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Institute of Economic Theories - University of Miskolc Microeconomics Lecture 1 Mónika Kis-Orloczki Assistant lecturer [email protected] 1 Four main reasons to study economics: • to learn a way of thinking, • to understand society, • to understand global affairs, and • to be an informed voter. The nature and scope of economics Economics is a social science which seeks to explain the economic basis of human societies. Economics deals with the decision alternatives of economic actors and with the social consequences of each decision. 2 Cause of decision: necessity ≠ possibility • Necessity: need for the consumption and use of goods and services, which appears as a lack. • Need: Need and necessity are not the same concepts. Needs may include desires as well, which cannot be satisfied under existing economic conditions. • Possibilities: are resources, which are available for satisfying needs. Possibilities in economics are determined by economic resources. NECESSITY > POSSIBILITY almost limited unlimited scarce 3 Economics = science of choices and decisions • Economics is the study of how scarce resources are allocated among competing uses. • Basic questions: – What to produce – How we produce it – For whom to produce 4 To learn a way of thinking • Opportunity cost: The best alternative that we forgo, or give up, when we make a choice or a decision. • Marginalism: The process of analyzing the additional or incremental costs or benefits arising from a choice or decision. 5 Place of economics in the system of sciences Main aspects for the classifications of sciences: According to verification – logical, – empirical (e.g. economics). According to topic – nature, – society (e.g. economics). According to function – theoretical (e.g. microeconomics, macroeconomics and international economics), – applied: - functional (e.g. finance), - sectorial (e.g. industrial economics). According to relationship with politics • normative • positive economics 6 Levels: • Microeconomics analyses the individual decision alternatives of the economic actors (consumers, firms, workers, and investors) • Macroeconomics analyses the economy as an aggregate, on national economy level. (the level and growth rate of national output, interest rates, unemployment, and inflation.) • International economics analyses causes and effects of real and financial relationships between national economies. 7 Most important methods of economics Measurement: It means the description of processes, drawing conclusions, generally aimed at quantification. Modelling: Models show the most typical features and working mechanisms of economic processes using an analogy in a different medium. Simplified representations of the real world. Economic models attempt to focus on what is relevant to the problem at hand and omit what is not. – Assumptions: The set of circumstances in which a model is applicable. Every model, or theory, must be based on a set of assumptions. – Ceteris paribus assumption (all else equal) A device used to analyze the relationship between two variables while the values of other variables are held unchanged. Analysis, testing and evaluation. 8 The market System of exchange relationships between potential buyers and sellers. The area where buyers and sellers meet, where the exchange happens. • Market actors: – Buyers – Sellers • Features of the market – – – – A democratic institute, Measurement by equal standards, Competition, concurrence, Participants depend on each other. 9 According to market characters • market of goods, • market of labour, • money and capital market. According to market area • local, • national , • international or world market. According to market formations • free trade where norms are established • norm-follower market, which is not a perfectly competitive market 10 Modelling the market • D= demand function: shows the quantities demanded by the buyers belonging to different prices and a given income. Formula: D = f / P / • S= supply function: shows the quantities offered by producers for selling at different prices. Formula: S = f / P / 11 Deducting the market demand curve Conditions of the model • Income is given and Price, P will not change at the beginning, • Market price influences the demanded quantities; price and quantity are in inverse P1 relationship, • We examine the demand of one product and of one /ordinary/ consumer, P2 • We assume that the consumer will raise his purchases by one unit as the price falls. D Q1 Q2 Quantity, Q 12 Deducting the market supply curve Conditions • the quantity to be sold is given, • the owners are not willing to sell their products at any price, • we analyse the market supply of one product at first. Price, P S P2 P1 Q1 Q2 Quantity, Q 13 Conclusions • Market supply can be modelled in the dimension of the quantity of one product and the price. • Supply function can be used to model the aggregate market supply as well. • Between the market price and the quantity to be sold there is a direct proportionality as far as normal goods are concerned. • An individual’s demand for a product and the market demand for a group of products and their relationship with the price can be modelled by the demand function. • We assume a continuous change of the price, and that a demanded quantity belongs to every price, which results in a continuous demand curve, • The function shows an inverse proportionality between the changing of the price and the demanded quantities as far as normal goods are concerned. • If the consumer’s income changes, we will arrive at another demand function. 14 Market equilibrium Model of the market’s working mechanism • In a market in the state of oversupply the equilibrium will be established by a fall in the market price. • In a market in the state of excess demand the equilibrium will be established by an increase in the market price. Price, P Excess supply S P1 P* P2 D Excess demand Q* Quantity, Q 15 The price’s role in the market’s working mechanism • orientation of market actors, • provides buyers with information about the price ratios of substituting products, • inspires market actors to rational decisionmaking, • keeps the market moving. 16 Shifts of the demand and supply curves • A variety of other factors may change the entire price–quantity relationship: – Consumers’ income – Prices of related goods (Substitutes and complements) – Tastes and preferences – Expectations about future prices – The number of consumers in the market • Factors that affect the supply of a good: – Prices of inputs (such as wages) – Technology – Natural disruptions (such as bad weather) – The number of firms in the market – Expectations – Government policies 17 • Changes in the market resulting from an increase (decrease) of demand by an unchanged supply function the equilibrium price will rise (fall), • producers’ income will rise (fall), • buyers’ expense will rise (fall) considering the product. • By an increase in supply and an unchanged demand the new market equilibrium price will be established at a lower price, • by a decrease in supply and an unchanged demand the new market equilibrium price will be established at a higher price. 18 Geometry of Consumer Surplus It measures the amount a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay. It can be derived from the market demand curve. Price, P a P1 P2 b D Q1 Q2 Quantity, Q 19