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Economics Defined
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Microeconomics
o 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
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Macroeconomics
o Branch of economics that deals with aggregate economic variables, such as
the level and growth rate of national output, interest rates, unemployment,
and inflation
1.1 The Themes of Microeconomics
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Trade - Offs
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A exchange, giving out one thing to get something else
Opportunity cost
▪ Best thing you must give up to get at
Consumers
▪ Consumers have limited incomes, which can be spent on a
wide variety of goods and services, or saved for the future
Workers
▪ Face constraints and make trade-offs, trading off labor for
leisure
Firms
▪ Face limited in terms of the kinds of products that they can
produce, and the resources available to produce them
Government
▪ Constrains and make trade-offs when making taxation and
spending decisions
Prices and Markets
▪ Microeconomics describes how prices are determined
Theories and Models
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In economics, explanation and prediction are based on theories
Theories are develops to explain observed phenomena in terms of a set of
basic rules and assumptions
Model
▪ A mathematical representation, based on economic theory, of
a firm, a market, or some other entity
▪ Check the model with natural experiment, statistical
investigation, or an economic experiment
▪ Nature experiment
• A situation that rises in an ordinary economical
life
• One factor interest is different, and other are
equal or very similar
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▪
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Statistical investigation
Looking for correlation
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• A tendency for the value of two variable to
move together in predictable in related way
Economic experiment
• Put people in a decision making situation, and
vary the influence of one factor to discover how
they will response
Positive versus Normative Analysis
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Positive analysis
▪ Describing relationship of cause and effect
• Ex. Raising the tax of one gallon of gas will raise
the price of gas, which will lead more people to
buy smaller car
Normative analysis
▪ Examining questions of what out to be
• Ex. The tax of gas should be raise
1.2 What is market?
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Market
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Collection of buyers and sellers that, through their actual or potential
interactions, determine the price of a product or set of products
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Market definition
o Determination of the buyers, sellers, and range of products that should be
included in a particular market
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Competitive versus Noncompetitive Markets
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o
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Perfectly competitive market
▪ Market with many buyers and sellers, so that no single buyer
or seller has a significant impact on price
Many other markets are competitive enough to be treated as if they were perfectly
competitive, but some are not
Market Price
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o
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Price prevailing(优势) in a competitive market
In markets that are not perfectly competitive, different firm might charge
different prices for the same product
The market prices of most goods will fluctuate(波动) over time, and for
many goods the fluctuations can be rapid. This is particularly true for goods
sold in competitive markets
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Market Definition - The Extent of a Market
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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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For some goods, it makes sense to talk about a market only in term of very
restrictive geographic boundaries
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We must also think carefully about the range of products to include in a market.
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Market definition is important for two reasons:
1. A company must understand who its actual and potential competitors
are for the various products that it sells or might sell in the future
2. Market definition can be important for public policy decisions
1.4 Why Study Microeconomics?
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Microeconomic principles help us understand the economy, aid in rational
and optimal decision-making by individuals, firms, and governments, and
help policy makers to create effective policy