Fernando & Yvonn Quijano Prepared by: Preliminaries 1 C H A P T E R Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.

Chapter 1: Preliminaries 2 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. CHAPTER 1 OUTLINE 1.1The Themes of Microeconomics 1.2What Is a Market? 1.3Real versus Nominal Prices 1.4Why Study Microeconomics?

Chapter 1: Preliminaries 3 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. Preliminaries ● microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise. ● macroeconomics Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation.

Chapter 1: Preliminaries 4 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. THE THEMES OF MICROECONOMICS 1.1 Trade-Offs Consumers Workers Firms Consumers have limited incomes, which can be spent on a wide variety of goods and services, or saved for the future. Workers also face constraints and make trade-offs. First, people must decide whether and when to enter the workforce. Second, workers face trade-offs in their choice of employment. Finally, workers must sometimes decide how many hours per week they wish to work, thereby trading off labor for leisure. Firms also face limits in terms of the kinds of products that they can produce, and the resources available to produce them.

Chapter 1: Preliminaries 5 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. Barter( 물물교환 ) by Sara Teasdale ( 장영희 역 ) “Life will not give but she will sell” Life has loveliness to sell, All beautiful and splendid things; Blue waves whitened on a cliff.., And children's faces looking up, Holding wonder like a cup. Music like a curve of gold, Scent of pine trees in the rain, Eyes that love you, arms that hold… Give all you have for loveliness; Buy it, and never count the cost… And for a breath of ecstasy, Give all you have been, or could be. 삶은 아주 멋진 것들을 팝니다. 모두 아름답고 훌륭한 것들이죠. 벼랑에 하얗게 부서지는 푸른 파도 잔처럼 경이로움을 가득 담고 쳐다보는 아이들의 얼굴들. 금빛 줄기처럼 휘어지는 음악소리. 비에 젖은 솔 내음새 당신을 사랑하는 눈매, 보듬어 안는 팔들, 전재산을 털어 아름다움을 사세요. 사고나서는 값을 따지지 마세요. 한 순간의 환희를 위해 당신의 모든 것을 바치세요.

Chapter 1: Preliminaries 6 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. 1.1 Prices and Markets Microeconomics describes how prices are determined. In a centrally planned economy, prices are set by the government. In a market economy, prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good. THE THEMES OF MICROECONOMICS

Chapter 1: Preliminaries 7 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. 1.1 Theories and Models In economics, explanation and prediction are based on theories. Theories are developed to explain observed phenomena, and examining ideal states, in terms of a set of basic rules and assumptions. A model is an abstraction of real world of complexities with a purpose of focusing on important matters. Positive versus Normative Analysis ● positive analysis Explaining observed phenomena by analyzing the relationships of cause and effect. ● normative analysis Examining ideal states by asking the questions of what ought to be. THE THEMES OF MICROECONOMICS

Chapter 1: Preliminaries 8 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. WHAT IS A MARKET? 1.2 ● market Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. ● market definition Determination of the buyers, sellers, and range of products that should be included in a particular market. ● arbitrage Practice of buying at a low price at one location and selling at a higher price in another.

Chapter 1: Preliminaries 9 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. 1.2 Competitive versus Noncompetitive Markets Market Price ● perfectly competitive market Market with many buyers and sellers, so that no single buyer or seller has a significant impact on price. ● market price Price prevailing in a competitive market. WHAT IS A MARKET?

Chapter 1: Preliminaries 10 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. 1.2 Market Definition—The Extent of a Market ● extent of a market Boundaries of a market, both geographical and in terms of range of products produced and sold within it. Market definition is important for two reasons: A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future. Market definition can be important for public policy decisions. WHAT IS A MARKET?

Chapter 1: Preliminaries 11 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. 1.2 In 1990, the Archer-Daniels-Midland Company (ADM) acquired the Clinton Corn Processing Company (CCP). The U.S. Department of Justice (DOJ) challenged the acquisition on the grounds that it would lead to a dominant producer of corn syrup with the power to push prices above competitive levels. ADM fought the DOJ decision, and the case went to court. The basic issue was whether corn syrup represented a distinct market. ADM argued that sugar and corn syrup should be considered part of the same market because they are used interchangeably to sweeten a vast array of food products. WHAT IS A MARKET?

Chapter 1: Preliminaries 12 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e Moohak- Daesun (2002) –Moohak is a local soju producer in Kyungnam province, while Daesun is a local producer in adjacent Busan area. –Both are dominant in each region, and almost close to a monopolistic position with market shares more than 80%. –But they are fringe firms in national market with market shares less than 10%. Jinro is a national producer with more than 50%. –KFTC defining the relevant markets as the two regions, made an injunctive order of shares disposal in –Seoul high court, evaluating confronting economic analyses on the relevant geographic market, made a final decision upholding the KFTC’s decision in Jeon (2004) submitted economic analyses which confirmed the KFTC’s market definition.

Chapter 1: Preliminaries 13 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e Hite-Jinro (2005) –Hite and Jinro are dominant companies in Korean beer and soju market, respectively – each with market share more than half. –Opposing parties argued that beer and soju constitute a single product market relevant to antitrust merger evaluation, so-called “pub alcoholic drink ( 大衆酒 ).” –KFTC concluded that beer and soju are separate product markets, and approved the merger with some transitory corrective remedies attached. Jeon-Kim-Park-Yoon (2005) submitted KFTC several economic analyses to support that beer and soju are separate product markets

Chapter 1: Preliminaries 14 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. REAL VERSUS NOMINAL PRICES 1.3 ● nominal price Absolute price of a good, unadjusted for inflation. ● real price Price of a good relative to an aggregate measure of prices; price adjusted for inflation. ● Consumer Price Index Measure of the aggregate price level for final consumption goods ● Producer Price Index Measure of the aggregate price level for intermediate products and wholesale goods.

Chapter 1: Preliminaries 15 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. Table 1.1 The Real Price of Eggs and of a College Education Consumer Price Index Nominal Prices Grade A Large Eggs$0.61$0.84$1.01$0.91$1.64 College Education$2,530$4,912$12,018$20,186$27,560 Real Prices ($1970) Grade A Large Eggs$0.61$0.40$0.30$0.21$0.31 College Education$2,530$2,313$3,568$4,548$5, The real price of eggs in 1970 dollars is calculated as follows: REAL VERSUS NOMINAL PRICES

Chapter 1: Preliminaries 16 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. REAL VERSUS NOMINAL PRICES 1.3 The Minimum Wage In nominal terms, the minimum wage has increased steadily over the past 70 years. However, in real terms its expected 2010 level is below that of the 1970s. Figure 1.1

Chapter 1: Preliminaries 17 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. WHY STUDY MICROECONOMICS? 1.4 Corporate Decision Making: Ford’s Sport Utility Vehicles The design and efficient production of Ford’s SUVs involved not only some impressive engineering, but a lot of economics as well. First, Ford had to think carefully about how the public would react to the design and performance of its new products. Next, Ford had to be concerned with the cost of manufacturing these cars. Finally, Ford had to think about its relationship to the government and the effects of regulatory policies.

Chapter 1: Preliminaries 18 of 18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. WHY STUDY MICROECONOMICS? 1.4 Public Policy Design: Automobile Emission Standards for the Twenty-First Century The design of a program like the Clean Air Act involves a good deal of economics. First, the government must evaluate the monetary impact of the program on consumers. The government must determine how new standards will affect the cost of producing cars. Finally, the government must ask why the problems related to air pollution are not solved by our market-oriented economy.