Microeconomics Nguyen Thuy Phuong (PhD) Chap 1: Microeconomics and enterprises of basic economic problems © 2007 Thomson South-Western LECTURER’S INFORMATION • BA: Foreign Trade University (K40) • MBA1: Lille 2, France; MBA2: UEH • PhD: Strasbourg University, France • Lecturing experience: >15 years (FTU, FPTGW, HCMUTE) • Scientific research, Economics, Marketing, Management, Negotiation, Work in groups • Research experience • International Journals & Conferences: 06 • Vietnamese Journals & Conferences: 14 Dr. Thuy-Phuong Nguyen • Scientific research projects: 04 nguyenthuyphuong@hcmute.vn • Books: 04 • Business advisor: 01 © 2007 Thomson South-Western MATERIALS • Text book: Principles of Economics, N. Gregory Mankiw, 8th edition • Lecturer’s slides* • References: • Principles of Microeconomics, N. Gregory Mankiw, 7th edition © 2007 Thomson South-Western Course evaluation • Attendance: 10% • Mid-term: 20-40% - presentation • Final exam: 50-70% • Multiple choice, closed book (expected) • Individual contribution © 2007 Thomson South-Western Group presentation • Time limitation: • 20 minutes for presentation • extra x minutes = -0.x points • Scorecard: • Presentation (85%) + class involvement (10%) + 5% group co-ordination • Be divided by contributions provided that the Total scores = average scores * #members © 2007 Thomson South-Western Topics for presentation 1.
Benefits of the opportunity cost approach to individual decision making. Do luxury goods follow the law of demand? 3. How does advertising affect price elasticity? 4. Examples of income and substitution effects on consumers’ purchasing behavior.
How do firms use the long-run average cost curve in their planning? 6. Losses from monopoly: theory and practice 7. Impact of marital status on the labor force composition. © 2007 Thomson South-Western Course content • Chap 1: Microeconomics and enterprises of basic economic problems • Chap 2: Demand and supply • Chap 3: Elasticity • Chap 4: Theory about actions of customers • Chap 5: Theory about action of producers Chap 6: Competition and exclusive • Chap 7: Labor market • Chap 8: The malfunction of market and the role of government © 2007 Thomson South-Western Chap 1: Microeconomics and enterprises of basic economic problems © 2007 Thomson South-Western Microeconomics.
WHY SHOULD YOU STUDY? How it would help your study and career? Go to mentimeter. The word economy comes from a Greek word for “one who manages a household.” © 2007 Thomson South-Western THE BASIC ECONOMIC PROBLEMS • Society and Scarce Resources: • The management of society’s resources is important because resources are scarce. means that society has limited resources and therefore cannot produce all the goods and services people wish to have. © 2007 Thomson South-Western THE BASIC ECONOMIC PROBLEMS Economics is the study of how society manages its scarce resources.
- People: how much to work, save, and spend? - Firms: how much to produce, how many workers to hire? - Society: how to divide its resources between activities? © 2007 Thomson South-Western TEN PRINCIPLES OF ECONOMICS • How people make decisions (4 principles) • How people interact (3 principles) • How the economy as a whole works (3 principles) © 2007 Thomson South-Western HOW PEOPLE MAKE DECISIONS • People face trade-offs. • The cost of something is what you give up to get it. • Rational people think at the margin. • People respond to incentives.
© 2007 Thomson South-Western Principle #1: People Face Trade-offs. • “There is no such thing as a free lunch!” © 2007 Thomson South-Western Principle #1: People Face Trade-offs. • To get one thing, we usually have to give up another thing. clothing • Leisure time v.
equity • Efficiency means society gets the most that it can from its scarce resources. Making decisions requires trading • Equity means the benefits of those resources are off one distributed goal fairly against among another. the members of society. © 2007 Thomson South-Western Principle #2: The Cost of Something Is What You Give Up to Get It.
• Decisions require comparing costs and benefits of alternatives. • Whether to go to college or to work? • Whether to study or go out on a date? • Whether to go to class or sleep in? • The opportunity cost of an item is what you give up to obtain that item. © 2007 Thomson South-Western Principle #2: The Cost of Something Is What You Give Up to Get It. • Basketball star LeBron James understands opportunity costs and incentives.
He chose to skip college and go straight from high school to the pros where he earns millions of dollars. © 2007 Thomson South-Western Principle #3: Rational People Think at the Margin. • A person is rational if she systematically and purposefully does the best she can to achieve her objectives • Many decisions are not “all or nothing,” but involve marginal changes - small, incremental adjustments to an existing plan of action. People make decisions by comparing costs and benefits at the margin.
© 2007 Thomson South-Western Principle #3: Rational People Think at the Margin. • Examples: • A student considers whether to go to college for an additional year, comparing the fees & foregone wages to the extra income he could earn with an extra year of education. • A firm considers whether to increase output, comparing the cost of the needed labor and materials to the extra revenue. © 2007 Thomson South-Western Principle #4: People Respond to Incentives.
• Marginal changes in costs or benefits motivate people to respond. • The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! © 2007 Thomson South-Western A C T I V E L E A R N I N G 1: Exercise • You are selling your old car. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? • A.
Blue book value is $6500 if transmission works, $5700 if it doesn’t • B. Blue book value is $6000 if transmission works, $5500 if it doesn’t © 2007 Thomson South-Western HOW PEOPLE INTERACT • Trade can make everyone better off. • Markets are usually a good way to organize economic activity. • Governments can sometimes improve economic outcomes.
© 2007 Thomson South-Western Principle #5: Trade Can Make Everyone Better Off. • Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. • Countries also benefit from trade & specialization: • get a better price abroad for goods they produce • buy other goods more cheaply from abroad than could be produced at home © 2007 Thomson South-Western Principle #6: Markets Are Usually a Good Way to Organize Economic Activity. • A market is a group of buyers and sellers.
• A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. • Households decide what to buy and who to work for. • Firms decide who to hire and what to produce. © 2007 Thomson South-Western Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.
• Famous insight by Adam Smith in The Wealth of Nations (1776): “Each of these households and firms acts as if “led by an invisible hand” to promote general economic well- being.” => prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole. © 2007 Thomson South-Western Principle #7: Governments Can Sometimes Improve Market Outcomes. • Markets work only if property rights are enforced. • Property rights are the ability of an individual to own and exercise control over a scarce resource • Market failure occurs when the market fails to allocate resources efficiently.
• When the market fails (breaks down) government can intervene to promote efficiency and equity. © 2007 Thomson South-Western Principle #7: Governments Can Sometimes Improve Market Outcomes. • Market failure may be caused by: • an externality (ngoại tác), which is the impact of one person or firm’s actions on the well-being of a bystander. • market power, which is the ability of a single person or firm to unduly influence market prices (ex.
=> Govt: use tax, welfare, law…to improve market outcomes © 2007 Thomson South-Western HOW THE ECONOMY AS A WHOLE WORKS • A country’s standard of living depends on its ability to produce goods and services. • Prices rise when the government prints too much money. • Society faces a short-run trade-off between inflation and unemployment. © 2007 Thomson South-Western Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
• Standard of living may be measured in different ways: • By comparing personal incomes. • By comparing the total market value of a nation’s production. • Almost all variations in living standards are explained by differences in countries’ productivities. © 2007 Thomson South-Western Principle #9: Prices Rise When the Government Prints Too Much Money.
• Inflation is an increase in the overall level of prices in the economy. • One cause of inflation is the growth in the quantity of money. • When the government creates large quantities of money, the value of the money falls. © 2007 Thomson South-Western Principle #10: Society Faces a Short-run Trade- off between Inflation and Unemployment.
• The Phillips Curve illustrates the trade-off between inflation and unemployment: • Inflation or Unemployment • It’s a short-run trade-off! • The trade-off plays a key role in the analysis of the business cycle—fluctuations in economic activity, such as employment and production © 2007 Thomson South-Western Inflation and Unemployment in Election Years year U rate inflation rate elec.4% Bush II (R) © 2007 Thomson South-Western Economics Microeconomics issues Macroeconomics issues How much income will a How much will a consumer country save? spend on food? What is the appropriate How much leisure time will exchange rate between consumers enjoy? currencies? How much output will a firm What will happen if taxes produce? are raised? How much R&D will a What will the company undertake? unemployment rate be? © 2007 Thomson South-Western Microeconomics and Macroeconomics • Microeconomics focuses on the individual parts of the economy. • How households and firms make decisions and how they interact in specific markets • Macroeconomics looks at the economy as a whole. • Economy-wide phenomena, including inflation, unemployment, and economic growth Question: within 10 principles, which ones are for Micro? Macro? © 2007 Thomson South-Western GAME Go to booklet.com with given code to play games © 2007 Thomson South-Western ECONOMICS Every field of study has its own terminology ▪ Mathematics • integrals ❖ axioms ❖ vector spaces ▪ Psychology • ego ❖ id ❖ cognitive dissonance ▪ Economics • supply ❖ opportunity cost ❖ elasticity ❖ consumer surplus ❖ demand ❖ comparative advantage ❖ deadweight loss © 2007 Thomson South-Western The Scientific Method: Observation, Theory, and More Observation • Uses abstract models to help explain how a complex, real world operates. • Develops theories, collects and analyzes data to evaluate the theories.
© 2007 Thomson South-Western The Role of Assumptions • Economists make assumptions in order to make the world easier to understand. • The art in scientific thinking is deciding which assumptions to make. • Economists use different assumptions to answer different questions. © 2007 Thomson South-Western Economic Models • Economists use models to simplify reality in order to improve our understanding of the world.
• Examples of model: Human anatomy model Airplane model Econnomic model © 2007 Thomson South-Western Economic Models • Two of the most basic economic models are: • The Circular Flow Diagram • The Production Possibilities Frontier © 2007 Thomson South-Western Our First Model: The Circular-Flow Diagram • The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.