Microeconomics for Managers

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Microeconomics for Managers
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Economics Foundations and Models

• Economics The study of the choices people make
  to attain their goals, given their scarce
  resources.
• Scarcity The situation in which unlimited wants
  exceed the limited resources available to fulfill
  those wants.
• Economic model A simplified version of reality
  used to analyze real-world economic situations.

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Economic Models, contd

• Constructing models
• Economic models make behavioral assumptions about
  the motives of consumers and firms.
• Models include Economic variables
• Something measurable that can have different
  values, such as the wages of software
  programmers, hours of work.
• Using models
• Positive analysis
• Analysis concerned with what is.
• Normative analysis
• Analysis concerned with what ought to be.

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The Economic Problem That Every Society Must Solve

• Efficiency and Equity
• Productive efficiency The situation in which a
  good or service is produced at the lowest
  possible cost.
• Allocative efficiency A state of the economy in
  which production is in accordance with consumer
  preferences in particular, every good or service
  is produced up to the point where the last unit
  provides a marginal benefit to society equal to
  the marginal cost of producing it.
• Equity The fair distribution of economic
  benefits.
• Voluntary exchange The situation that occurs in
  markets when both the buyer and seller of a
  product are made better off by the transaction

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Throughout this book, as we study how people make
choices and interact in markets, we will return
to three important ideas

• People are rational.
• Having or exercising the ability to reason.
• Of sound mind sane.
• People respond to economic incentives.
• some form of material reward especially money
  in exchange for acting in a particular way.
• Optimal decisions are made at the margin.
• Marginal analysis Analysis that involves
  comparing marginal (additional) benefits and
  marginal (additional) costs.

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Microeconomics and Macroeconomics

• Microeconomics The study of how households and
  firms make choices, how they interact in markets,
  and how the government attempts to influence
  their choices.
• Macroeconomics The study of the economy as a
  whole, including topics such as inflation,
  unemployment, and economic growth.

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The Market System

• Market A group of buyers and sellers of a good
  or service and the institution or arrangement by
  which they come together to trade.
• Product markets Markets for goodssuch as
  computersand servicessuch as medical treatment.
• Factor markets Markets for the factors of
  production, such as labor, capital, natural
  resources, and entrepreneurial ability.
• Factors of production The inputs used to make
  goods and services.

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Factors of production are divided into four broad
categories

• Labor includes all types of work, from the
  part-time labor of teenagers working at
  McDonalds to the work of top managers in large
  corporations.
• Capital refers to physical capital, such as
  computers and machine tools, that is used to
  produce other goods.
• Human capital refers to training or education
  that improves labor productivity
• Natural resources include land, water, oil, iron
  ore, and other raw materials (or gifts of
  nature) that are used in producing goods.
• An entrepreneur is someone who operates a
  business. Entrepreneurial ability is the
  ability to bring together the other factors of
  production to successfully produce and sell goods
  and services.

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The Market System

• Two key groups participate in markets
• A household consists of all the individuals in a
  home.
• Firms are suppliers of goods and services.
• Circular-flow diagram A model that illustrates
  how participants in markets are linked.

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The Market System
The Circular-Flow Diagram
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Chapter 3, Learning Objectives

• Discuss the variables that influence demand.
• Discuss the variables that influence supply.
• Use a graph to illustrate market equilibrium.
• Use demand and supply graphs to predict changes
  in prices and quantities.

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Perfectly competitive market

• A market in which there are many buyers and
  sellers
• All the products are identical
• There are no barriers to new sellers entering the
  market

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The Demand Side of the Market

• Demand schedule A table showing the relationship
  between the price of a product and the quantity
  of the product demanded
• Quantity demanded The amount of a good or
  service that a consumer is willing and able to
  purchase at a given price
• Demand curve A curve that shows the relationship
  between the price of a product and the quantity
  of the product demanded
• Market demand The demand by all the consumers of
  a given good or service.

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Law of demand

• The rule that, holding everything else constant,
  the price of a product and the quantity demanded
  are inversely related
• when the price of a product falls, the quantity
  demanded of the product will increase, and when
  the price of a product rises, the quantity
  demanded of the product will decrease.

gtEXCEL example
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What Explains the Law of Demand?

• Substitution effect The change in the quantity
  demanded of a good that results from a change in
  price, making the good more or less expensive
  relative to other goods.
• Income effect The change in the quantity
  demanded of a good that results from the effect
  of a change in the goods price on consumers
  purchasing power.

gtEXCEL example
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Variables That Shift Market Demand

• Income
• Price of related goods
• Substitutes Goods and services that can be used
  for the same purpose.
• Complements Goods and services that are used
  together.
• Tastes
• Population and demographics
• Expected Future Prices

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Shifts in demand graphically
Shifting the Demand Curve
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(No Transcript)
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A Change in Demand versus a Change in Quantity
Demanded
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The Supply Side of the Market

• Quantity supplied The amount of a good or
  service that a firm is willing and able to supply
  at a given price.
• Supply schedule A table that shows the
  relationship between the price of a product and
  the quantity of the product supplied.
• Supply curve A curve that shows the relationship
  between the price of a product and the quantity
  of the product supplied.

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The Supply Side of the Market

• Law of supply The rule that, holding everything
  else constant, increases in price cause increases
  in the quantity supplied, and decreases in price
  cause decreases in the quantity supplied.
• when the price of a product falls, the quantity
  of the product supplied will decrease, and when
  the price of a product rises, the quantity of the
  product supplied will increase.

gtEXCEL example
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Variables That Shift Supply

• The following are the most important variables
  that shift supply
• Prices of inputs
• Technological change
• Technological change A positive or negative
  change in the ability of a firm to produce a
  given level of output with a given quantity of
  inputs.
• Prices of substitutes in production
• Expected future prices
• Number of firms in the market

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The Supply Side of the Market
Learning Objective 3.2
Shifting the Supply Curve
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(No Transcript)
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The Supply Side of the Market
Learning Objective 3.2
A Change in Supply versus a Change in the
Quantity Supplied
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Market Equilibrium Putting Demand and Supply
Together

• Market equilibrium The price which equates
  quantity demanded and quantity supplied.
• Any other price Qd ? Qs

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Market Equilibrium
Learning Objective 3.3
FIGURE 3-7
Market Equilibrium
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Market Equilibrium Putting Demand and Supply
Together
Demand
Supply
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Changes in Market price and quantity

• Shift in demand curve
• Equilibrium price moves in the same direction
• Equilibrium quantity moves in the same direction
• Shift in the supply curve
• Equilibrium price moves in the opposite direction
• Equilibrium quantity moves in the same direction

gtapple market examples
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Shifts in a Curve versus Movements along a Curve
Learning Objective 3.4
Dont Let This Happen to YOU!Remember A Change
in a Goods Price Does NotCause the Demand or
Supply Curve to Shift
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Chapter 4, Learning objectives

• Understand the concepts of consumer surplus and
  producer surplus.
• Understand the concept of economic efficiency.
• Understand the economic effect of government
  imposed price ceilings and price floors.

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Consumer Surplus and Producer Surplus

• Consumer surplus The difference between the
  highest price a consumer is willing to pay and
  the price the consumer actually pays.
• Marginal benefit The additional benefit to a
  consumer from consuming one more unit of a good
  or service.

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Measuring consumer surplus
Demand
0.75
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Producer Surplus

• Producer surplus The difference between the
  lowest price a firm would have been willing to
  accept and the price it actually receives.
• Marginal cost The additional cost to a firm of
  producing one more unit of a good or service.

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Measuring Producer surplus
Supply
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What Consumer Surplus and Producer Surplus
Measure

• Consumer surplus measures the net benefit to
  consumers from participating in a market rather
  than the total benefit. The net benefit equals
  the total benefit received by consumers minus the
  total amount they must pay to buy the good.
• Similarly, producer surplus measures the net
  benefit received by producers from participating
  in a market, or the total amount firms receive
  from consumers minus the cost of producing the
  good

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The Efficiency of Competitive Markets

• Economic surplus The sum of consumer surplus and
  producer surplus.

Supply
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Economic Surplus and Economic Efficiency

• Economic efficiency A market outcome in which
  the sum of consumer surplus and producer surplus
  is at a maximum.

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Government Intervention in the MarketPrice
Floors And Price Ceilings

• Price floor, lower limit on the price in a market
  or minimum price
• Price ceiling, upper limit on the price in a
  market or maximum price
• Both have the potential to move a market away
  from economic efficiency

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Price Ceiling, shortage
Demand
Supply
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Price Ceiling, deadweight loss
Demand
Supply
gtcompare to slide 37
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Price Floor, surplus
Demand
Supply
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When the government imposes price floors or price
ceilings, three important results occur

• Some people win.
• Some people lose.
• There is a loss of economic efficiency