1. 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

2. 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

3. 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

4. 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

5. Positive Versus Normative Analysis
Positive analysis – assessment of expected objective outcomes; objective
Normative analysis – a nonscientific value judgment; subjective
John Wiley & Sons, Inc.
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6. 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

7. Table 1.1: Nominal and Real Price Changes, 1983 to 2005
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8. 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

9. 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

10. 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

11. 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
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John Wiley & Sons, Inc.
Copyright 2006