Welcome to the world of Microeconomics Actually it is your world, yes the one in which you live.

Lets get started with chapter 1 Gross Domestic Product (GDP)--This term represents a measurement of the value of all goods and services produced in an economy during a specified time period. This time period could be a year, six months, three months, or even one month. It only measures finished goods and services. Goods in process and intermediate goods, are not counted nor is the sale of a used car.

Prices are important to us as individuals. Prices determine the perceived value placed on an item available for sale. But how do we know if a price is too high or extremely low? What determines if it is a fair price or if prices are truly rising or falling over time?

Nominal vs Relative prices Nominal Price means the actual price shown on the price tag. Relative price is the price of one good compared to the price of another good.

Relative Price In each box to the left is a trumpet. Both brands are basically the same. The Conn is a brand name trumpet with a high quality sound. The Thor trumpet is a private label brand with good quality sound. Conn Thor

Nominal vs Relative Prices In the case of the two trumpets, the nominal price of each are: Conn $600, Thor $200. Relatively speaking the Conn trumpet costs three times as much as the Thor. Which do you purchase? That depends on you and all the factors that you must consider. After careful consideration, you will choose the trumpet that will provide you the maximum benefit per dollar given up.

It is important to make this distinction between nominal and relative prices. You have heard people say, for example, “when we got married in 1958 our rent was only $60 per month.” You begin to think, wow if only I had a $60 per month rent payment instead of a $400 per month rent payment. However relatively speaking, you may be paying more, the same or even less then this couple was in We must adjust for inflation.

Inflation and Inflation Rate Two terms you have heard before today, I’m sure. Inflation is an increase in the overall price level. The inflation rate is inflation expressed as a percent and represents the percentage increase in the overall price level.

Think back to the meaning of Gross Domestic Product In GDP was 2,784 and was 5,744 ten years later in 1990 and 7,576 in According to these numbers the United States total value of all newly produced goods and services has increased with each date presented. Is this true?

Possibly It is true, nominally speaking. GDP has risen over the time period presented. However, economists must correct the GDP for inflation (the rise in the overall price level) to acquire the real GDP, which is a more accurate figure for comparison. This adjustment will be presented later in your studies.

What is a market? Your text defines a market as “an arrangement by which economic exchange between people take place.” Wow! But what does that mean?

The term market is often presented as though it is easy to define and it has definite boundaries. Would a buyer of lumber be considered in the same market as a buyer of concrete? Possibly, if the buyer was in the construction industry then the person might purchase the lumber for the structure and the concrete for the foundation.

The point is that it is very difficult to exactly define who is and who is not in a market. But we can state that when an exchange between a buyer and a seller take place, they are in the same market. Examples of a marketplace include: A retail store, your home, the Internet, and the back alley. Anywhere goods and services are exchanged. The goods and services may be considered legal or illegal by law, but when they are exchanged it is still a market.

So what is a resource? Anything of use is a resource. Whether legal or illegal it is a resource. Money, clothes, compact discs, cars, buildings, drugs, and counterfeit money are all examples of resources. The study of economics breaks all resources into four categories. These resources are called the factors of production.

Factors of Production LAND LABOR CAPITAL ENTREPRENEURSHIP It takes each of the factors for a business and an economy to operate. Remove any one and the business cannot function.

LAND Land includes all natural resources. It is the soil, what is under the soil (i.e. minerals and water), and what is above the soil (i.e. timber)

LABOR The human aspect in a society. It encompasses both the physical efforts and also the intellectual services of people.

CAPITAL Items used to produce something else. Money, equipment, buildings, and vehicles are all examples of capital.

ENTREPRENEURSHIP This is the willingness to take risks. If it were not for the risk taker, the entrepreneur, business would not start, grow, prosper, or fail. Someone must be willing to take the chance.

Incomes for each resource Land Labor Capital Entrepreneurship Rent Wages Interest Profit

Most macroeconomic textbooks, unless they were written by microeconomic theorist, do not include entrepreneurship as a factor of production. However, it is my opinion that I would be remiss if we did not include entreprenueruship. The return for the risk taking is profit and that is how business leaders base most of their reactions regarding economic policy.

Economic models Economists use models, or theories, to explain how the economy works. Economists must hold constant the “rest of the world” in order to study correlations and make predictions regarding specific variables within a dynamic world.

Ceteris Paribus This is a Latin term meaning everything else held constant. In order for us to study society, it is important that we hold variables constant to determine the effect of a specific variable.

Micro vs Macro Microeconomics is the study of economics at the level of the individual. Macroeconomics is the study of the economy as a whole.

You have completed chapter 1. You are ready to open the next presentation. Unit 1 Chapter 1 Appendix open file