Microeconomics for International MA

Lecture1: Introduction Xiaojia Bao

WISE, Xiamen U

Fall 2013

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Intro

Class Info
Xiaojia Bao, xb2112@columbia.edu Location: TongAn1-103(M); Econ-BuildingD210(W) Oce hour: Monday 2-4pm, Econ-Building A213 Textbook: Robert Pindyck and Daniel Rubinfeld, Microeconomics (7th Edition), Tsinghua University Press 2007. Grading: 3 Homeworks (15%)+ 4 in-class tests (20%)+mid-term (30%) +nal exam (30%)+participation and discussion (5%). Graded answer books will be returned to you in the following week after each test. TA: Mohammed K. Abbas; Email: TA session: Friday 10:10-11:50am, Nanqiang2-501 Mid-term in early November; Final in late December

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Course Objectives
The objective of this course is to develop the students ability tothink economically. the introduction of tools to understand economic behavior, the application of these tools to the issues of market behavior.

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Introduction

Outline What is Microeconomics? Themes of Microeconomics Key Ideas of Microeconomics Concepts of Microeconomics

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Microeconomics vs. Macroeconomics

Microeconomics the study of how households and rms make decisions and how these decisionmakers interact in the marketplace. Macroeconomics economy as a whole Microeconomics focuses on the decisions of individual consumers and businesses, examining issues related to supply and demand and the prices of goods and services.

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Themes of Microeconomics: Trade-os

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-os. First, people must decide whether and when to enter the workforce. Second, workers face trade-os in their choice of employment. Finally, workers must sometimes decide how many hours per week they wish to work, thereby trading o 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.

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Examples of trade-os

Cost vs.Quality
Should I pay more for a luxury car or should I pay less for an ordinary one?

Prot vs. Environment Long run benets vs. short run benets

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Trade-o: Opportunity Costs

Opportunity Costs: Options you give up when you make a decision Degree and earnings.

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Trade-o: More examples

Trade-o is always linked to scarcity. Because resources are limited, people tend to nd the way to get the largest benet from them. The subjects of trade-os can be commodity, capital. labor and natural resource etc. Quality and Quantity Trade-o of fertility.
Studies on # of children and their scholastic performance conrmed that family size directly aects childrens achievement (Hanushek, JPE, 1992). Children in smaller households tend to perform better.

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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 rms. These interactions occur in markets-collections of buyers and sellers that together determine the price of a good.

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Price and Markets: Examples

Argentina started the electric power deregulation and privatization in 1992. It reduced electricity wholesale price signicantly.

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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.
Theories on price determination Theories on monopoly deceasing economic eciency

A model is a mathematical representation, based on economic theory, of a rm, a market, or some other entity. These interactions occur in marketscollections of buyers and sellers that together determine the price of a good.

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The Market for Sweeteners

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.

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The Market for Bottled Water

Natural spring water, puried water, mineralized water

Consumption is strongly path-dependent. Brands which entered the market earlier tend to take a larger share, like Nongfu Spring, Master Kong and Wahaha.

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Themes of Microeconomics: Positive vs. Normative Analysis

Positive Analysis: Analysis describing relationships of cause and eect.
Objective statements that can be tested, amended or rejected by referring to the available evidence.
The rising price of crude oil on world markets will lead to an increase in cycling to work A reduction in income tax will improve the incentives of the unemployed to nd work. A rise in average temperatures will increase the demand for sun screen products.

Normative Analysis: Analysis examining questions of what ought to be.

Subjective statements, carrying value judgements.
Pollution is the most serious economic problem Unemployment is more harmful than ination The government should increase the minimum wage to 12.8 Yuan per hour to reduce poverty.
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Concepts
Market Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. To dene a market, one should include buyers, sellers, and range of products that should be included in a particular market. Extent of a market: Boundaries of a market, both geographical and in terms of range of products produced and sold within it.

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Concepts conti.

Arbitrage Practice of buying at a low price at one location and selling at a higher price in another.
Items with limited supplies. Foreign exchange market

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Concepts conti.

Competitive versus Noncompetitive Markets Perfectly competitive market: Market with many buyers and sellers, so that no single buyer or seller has a signicant impact on price. Market Price Price prevailing in a competitive market.

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Concepts conti.

Nominal Price Absolute price of a good, unadjusted for ination. Real Price Price of a good relative to an aggregate measure of prices; price adjusted for ination. Consumer Price Index (CPI) A measure of the aggregate price level. Producer Price Index (PPI) Measure of the aggregate price level for intermediate products and wholesale goods.

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CPI
How the CPI is calculated?
1

Survey consumers to determine composition of the typical consumers basket of goods. Every month, collect data on prices of all items in the basket; compute cost of basket. CPI in any month= 100 cost of basket in current month cost of basket in base month

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CPI/PPI data

US CPI/PPI

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Real and Nominal value calculation

Real Value = Nominal Value

CPI in base year CPI

Table 1.1 The Real Price of Eggs and of a College Education 1970 1980 1990 2000 2007 Consumer Price Index 38.8 82.4 130.7 172.2 205.8 Nominal Prices Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64 College Education $2,530 $4,912 $12,018 $20,186 $27,560 Real Prices ($1970) Grade A Large Eggs $0.61 ? College Education $2,530 ? 38.8 1970 Real price for eggs in 1980 = nominal price in 1980 CPI CPI1980 = 0.84 82.4

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Real and Nominal value calculation

Table 1.1 The Real Price of Eggs and of a College Education 1970 1980 1990 2000 2007 Consumer Price Index 38.8 82.4 130.7 172.2 205.8 Nominal Prices Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64 College Education $2,530 $4,912 $12,018 $20,186 $27,560 Real Prices ($1970) Grade A Large Eggs $0.61 $0.40 $0.30 $0.21 $0.31 College Education $2,530 $2,313 $3,568 $4,548 $5,196 Why if we use 1990 as the price base year? What is the percentage change of real price?

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Nominal and Real Housing Price

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Nominal and Real Minimum Wage

In nominal terms, the minimum wage has increased steadily over the past 70 years. However, in real terms its expected 2010 level is below that of the 1970s.

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Why to study microeconomics

Corporate Decision Making: Fords Sport Utility Vehicles The design and ecient production of Fords 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. Next, Ford had to be concerned with the cost of manufacturing these cars. Finally, Ford had to think about its relationship to the government and the eects of regulatory policies.

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Why to study microeconomics conti.

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 aect 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.

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Summary

Themes of microeconomics
trade-os; prices and markets; theories and models; positive and normative analysis.

Key ideas of microeconomics

trade-os; think on the margin;

Concepts of microeconomics
nominal and real price; CPI and PPI; arbitrage; competitive market; opportunity cost; scarcity

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