Download Microeconomics

Microeconomics
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Course: Basic Microeconomics
Instructor: Wai Chiu WOO
Textbook: Pindyck and Rubinfield
Teaching assistants: Geng, Longbo, Wong Tak
Yuen
Microeconomics
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Requirements of this course:
Mid-term: 35%
Final: 50%
Assignments: 15%
Midterm
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29th Feb (Friday): 7:00-8:30pm
Venue to be announced
Combined exam for both Class C and D.
Medical note from Uni clinics, or note
endorsed by Uni clinics
• Extra works and/or tests to be assigned
• Time clash with midterm.
Microeconomics
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Assignments 15%
6 assignments
Submitted by a 2-person team.
Submit the team member list to me on the 21st
Jan class.
- Tutorials to discuss answers (schedule to be
announced).
- Answers won’t be posted on Web.
Microeconomics
• How to prepare for this course?
- Reading textbook (This is a good textbook).
In my opinion, this is a bad habit of not
reading textbook.
- Do the assignments yourself, better take the
opportunity to train yourself.
- Attending lectures and tutorials.
Microeconomics
• WebCT
(http://webct.cuhk.edu.hk/webct/entryPageIns.dowe
bct):
- For PowerPoints, or other notices, assignments.
• E-mail:
- Check your university’s accounts, not your private
yahoo or google account
- Don’t send e-mails through WebCT to me. Send to
my e-mail address [email protected].
Microeconomics
• Microeconomics is one of the two major
branches in economics. Another branch is
macroeconomics.
• Why study economics?
• I suppose it is interesting.
• Understanding the nature of many important
issues, e.g. development, unemployment,
competitiveness, distribution, business
strategies etc.
Microeconomics
• What is economics?
• The most famous definition (by
Lionel Robbins): “Economics is
the science which studies human
behaviour as a relationship
between given ends and scarce
means which have alternative
uses”
• Human behaviour: subject of all
social science
• Scarce means: economics
Microeconomics
• Scarcity is the source of all economic problem.
• Can’t serve all our wants. Have to make trade
off. This is econ problem.
• “human behaviour as a relationship between
given ends and scarce means”
• This is how economists see the world, differ
from other social scientists.
Microeconomics
• Sociologists’ view: human behaviours as
members of groups, institutions and society
• Anthropologists’ view: human behaviours in
different cultural contexts.
Microeconomics
• Economics defined by point of view rather than
area of study.
• All human behaviour is economic (or
sociological).
• Family life is not economic? Nobel Laureate Gary
Becker says it is. People bear fewer children coz
foregone earning is higher.
• But sociologists study family in another
perspective (how we learn to be
a member of a society).
Microeconomics
• Human behaviour in the eyes of economists:
Making choices to maximize benefit subject to
constraints (scarcity resource)
• Consumer: Choose quantity purchased → Max
satisfaction (utility) st. budget, prices of goods
• Producer: Choose quantity produced, input
employment → Max profit st. production
technology, input prices
• Government: Choose taxes, subsidies, public
projects → Max social welfare st. nation’s resource
Microeconomics
• In short, “constrained maximization” is the
typical model of human behaviour in econ
• The approach also distinguishes economics
from other social science.
Student Background of ECO1011C&D
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No advanced maths + no econ: 3
Advanced maths + no econ: 16
Perspectives in econ: 33
HKCEE econ: 14
HKAL econ: 4
Micro vs Macro
• Micro vs Macro: What’s the difference?
• Macroeconomics: studies aggregate variables
(GNP, inflation, unemployment, etc)
• Microeconomics: studies individual actors
(consumer, producers etc), their interactions
(market)
Micro vs Macro
• These are the traditional definitions.
But I don’t like it.
• 20-30 years ago: Macro is Keynesian
economics. Micro is economics before
the great British economist Keynes
(1883-1946).
• Keynesian econ: draw a map of econ,
how C, I relates to Y, r, etc
• Pre-Keynes econ: how single
consumer, firm behaves
Micro vs Macro
• There was a methodological gap.
• Similar to physics
• Microphysics (Microecon): Quantum physics
looks at atoms (individual actors)
• Macrophysics (Macroecon): Theory of
Relativity looks at stars (aggregate data)
Micro vs Macro
• Nowadays, all macro textbooks will talk about
micro foundations. E.g. individual consumer’s
behaviour → aggregate data. Is it micro?
• Furthermore, the last chapter of micro
textbook is usually about general equilibrium
(how all markets in an economy interact). Is it
macro?
Micro vs Macro
• Probably we can only say:
• For macro, our end-point is aggregate data, but
we may step back to find out the factors
behind aggregates
• For micro, we always start from individual
actors, but we may step forward to draw the
picture for the whole economy.
Some methodological issues
• Positive vs Normative Analysis:
• Positive analysis: about what is, was, will be.
Fact.
• E.g. income up, price up
• Normative statement: about what ought to be,
what is good or desirable. Value.
• E.g. should enhance our competitiveness
Some methodological issues
• Economics, as a social science, is positive
• But economics is related to public policy
making. Which policy is desirable?
• Some normative analysis is needed when
applying economics in public policy analysis.
• Shouldn’t confuse fact with value.
• Shouldn’t say value must be purely arbitrary.
Some methodological issues
• Theory vs Empirics:
• Science: theory → prediction
→ confirmation/refutation
• Scientific statements usually are formulated as
“universal truth”.
• E.g. sun rises from the east everyday.
• Empirically, you can’t prove universal
statements to be true (there is always a
tomorrow).
Some methodological issues
• But you can falsify an universal statement (one
counterexample is enough).
• Karl Popper: scientific statement is refutable (in
principle).
• Karl Marx: Capitalism will eventually break down
• No time frame: can’t be refuted even in principle.
Not a scientific statement.
Some methodological issues
• Economics textbook presents you a lot of
theories.
• Eventually, they are used to make analysis of
the real world and make predictions. We are
able to test if these theories are consistent with
facts.
Some methodological issues
• Assumptions vs Real World:
• Jokes about economists’ making unrealistic
assumptions are many.
• A mathematician, physicist, economist after a
Titanic crash on an island. Starving to death.
Find a can of roastbeef. Debating how to open
it without can-opener. Math: drop the can from
the cliff. Physic: heat the can. Econ: “Let’s
suppose the can is opened”
Some methodological issues
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Actually, not so bad!
Common assumptions used in economic models
Individuals are identical.
Only two persons in a society.
Not realistic. Is it a bad thing?
Market D = D1 + D2. Realistic assumption: n persons
in a society.
• The model is complicated without providing
additional insights.
Some methodological issues
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Maybe we can’t solve the model.
Can’t use graph for illustration.
What’s the benefit by assuming n persons?
We get the same wanted conclusion: market D
= sum of individual D.
• Pros and Cons of realistic assumption → We
usually prefer simplifying assumption.
Some methodological issues
• The point is: Is the simplification relevant to the
problem?
• E.g. Can one or two soft drink vending machines be
installed on ELB? The answer depends on the no of
consumers.
• We can’t assume only two persons in this situation.
• Coz no of consumers is a relevant point.
Some methodological issues
• Topic: A Study of Effective Measures to
Reduce Road Congestion
• Major proposal: Control the traffic of private
car
• Major assumption: Private cars are the major
contributor of road congestion.
Some methodological issues
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Making good simplifications:
Depends on experience
Distinguish good economists from bad
Realistic assumption is not a must
Some methodological issues
• Maths vs Logics:
• To be a good economics student/economist, you must
have a reasonable skill in mathematics and logics.
• I find maths is usually not a problem for my students.
If they can’t do basic maths, they will naturally be
crowded out.
• However, a good “calculator” is not equivalent to
having a logical mind.
• At least you have to understand the “if-then” logical
structure.
Some methodological issues
• If profit is maximized, you can’t increase
profit by selling more product.
• If you can’t increase profit by selling more
product, profit is maximized.
• If route A is shorter than route B, then route B
is not the shortest route.
• If route B is not the shortest route, then route A
is shorter than route B.
Some methodological issues
• If X then Y: If X is true then Y must be true. X
is sufficient to ensure Y is true. But it doesn’t
mean we must rely on X to establish Y.
• X is a sufficient condition for Y, but not a
necessary condition.
• Now, suppose Y is not true. Then, X must be
untrue. Why? Coz if we have X then Y must be
true.
• Y is a necessary condition for X.
Some policy questions
• Minimum wage law:
• Why it is opposed by almost all economists?
• Would some workers benefit from such law?
Would some suffer from it?
• Would the benefit of the gainers offsets the
loss of the losers?
Some policy questions
• Telecommunication companies are regulated
by Tele Authority. Why?
• Price cut by the dominating operator needs
approvals from the Authority. Wouldn’t it
unfair to the operator?
• Why we believe competition is not enough in
this sector?
Some policy questions
• Suppose all goods and services are taxed at 5%
on their sales values.
• Consumers say: we pay 5% more? Is it correct?
• Retailers say: we lose our consumers. Is it
correct?
• Can both of them correct?
• Who really suffer more?
1.Analysis with Demand-Supply Model:
Basic demand-supply model
Welfare analysis
Elasticity
Market interventions
Inter-marker effects
1.Consumer’s Decision-making:
Preference and utility
Indifference curve
Derivation of demand curve
Applications
Decision-making under uncertainty
Reducing risk
1.Producer’s Decision-making:
Production technology
Cost of production
Profit-maximization: competitive market
Profit-maximization: monopoly
1.Optional Topics:
Game theory
Oligopoly
Pricing strategies with monopoly powers