ECON 201 FALL 2015 Introduction to Microeconomics

WHAT IS ECONOMICS? IT IS ALL ABOUT THE INCENTIVES!!!

WHAT IS ECONOMICS? IT IS ALL ABOUT THE INCENTIVES!!!  Who’s Incentives?  Buyers and Sellers of Goods in the Product Market we are analyzing/modeling  Why Incentives?  Because that is what these participants are responding to  What are Incentives?  Prices of the good, similar goods, income, product quality, costs of production, profits, personal value of the good ….

WHAT IS ECONOMICS?  You may not like the market’s outcome:  NYTimes: Drug (Daraprim) Goes From $13.50 a Tablet to $750, Overnight  Turing’s price increase is not an isolated example. While most of the attention on pharmaceutical prices has been on new drugs for diseases like cancer, hepatitis C and high cholesterol, there is also growing concern about huge price increases on older drugs, some of them generic, that have long been mainstays of treatment. Turing’s price increase is not an isolated examplediseases like cancerhepatitis Ccholesterolconcern about huge price

WHAT IS ECONOMICS?  But to change the outcome  You need to change the drug manufacturer’s and CEO’s incentives  Need to model the market for the drug to be able to assess what factors drove this result and how changing the factors affect the drug’s price  No competitors -> firm has market power (monopoly)  High start-up costs (fixed costs of the plant)  Government manufactures drug, price controls, subsidizing initial costs of new entrants

ECONOMICS?  Two major branches of economics 1. Microeconomics  Study of how individual markets operate  How/why consumers and producers of goods interact to determine  What is produced, how much, at what price 2. Macroeconomics  Focuses on the performance of the national economy ( sum of all markets)  Gross National Product (aggregate of all goods)  Unemployment/employment, inflation, interest rate  Other major factors affecting them (Fed’s monetary policy, taxes, budget surpluses/deficits, international trade – exchange rates)

WHAT WE ARE MODELING IN MICRO Circular Flow – Micro (1 Market) Model of the Economy

A MODEL OF CONSUMER DEMAND First Law of Demand: As Price of Good X Decreases Quantity Demanded of Good X Increases (and vice versa) – other factors held constant

A MODEL OF A FIRM’S SUPPLY DECISION First Law of Supply: Quantity Supplied Increases as Price Increases (other factors held constant)

A MICRO MODEL DEMAND & SUPPLY – 1 GOOD

MACRO Macroeconomics, on the other hand, looks at the big picture (hence "macro"). It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world. For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not necessarily a bad thing. Thus, for an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels.

MACRO MODELING A BIT MORE COMPLEX

MACRO’S DEMAND AND SUPPLY MODEL Keynesian Aggregate Demand & Supply (Hick’s) AD = C + I + G + NX Effects of an Economic Recession

OR IN EQUATION FORM

BASIC MICROECONOMIC MODELS  Demand for a Product  Supply of a Product  Market Demand/Supply and Equilibrium  Production Function  Cost Function  Production Possibilities Frontier

HOW DO WE DO IT? s/textbooks/boundless-economics- textbook/principles-of-economics- 1/economic-models-43/economic- models /

SOME BASIC MICRO MODELS

A SIMPLE DEMAND MODEL

SUPPLY CURVE BASED ON COST OF PRODUCTION

FINDING EQUILIBRIUM THE PRICE THAT EQUATES QTY SUPPLIED AND QTY DEMANDED