1 Microeconomics Lecture 1 Institute of Economic Theories - University of Miskolc Mónika Kis-Orloczki Assistant lecturer

2 Four main reasons to study economics: to learn a way of thinking, to understand society, to understand global affairs, and to be an informed voter. The nature and scope of economics Economics is a social science which seeks to explain the economic basis of human societies. Economics deals with the decision alternatives of economic actors and with the social consequences of each decision.

3 Cause of decision: necessity ≠ possibility Necessity: need for the consumption and use of goods and services, which appears as a lack..Need: Need and necessity are not the same concepts. Needs may include desires as well, which cannot be satisfied under existing economic conditions..Possibilities: are resources, which are available for satisfying needs. Possibilities in economics are determined by economic resources. NECESSITY > POSSIBILITY almost limited unlimitedscarce

4 Economics = science of choices and decisions Economics is the study of how scarce resources are allocated among competing uses. Basic questions: –What to produce –How we produce it –For whom to produce

5 To learn a way of thinking Opportunity cost: The best alternative that we forgo, or give up, when we make a choice or a decision. Marginalism: The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.

6 Place of economics in the system of sciences Main aspects for the classifications of sciences: verification According to verification –logical, –empirical (e.g. economics). topic According to topic –nature, –society (e.g. economics). function According to function –theoretical (e.g. microeconomics, macroeconomics and international economics), –applied: - functional (e.g. finance), - sectorial (e.g. industrial economics). relationship with politics According to relationship with politics normative positive economics

7 Levels: Microeconomics analyses the individual decision alternatives of the economic actors (consumers, firms, workers, and investors) Macroeconomics analyses the economy as an aggregate, on national economy level. (the level and growth rate of national output, interest rates, unemployment, and inflation.) International economics analyses causes and effects of real and financial relationships between national economies.

8 Most important methods of economics Measurement: It means the description of processes, drawing conclusions, generally aimed at quantification. Modelling: Models show the most typical features and working mechanisms of economic processes using an analogy in a different medium. Simplified representations of the real world. Economic models attempt to focus on what is relevant to the problem at hand and omit what is not. –Assumptions: The set of circumstances in which a model is applicable. Every model, or theory, must be based on a set of assumptions. –Ceteris paribus assumption (all else equal) A device used to analyze the relationship between two variables while the values of other variables are held unchanged. Analysis, testing and evaluation.

9 The market System of exchange relationships between potential buyers and sellers. The area where buyers and sellers meet, where the exchange happens. Market actors: –Buyers –Sellers Features of the market –A democratic institute, –Measurement by equal standards, –Competition, concurrence, –Participants depend on each other.

10 According to market characters market of goods, market of labour, money and capital market. According to market area local, national, international or world market. According to market formations free trade where norms are established norm-follower market, which is not a perfectly competitive market

11 Modelling the market D= demand function: shows the quantities demanded by the buyers belonging to different prices and a given income. Formula: D = f / P / S= supply function: shows the quantities offered by producers for selling at different prices. Formula: S = f / P /

12 Deducting the market demand curve Conditions of the model Income is given and will not change at the beginning, Market price influences the demanded quantities; price and quantity are in inverse relationship, We examine the demand of one product and of one /ordinary/ consumer,.We assume that the consumer will raise his purchases by one unit as the price falls. Price, P Quantity, Q D P1P1 Q1Q1 P2P2 Q2Q2

13 Deducting the market supply curve Conditions the quantity to be sold is given, the owners are not willing to sell their products at any price, we analyse the market supply of one product at first. S Price, P Quantity, Q P1P1 Q1Q1 P2P2 Q2Q2

14 Conclusions Market supply can be modelled in the dimension of the quantity of one product and the price. Supply function can be used to model the aggregate market supply as well. Between the market price and the quantity to be sold there is a direct proportionality as far as normal goods are concerned. An individual’s demand for a product and the market demand for a group of products and their relationship with the price can be modelled by the demand function. We assume a continuous change of the price, and that a demanded quantity belongs to every price, which results in a continuous demand curve, The function shows an inverse proportionality between the changing of the price and the demanded quantities as far as normal goods are concerned..If the consumer’s income changes, we will arrive at another demand function.

15 Market equilibrium Model of the market’s working mechanism In a market in the state of oversupply the equilibrium will be established by a fall in the market price. In a market in the state of excess demand the equilibrium will be established by an increase in the market price. P1P1 S Price, P Quantity, Q D P*P* Q*Q* P2P2 Excess supply Excess demand

16 The price’s role in the market’s working mechanism orientation of market actors, provides buyers with information about the price ratios of substituting products, inspires market actors to rational decision- making, keeps the market moving.

17 Shifts of the demand and supply curves A variety of other factors may change the entire price–quantity relationship: –Consumers’ income –Prices of related goods (Substitutes and complements) –Tastes and preferences –Expectations about future prices –The number of consumers in the market Factors that affect the supply of a good: –Prices of inputs (such as wages) –Technology –Natural disruptions (such as bad weather) –The number of firms in the market –Expectations –Government policies

18 Changes in the market resulting from an increase (decrease) of demand by an unchanged supply function the equilibrium price will rise (fall), producers’ income will rise (fall), buyers’ expense will rise (fall) considering the product. By an increase in supply and an unchanged demand the new market equilibrium price will be established at a lower price, by a decrease in supply and an unchanged demand the new market equilibrium price will be established at a higher price.

19 a b P1P1 P2P2 D Price, P Quantity, Q Q2Q2 Q1Q1 Geometry of Consumer Surplus It measures the amount a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay. It can be derived from the market demand curve.