the program on consumers. The government must determine how new standards will affect the cost of producing cars. Finally, the government must ask why the problems related to air pollution are not solved by our market-oriented economy. Thanks