MICROECONOMICS ECS201 WELCOME

WHAT ARE WE DOING TODAY? Who am I? What to do and not to do Means of communication ADC services Unisa Analyze your study skills What do you see? Chapter 1 Chapter 2 Questions

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Preliminaries What is Microeconomics? Chapter 1 Preliminaries What is Microeconomics?

Outcomes Nature and importance of microeconomics The workings of a market Real and Nominal prices

International Economics Microeconomics Macroeconomics Public Economics Monetary Economics Finance Economics Development Economics International Economics

WHAT IS MICROECONOMICS? Equips us to answer questions Explain irregularity in our everyday lives Provide the background for other economic disciplines Knowledge of basic economic theory Application of basic economic theory Gain insight in social and economic events WHY? Help us predict what is likely to happen Make sense of solutions to answer questions on economic events. SA and other countries.

THEMES of microeconomics Trade-offs Prices and Markets Theories and Models Positive and Normative analysis Nature of Markets Real versus Nominal prices Why study Economics?

THEMES of microeconomics - Trade-offs Consumer Theory Optimal Trade-Off Consumers - Limited income - Trade-off for maximized well-being Workers - When to enter workforce - Work or education? Firms - What to produce? - Resource available Theory of the firm

Prices Markets Prices and Markets Trade-offs e.g. Labour: Work for pleasure Centrally planned economy = Prices set by government Market economy = Prices determined by consumers, workers, firms Prices Interactions to determine price Markets

LIMITED RESOURCES Theories = Explanations & Predictions THEORIES AND MODELS Theories = Explanations & Predictions Model = Mathematical representation

POSITIVE AND NORMATIVE ANALYSIS LIMITED RESOURCES POSITIVE AND NORMATIVE ANALYSIS Positive - Central to microeconomics - Explanations and predictions - Describe relationships of cause and effect Normative - Go beyond explanations and predictions - “What is best?” - Examine questions of what ought to be

MARKET Definition: Market = More than an industry Collection of buyers and sellers Through actual or potential interactions Determine price of a product Or, set of products Market = More than an industry Industry: Collection of firms that sell same/closely related products. Potential interactions & actual interactions Arbitrage: Significant difference in price of commodity Practice of buying low @ one location & sell high at another location

MARKET Competitive market Noncompetitive market Market price: Perfectly competitive: Many buyers and sellers e.g. agricultural markets Noncompetitive market Many producers Cartel: Group of producers act collectively Market price: Competitive market = Single price = market price Not perfectly competitive = Different prices Average price = Market price

MARKET Market Definition: Extent of the market: Buyers and sellers Extent of the market: Determine which buyers and sellers Boundaries of a market Geographical and i.t.o. range of products Market definition importance: Understand who is actual and potential competitors Public policy decisions

REAL VS NOMINAL PRICES Nominal prices: Real prices: Absolute price “Current-dollar” Real prices: Price relative to aggregate measure of prices “Constant-dollar” Consumer Price Index Producer Price Index

IMPOTANT CONCEPTS IMPORTANT CONCEPTS CETERIS PARIBUS EQUILIBRIUM Assumption used when designing models. Meaning: All variables other than the one economist use will remain unchanged. Latin expression: “All other things being equal” EQUILIBRIUM Important in economic theory A situation, once it has been reached, tends to persist All factors in balance.

IMPOTANT CONCEPTS IMPORTANT CONCEPTS PRICES RATIONAL INDIVIDUALS MACRO = Absolute prices i.e. price of goods and services MICRO = Relative prices i.e. relationship between price in question and price of other products RATIONAL INDIVIDUALS Behave rationally Well off given limitations MALE OR FEMALE? “He” merely used for practical reasons