1. Introduction to Microeconomics
Econ 201 Summer 2016
Introduction to Microeconomics

2. IT IS ALL ABOUT THE INCENTIVES!!!
What is Economics?
IT IS ALL ABOUT THE INCENTIVES!!!

3. IT IS ALL ABOUT THE INCENTIVES!!!
What is Economics?
IT IS ALL ABOUT THE INCENTIVES!!!
Who’s Incentives?
Buyers and Sellers of Goods in the Product Market we are analyzing/modeling
Why Incentives?
Because that is what these participants are responding to
What are Incentives?
Prices of the good, similar goods, income, product quality, costs of production, profits, personal value of the good ….

4. What is Economics? You may not like the market’s outcome:
NYTimes: Drug (Daraprim) Goes From $13.50 a Tablet to $750, Overnight
Turing’s price increase is not an isolated example. While most of the attention on pharmaceutical prices has been on new drugs for diseases like cancer, hepatitis C and high cholesterol, there is also growing concern about huge price increases on older drugs, some of them generic, that have long been mainstays of treatment.

5. What is Economics? But to change the outcome
You need to change the drug manufacturer’s and CEO’s incentives
Need to model the market for the drug to be able to assess what factors drove this result and how changing the factors affect the drug’s price
No competitors -> firm has market power (monopoly)
High start-up costs (fixed costs of the plant)
Government manufactures drug, price controls, subsidizing initial costs of new entrants

6. Economics? Two major branches of economics 1. Microeconomics
Study of how individual markets operate
How/why consumers and producers of goods interact to determine
What is produced, how much, at what price
Macroeconomics
Focuses on the performance of the national economy ( sum of all markets)
Gross National Product (aggregate of all goods)
Unemployment/employment, inflation, interest rate
Other major factors affecting them (Fed’s monetary policy, taxes, budget surpluses/deficits, international trade – exchange rates)

7. What We Are Modeling in Micro
Circular Flow – Micro (1 Market) Model of the Economy

8. A Model of Consumer Demand
First Law of Demand: As Price of Good X Decreases Quantity Demanded of Good X Increases (and vice versa) – other factors held constant
Other factors: prices of substitutes, complements, income, product quality, number of consumers – shift the demand curve

9. A Model of a Firm’s Supply Decision
First Law of Supply: Quantity Supplied Increases as Price Increases (other factors held constant)
Held constant: input prices, technology, weather/external factors, number of suppliers

10. A Micro Model Demand & Supply – 1 good
At equilibrium price – quantity supplied at p* = quantity demanded at p*; p* is unique, i.e., only price where this is true

11. Macro
Macroeconomics, on the other hand, looks at the big picture (hence "macro").
It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world.
For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not necessarily a bad thing.
Thus, for an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels.

12. Macro Modeling A Bit More Complex

13. Macro’s Demand and Supply Model
Keynesian Aggregate Demand & Supply (Hick’s)
Effects of an Economic Recession
AD = C + I + G + NX

14. Or In Equation Form

15. Basic Microeconomic Models
Demand for a Product
Supply of a Product
Market Demand/Supply and Equilibrium
Production Function
Cost Function
Production Possibilities Frontier

16. How Do We Do It?

17. Some Basic Micro Models

18. A Simple Demand Model
Demand curve – relationship between market price and quantity demanded/bought at various prices

19. Supply Curve Based on Cost of Production
MC = Marginal costs (incremental cost of producing each unit) -> Supply curve = MC curve above minimum of Avg Variable Cost

20. Finding Equilibrium The Price That Equates Qty Supplied and Qty Demanded
Equilibrium – price at which Qs = Qd => that price is unique (only 1 price)