MICROECONOMICS: Theory & Applications Chapter 1: An Introduction to Microeconomics By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 11th Edition, Copyright 2012 PowerPoint prepared by Della L. Sue, Marist College Copyright 2012 John Wiley & Sons, Inc.

Learning Objectives Convey the scope of microeconomic theory and explain why theory, in general, is essential to understanding and predicting real-world outcomes. Distinguish between positive and normative analysis. Differentiate between real and nominal prices. Introduce the concept of opportunity cost and explain how economic costs differ from accounting costs. Show how a production possibility frontier graphically depicts the basic assumptions economists make about market actors as well as the concept of opportunity cost. Copyright 2012 John Wiley & Sons, Inc.

The Scope of Microeconomic Theory “micro-” derives from the Greek word “mikros-” focuses on the behavior of individuals as fundamental decision makers in a society also referred to as “price theory” Copyright 2012 John Wiley & Sons, Inc.

The Nature and Role of Theory A theory shows how facts are related to one another. Theory is based on certain assumptions. Theory can be used to predict as well as explain real-world outcomes. “Good” theory – a theory that successfully explains and predicts the phenomena that it is intended to explain and predict. Copyright 2012 John Wiley & Sons, Inc.

Positive versus Normative Analysis Positive analysis – assessment of expected objective outcomes; draws on accepted rules of logic and evidence Normative analysis – a nonscientific value judgment; subjective Copyright 2012 John Wiley & Sons, Inc.

Market Analysis and Real versus Nominal Prices Markets – the interplay of all potential buyers and sellers of a particular commodity or service Nominal price – absolute price, not adjusted for the changing value of money Real price - nominal price adjusted for the changing value of money Copyright 2012 John Wiley & Sons, Inc.

Table 1.1 Source Copyright 2012 John Wiley & Sons, Inc.

Basic Assumptions about Market Participants Goal-oriented – market participants are interested in fulfilling their own, personal goals Rational behavior – behavior is based on a careful, deliberate process that weighs expected benefits and costs Scarce resources – availability of resources is insufficient for individuals to satisfy all desires Copyright 2012 John Wiley & Sons, Inc.

Opportunity Cost Explicit costs – money used in the pursuit of a goal that could otherwise have been spent on an alternative objective Implicit costs – costs associated with the individual’s use of his or her own time Economic cost (aka “opportunity cost”) = explicit costs + implicit costs Copyright 2012 John Wiley & Sons, Inc.

Other Costs Accounting costs = costs reported in companies’ net income statements generated by accountants Sunk costs = costs that have already been incurred and are beyond recovery Copyright 2012 John Wiley & Sons, Inc.

Production Possibility Frontier A depiction of all the different combinations of goods that a rational actor with certain personal goals can attain with a fixed amount of resources Constant versus increasing per-unit opportunity cost – effect on shape of PPF Copyright 2012 John Wiley & Sons, Inc.

Figure 1.1 - A Production Possibility Frontier (PPF) Copyright 2012 John Wiley & Sons, Inc.

Figure1.2 - The Typical-Case PPF: Concave to the Origin Copyright 2012 John Wiley & Sons, Inc.

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