Chapter 1 Preliminaries 1

Economics Economics is the study of production and consumption of goods and services with the utilization of minimum resources. Economics is divided into three school of thoughts: Classical School of Thought Neo-Classical School of Thought Modern Economics Chapter 1: Preliminaries

Classical School of thought The Scotland economist Adam Smith was first economist who gave the idea and define the economics as “Economics is the study of production or earning of money, distribution and interchange of money”. Many other economists support this idea e.g. J.S. Mill, Recordo and Walker of American Economist. But after the some time many people put objection on this idea and named it the knowledge of diamal sciences and pig philosophy. Chapter 1: Preliminaries

Neo-Classical School of Thought Due to the objection on Adam Simith idea and his followers then Dr. Marshal introduce the economics as “it is the knowledge of welfare and named it welfare economics” After that Prof. Robens and many other economists objected that this definition limited that only cover the concept of human welfare. Chapter 1: Preliminaries

Modern Economics According to Prof. Robens “Economics is the knowledge of human behavior and relationship between interchange of goods or services to get maximum benefit under the utilization of minimum resources” According to Keynes “Economics is the knowledge which give the opportunities of earnings due to the utilization of minimum resources and enhance the income of the economy” Chapter 1: Preliminaries

Preliminaries Microeconomics deals with: Behavior of individual units When Consuming How we choose what to buy When Producing How we choose what to produce Chapter 1: Preliminaries 4

Preliminaries The Linkage Between Micro and Macro-economics Microeconomics is the foundation of macroeconomic analysis Chapter 1: Preliminaries 7

Theories and Models Microeconomic Analysis Models: a mathematical representation of a theory used to make a prediction. Chapter 1: Preliminaries 9

Positive Versus Normative Analysis Positive Analysis Positive analysis is the use of theories and models to predict the impact of a choice. Normative Analysis Normative analysis addresses issues from the perspective of “What ought to be?” A normative statement expresses a judgment about whether a situation is desirable or undesirable Chapter 1: Preliminaries 11

What is a Market? Markets Markets vs. Industries The interaction of consumers and producers A geographically defined area where buyers and sellers interact to determine the price of a product or a set of products. Markets vs. Industries Industries are the supply side of the market. Chapter 1: Preliminaries 17

What is a Market? Arbitrage Buying a product at a low price in one location and selling at a high price in another Chapter 1: Preliminaries 18

What is a Market? Competitive vs. Noncompetitive Markets Because of the large number of buyers and sellers, no individual buyer or seller can influence the price. Example: Most agricultural markets Noncompetitive Markets Markets where individual producers can influence the price. Chapter 1: Preliminaries 19

What is a Market? Market Price Competitive markets establish one price. Noncompetitive markets may set many prices for the same product. Chapter 1: Preliminaries 21

Real Versus Nominal Prices Nominal price is the absolute or current dollar price of a good or service when it is sold. Real price is the price relative to an aggregate measure of prices or constant dollar price. Chapter 1: Preliminaries 22

Real Versus Nominal Prices Calculating Real Prices Chapter 1: Preliminaries 25

An Example: Calculating the Real Price of Milk Nominal Price Real Price of Milk Year of Milk CPI in 1970 dollars 1970 .40 38.8 .40 = 38.8/38.8 x .40 1980 .65 82.4 .31 = 38.8/82.4 x .65 1999 1.05 167.0 .24 = 38.8/167.0 x 1.05 Chapter 1: Preliminaries 26

Calculating Real Prices: An Example - Eggs & College 1970 1975 1980 1985 1990 1998 Consumer Price Index (1983) 38.8 53.8 82.4 107.6 130.7 163.0 Nominal Prices Grade A Large Eggs $0.61 $0.77 $0.84 $0.80 $0.98 $1.04 College Education $2,530 $3,403 $4,912 $8,156 $12,800 $19,213 Real Prices ($1970) Grade A Large Eggs $0.61 $0.56 $0.40 $0.29 $0.30 $0.25 College Education $2,530 $2,454 $2,313 $2,941 $3,800 $4,573 Chapter 1: Preliminaries 23

Summary Microeconomics is concerned with the decisions made by small economic units. Microeconomics relies heavily on the use of theory and models. Chapter 1: Preliminaries 30

Summary The market price is established by the interaction of buyers and sellers. A market’s geographic boundaries and range of products must be defined. To reduce the effects of inflation we measure real prices, rather than nominal prices. Chapter 1: Preliminaries 31

Thanks 1