Define Microeconomics: Individual units making decisions Purchasing power relative to prices and incomes How many to hire? Where to work? ULTIMATE PROBLEM: SCARCE RESOURCES SOLUTION: MAKING MOST OUT OF IT (ALLOCATION)

AGGREGATE? Collection of items that are gathered together

AGGREGATE OR INDIVIDUAL UNIT?

Or any individual entity (investors, owners, workers, consumers)

MICRO OR MACRO?  What determines the cost to a university of offering a new course?  What government policies should be adopted to make it easier for low-income students to attend college?  What determines the overall trade in goods, services and financial assets between the US and the rest of the world? MICRO MACRO

Define: trade-offs

Why trade? (1) Resources are scarce: optimum result (2) constraints: costs (requirements) Who trades? consumers workers firms Purchase or save Education = position Labor or leisure Produce or not (3) Prices of goods and services

I. What are theories? To explain observed phenomena in terms of rules and assumptions (models of quantitative predictions)

Describing relationships of cause and effect Questions what is best. (alternative policy options) Goes beyond explanation & prediction

MARKET? Collection of buyers and sellers Interact = determine price range Who are buyers and sellers? Consumers & firms as buyers? Consumers (workers) & firms as sellers? Supply & demand

Act of buying at a low price & selling at high price Same principle applied in stock market DIFFERENT PRICES OF THE SAME PRODUCT CAN BE PREVENTED BY: Arbitrer (French): to give judgment

Perfectly competitive market? Many buyers and sellers No single buyer or seller has a significant impact on price NOT perfectly competitive market? 2 firms charging different prices on the same product One firm tries to win customers

INFLATION OR DEFLATION?

NOMINAL VS REAL PRICE NOMINAL PRICE Unadjusted price of a good even on inflation REAL PRICE Price adjusted for inflation

WHAT HAPPENED TO YOUR NOMINAL WAGE AND REAL WAGE? WHICH ONE INCREASED?

WHOLESALE OR RETAIL?

WHOLESALER OR RETAILER?

INDEX FINGER?

It records how the cost of a large market basket of goods (retail) purchased by a typical consumer changes over time It records how prices at the wholesale level change over time

PERCENTAGE CHANGE IN REAL PRICE CPI NOMINAL PRICES Eggs$ 0.61$ 0.84$ 1.01$ 0.91$ 1.64 College Educ. $ 2530$ 4912$ 12,018$ 20, 186$ 27, 560 REAL PRICES Eggs$ 0.61$ 0.40$ 0.30$ 0.21$ 0.31 College Educ. $ 2530$ 2313$ 3568$ 4548$ 5196

COMPUTE FOR THE REAL PRICE OF EGGS:  Real price of eggs in Year1 = CPI(x) ______ x nominal price in (year 1) CPI (year1)  Real price of eggs in 1980 = CPI1970 _______Xnominal price in 1980 CPI _______x Real price of eggs in 1980 = 0.39 OR 0.40  And so forth

COMPUTE FOR THE % CHANGE IN REAL PRICE OF EGGS  Calculate the % change in real price of eggs in 1990  Base year is 1970 & the current year is (for instance) 2007  Real price of eggs in 1970 = CPI1990xNominal Price in 1970 CPI x = 2.05  Real price of eggs in 2007 = CPI1990xNominal Price in 2007 CPI x = 1.04  % change in Real Price = Real Price in 2007 – Real Price in 1970 Real Price in – = (x100) = - %49 (decline)

SEATWORK: COMPUTE FOR THE % CHANGE OF REAL PRICE IN EDUCATION  DID IT INCREASE OR DID IT DECLINE?