MICROECONOMICS:Theory & Applications Chapter 1 An Introduction to Microeconomics By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 9th Edition, copyright 2006 PowerPoint prepared by Della L. Sue, Marist College

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. John Wiley & Sons, Inc. Copyright 2006

The Scope of Microeconomic Theory “micro-” derives from the Greek word “mikros-” focuses on the behavior of individuals as fundamental decisionmakers in a society. also referred to as “price theory”. John Wiley & Sons, Inc. Copyright 2006

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. John Wiley & Sons, Inc. Copyright 2006

Positive Versus Normative Analysis Positive analysis – assessment of expected objective outcomes; objective Normative analysis – a nonscientific value judgment; subjective John Wiley & Sons, Inc. Copyright 2006

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 John Wiley & Sons, Inc. Copyright 2006

Table 1.1: Nominal and Real Price Changes, 1983 to 2005 John Wiley & Sons, Inc. Copyright 2006

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 John Wiley & Sons, Inc. Copyright 2006

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 John Wiley & Sons, Inc. Copyright 2006

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 John Wiley & Sons, Inc. Copyright 2006

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 Figure 1.2 John Wiley & Sons, Inc. Copyright 2006

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