Chapter 1: Preliminaries

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Chapter 1 Preliminaries

• Zeynal Karaca

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The Themes of Microeconomics

• Trade-Offs
• Consumers, workers and firms
• Prices and Market
• A market is the collection of buyers and sellers
  that through their actual or potential
  interactions, determine the price of a product or
  service.
• Geographic range
• Product range
• Market for prescription drugs
• Arbitrage is the practice of buying at a low
  price at one location and selling at a higher
  price in another.
• Competitive vs. Noncompetitive markets
• Market price prevails in a competitive market

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• Theories and Models
• It is often said that a good theory is one that
  can be refuted by an empirical, data oriented
  study.
• Positive vs. Normative Analysis
• Gasoline Rationing is poor social policy because
  it interferes with the workings of the
  competitive market system.
• Gasoline Rationing is a policy under which people
  are worse off than are made better off.

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• Real vs. Nominal Prices
• Real Price in year t
• (CPI at base year)/(CPI at year t)(Nominal
  Price at year t)
• Example
• 1980
  1990 2001
• CPI 100.00 158.62
  214.93
• Butter Price 1.88 1.99
  3.30
• Real price of butter in terms of 1980 dollars.
• Real Butter Prices will be 1.25 in 1990 and
  1.54 in 2001
• The percentage change in real prices from 1980 to
  2001
• Percentage Change in real prices from 1980 to
  2001 is -18
• Real price of butters in terms of 1990 dollars.
• Real Butter Prices will be 2.98 in 1980 and
  2.43 in 2001
• The percentage change in real prices from 1990 to
  2001
• Percentage Change in real prices from 1980 to
  2001 is -18