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Intro to Microeconomics

economics - social science studying behavior/interaction 

  • microeconomics - behavior of individual economic units
    • how units interact to form larger units (consumers/owners >> markets/industries)
  • about making tradeoffs, choices
  • originally about how to allocate resources to increase nation’s wealth (optimization)
  • tradeoffs made for best/optimum output (balance between everything)
    • use capital or labor? invest in machines or labor?
    • lower price >> sell more >> less profit per unit
    • higher price >> sell less >> more profit per unit
    • making the most out of given limits
  • consumer theory - how consumers maximize preferences
    • limited income/time, how/when to consume
    • job security vs advancement
    • labor vs leisure
  • producer theory - how firms maximize profits, how/when/what to produce
    • statistics/econometrics - tests accuracy of predictions/models

economic variables - stocks vs flows 

  • flow variables - measured per unit of time (ie income)
    • production/consumption - units made/consumed annually
  • stock variables - not measured w/ respect to time
    • price, wealth, inventories
  • expenditure = total price = unit price x consumption
  • revenue = unit price x production
  • consumption = expenditure / price index
  • price index = cost of materials
  • nominal price - absolute/current dollar price of good/service when it is sold
  • real price - price relative to others in relation to time, corrects for inflation
    • consumer price index ( CPI ) - measures aggregate prices altogether, computed from wide market
    • CPI percent changes = rate of inflation
    • real price = CPIbase year / CPI current year x nominal price

theories - used to explain observations w/ set of basic rules/assumptions 

  • used to make predictions
  • quality of predictions >> validity of theory
  • tested by conducting experiments, comparing data
  • imperfect, but gives insight into observations
  • models - created from theories
    • mathematical representations used to make quantitative predictions
  • positive analysis - statements describing cause/effect
    • deals w/ explanation/prediction
  • normative analysis - questions what should happen
    • tries to find best potential scenario, deals more w/ comparison
Subject X2: 

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