1. Fakulti Ekonomi & Pengurusan
ECN 3101 : MIKROEKONOMI
Dr Normaz Wana Ismail
Bilik E231
Jabatan Ekonomi
Fakulti Ekonomi & Pengurusan
UPM, Serdang
Tel:
©2005 Pearson Education, Inc.
Chapter 1

2. Virtual class FEP’s website http://www.econ.upm.edu.my/2007/wmv/
click ‘Kelas maya’
©2005 Pearson Education, Inc.
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3. ©2005 Pearson Education, Inc.
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4. TOPICS Introduction: demand and Supply Consumer Behavior
Individual demand and Market
Production and Cost
Perfect Competition
Monopoly
Monopolistic Competition
Ologopoly
©2005 Pearson Education, Inc.
Chapter 1

5. Chapter 1
Preliminaries

6. Themes of Microeconomics
Microeconomics deals with limits
Limited budgets
Limited time
Limited ability to produce
How do we make the most of limits?
How do we allocate scarce resources?
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7. Themes of Microeconomics
Workers, firms and consumers must make trade-offs
Do I work or go on vacation?
Do I purchase a new car or save my money?
Do we hire more workers or buy new machinery?
How are these trade-offs best made?
©2005 Pearson Education, Inc.
Chapter 1 5

8. Themes of Microeconomics
Consumers
Limited incomes
Consumer theory – describes how consumers maximize their well-being, using their preferences, to make decisions about trade-offs.
How do consumers make decisions about consumption and savings?
©2005 Pearson Education, Inc.
Chapter 1

9. Themes of Microeconomics
Workers
Individuals decide when and if to enter the work-force
Trade-offs of working now or obtaining more education/training
What choices do individuals make in terms of jobs or work places?
How many hours do individuals choose to work?
Trade-off of labor and leisure
©2005 Pearson Education, Inc.
Chapter 1 6

10. Themes of Microeconomics
Firms
What types of products do firms produce?
Constraints on production capacity & financial resources create needs for trade-offs.
Theory of the Firm – describes how these trade-offs are best made
©2005 Pearson Education, Inc.
Chapter 1 7

11. Themes of Microeconomics
Prices
Trade-offs are often based on prices faced by consumers and producers
Workers made decisions based on prices for labor – wages
Firms make decisions based on wages and prices for inputs and on prices for the goods they produce-firm decide to hire more workers or purchase more machines
©2005 Pearson Education, Inc.
Chapter 1

12. Themes of Microeconomics
Prices
How are prices determined?
Centrally planned economies -governments control prices
Market economies – prices determined by interaction of market participants
Markets – collection of buyers and sellers whose interaction determines the prices of goods.
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Chapter 1

13. Theories and Models
Economics is concerned with explanation of observed phenomena
Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions.
The Theory of the Firm – firms max profits
( the theory that explains how firm chooses the amounts of L,K,E that they use for production and the amount of output they produce)
The Theory of Consumer Behavior
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14. Theories and Models Theories are used to make predictions
Economic models are created from theories
Models are mathematical representations used to make quantitative predictions
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15. Theories and Models Validating a Theory
The validity of a theory is determined by the quality of its prediction, given the assumptions.
Theories must be tested and refined
Theories are invariably imperfect – but gives much insight into observed phenomena
©2005 Pearson Education, Inc.
Chapter 1 10

16. Positive & Normative Analysis
Positive Analysis – statements that describe the relationship of cause and effect
Questions that deal with explanation and prediction
What will be the impact of an import quota on foreign cars?
What will be the impact of an increase in the gasoline excise tax?
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Chapter 1 11

17. Positive & Normative Analysis
Normative Analysis – analysis examining questions of what ought to be
Often supplemented by value judgments
Should the government impose a larger gasoline tax?
Should the government decrease the tariffs on imported cars?
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Chapter 1 12

18. Market What is Markets Type of Market Market Price
Collection of buyers and sellers, through their actual or potential interaction, determine the prices of products
What is Markets
Type of Market
Market Price
Why Market is important
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19. SUPPLY AND DEMAND What are supply and demand?
What is the market mechanism?
What are the effects of changes in market equilibrium?
What are elasticity of supply and demand?
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Chapter 1

20. Supply If a firm supplies a good or service, then the firm
1. Has the resources and the technology to produce it,
2. Can profit from producing it, and
3. Has made a definite plan to produce and sell it.
Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce.
The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

21. The supply curve slopes upward demonstrating that
Price
($ per unit)
The Supply
Curve Graphically P2 Q2
The supply curve slopes
upward demonstrating that
at higher prices firms
will increase output P1 Q1
Quantity
©2005 Pearson Education, Inc.
Chapter 2 7

22. Change in Supply The cost of raw materials falls
Produced Q1 at P1 and Q0 at P2
Now produce Q2 at P1 and Q1 at P2
Supply curve shifts right to S’ P S S’ Q2 P1 P2 Q1 Q0 Q
©2005 Pearson Education, Inc.
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23. The Supply Curve-summary
Change in Quantity Supplied
Movement along the curve caused by a change in price
Change in Supply
Shift of the curve caused by a change in something other than price
Change in costs of production
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Chapter 2 35

24. Demand If you demand something, then you 1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it.
Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy.
The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price.

25. The Demand Curve P2 P1 D Q1 Q2 Quantity Price ($ per unit)
The demand curve slopes
downward demonstrating
that consumers are willing
to buy more at a lower price
as the product becomes
relatively cheaper. P2 Q1 P1 Q2
Quantity
©2005 Pearson Education, Inc.
Chapter 2 10

26. Demand A Shift of the Demand Curve
If the price remains the same but one of the other influences on buyers’ plans changes,
demand changes and the demand curve shifts.

27. Demand Six main factors that change demand are
The prices of related goods
Expected future prices
Income
Expected future income
Population
Preferences

28. The Market Mechanism
The market mechanism is the tendency in a free market for price to change until the market clears
Markets clear when quantity demanded equals quantity supplied at the prevailing price
Market Clearing price – price at which markets clear
©2005 Pearson Education, Inc.
Chapter 2

29. The Market Mechanism S P0 D Q0 Price ($ per unit)
Quantity
Price
($ per unit) D
The curves intersect at
equilibrium, or market-
clearing, price.
Quantity demanded equals quantity supplied at P0 P0 Q0
©2005 Pearson Education, Inc.
Chapter 2 12

30. ELASTICITY OF DEMAND AND SUPPLY

31. Price Elasticity of Demand
Measures the sensitivity of quantity demanded to price changes.
It measures the percentage change in the quantity demanded of a good that results from a one percent change in price.
Chapter 2 70

32. Elasticities for Linear Demand Curves
For linear demand curves re-write the price elasticity of demand formula as:
Notice that the first term is related to the slope of the demand curve
The second term is the initial price divided by the initial quantity
2-32

33. Other Demand Elasticities
Income Elasticity of Demand
Measures how much quantity demanded changes with a change in income.
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Chapter 2 79

34. Other Demand Elasticities
Cross-Price Elasticity of Demand
Measures the percentage change in the quantity demanded of one good that results from a one percent change in the price of another good.
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Chapter 2 81

35. Chapter 3
Consumer Behavior

36. Introduction How are consumer preferences used to determine demand?
How do consumers allocate income to the purchase of different goods?
How do consumers with limited income decide what to buy?
Chapter 3
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37. Consumer Behavior
There are three steps involved in the study of consumer behavior
Consumer Preferences
To describe how and why people prefer one good to another
Budget Constraints
People have limited incomes
Chapter 3
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38. Consumer Behavior
Given preference sand limited incomes, what amount and type of goods will be purchased?
What combination of goods will consumers buy to maximize their satisfaction?
Chapter 3
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39. Indifference Curves: An Example
Indifferent between B, A, & D
E is preferred to U1
U1 is preferred to H & G
Food 10 20 30 40
Clothing 50 G D A E H B
Chapter 3
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40. Indifference Curves
We measure how a person trades one good for another using the marginal rate of substitution (MRS)
It quantifies the amount of one good a consumer will give up to obtain more of another good.
It is measured by the slope of the indifference curve.
Chapter 3
©2005 Pearson Education, Inc. 29

41. Marginal Rate of Substitution
Food 2 3 4 5 1
Clothing 6 8 10 12 14 16 A B D E G -6 1 -4 -2 -1
MRS = 6
MRS = 2
Chapter 3
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42. Budget Constraints
Preferences do not explain all of consumer behavior.
Budget constraints also limit an individual’s ability to consume in light of the prices they must pay for various goods and services.
Chapter 3
©2005 Pearson Education, Inc. 42 46

43. Budget Constraints The Budget Line
Indicates all combinations of two commodities for which total money spent equals total income.
We assume only 2 goods are consumed, so we do not consider savings
Chapter 3
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44. The Budget Line A (I/PC) = 40 B 30 10 D 20 E 10 G Food 40 60
80 = (I/PF) 20 10 30
Clothing A B D E G 10 20
Chapter 3
©2005 Pearson Education, Inc. 42 54

45. The Budget Line - Changes40
Food
(units per week)
Clothing
(units
per week) 80
120
160
A decrease in the
price of food to
$.50 changes
the slope of the
budget line and
rotates it outward.
An increase in the
price of food to
$2.00 changes
the slope of the
budget line and
rotates it inward. L3
(PF = 2)
(PF = 1) L1
(PF = 1/2) L2
Chapter 3
©2005 Pearson Education, Inc. 42 65

46. Consumer Choice
A corner solution exists if a consumer buys in extremes, and buys all of one category of good and none of another.
MRS is not necessarily equal to PA/PB
Chapter 3
©2005 Pearson Education, Inc. 83

47. A Corner Solution A U2 U3 U1 A corner solution exists at point B. B
Ice Cream (cup/month)
Frozen
Yogurt
(cups
monthly) B A
A corner solution
exists at point B. U2 U3 U1
Chapter 3
©2005 Pearson Education, Inc. 84

48. A Corner Solution
Ice Cream (cup/month)
Frozen
Yogurt
(cups
monthly)
if the consumer could give up more frozen yogurt for ice cream he would do so.
However, there is no more frozen yogurt to give up B A U2 U3 U1
At point B, the MRS of ice cream for frozen yogurt is greater than the slope of the budget line.
Chapter 3
©2005 Pearson Education, Inc. 84

49. Individual and Market Demand
Chapter 4
Individual and Market Demand

50. Individual Demand Price Changes
Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.
For each price change, we can determine how much of the good the individual would purchase given their budget lines and indifference curves
Chapter 4 4

51. Effect of a Price Change
Food (units
per month)
Clothing
Assume:
I = $20
PC = $2
PF = $2, $1, $0.50 6 A U1 4 10 4 U2 B 12 20 5 U3 D
Each price leads to different amounts of food purchased
Chapter 4 4

52. Individual demand – income changes
Changing income, with prices fixed, causes consumer to change their market baskets.
An increase in income; (P of all gods fixed) – causes consumers to alter their choice of market baskets
Chapter 4

53. Effects of Income Changes
Food (units
per month)
Clothing
(units per
month) D 7 16 U3
Assume: Pf = $1, Pc = $2
I = $10, $20, $30
ICC
An increase in income,
with the prices fixed,
causes consumers to alter
their choice of
market basket. 5 10 B U2 3 4 A U1
Chapter 4

54. Income and Substitution Effects
A change in the price of a good has two effects:
Substitution Effect -consumer will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive
Income Effect –because one of the goods is now cheaper, consumers enjoy an increase in real purchasing power. they better off because they can buy the same amount of good for les money- and thus have money left over for additional purchases
Chapter 4

55. Market Demand Market Demand Curves
A curve that relates the quantity of a good that all consumers in a market buy to the price of that good.
The sum of all the individual demand curves in the market
Chapter 4

56. Consumer Surplus Consumer Surplus
The difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid.
Can calculate consumer surplus from the demand curve
Chapter 4

57. Consumer Surplus - Example
Student wants to buy concert tickets
Demand curve tells us willingness to pay for each concert ticket
1st ticket worth $20 but (cost) price is $14 so student generates $6 worth of surplus
It worth to buy because generates $6 surplus of value ( beyond the cost)
Can measure this for each ticket
The second also worth (surplus $5)
Total surplus is addition of surplus for each ticket purchased
Chapter 4

58. Consumer Surplus - Example
Price
($ per
ticket)
The consumer surplus
of purchasing 6 concert
tickets is the sum of the
surplus derived from
each one individually. 20 19 18 17 16
Consumer Surplus
= 21 15 14
Market Price 13
Will not buy more than 7 because surplus is negative 1 2 3 4 5 6
Rock Concert Tickets
Chapter 4

59. Aggregate Consumer Surplus
The stepladder demand curve can be converted into a straight-line demand curve by making the units of the good smaller.
Consumer surplus is area under the demand curve and above the price
Chapter 4

60. Consumer Surplus Consumer Surplus 20 for the Market Demand 19 18 17 16
Price
($ per
ticket)
Consumer Surplus
for the Market Demand 20
Demand Curve 19 18
CS = ½ ($20 - $14)*(6500) = $19,500 17 16
Consumer
Surplus 15 14
Market Price
Actual
Expenditure 13 1 2 3 4 5 6
Rock Concert Tickets
Chapter 4

61. Chapter 6
Production

62. Production Decisions of a Firm
Production Technology
Describe how inputs can be transformed into outputs
Inputs: land, labor, capital & raw materials
Outputs: cars, desks, books, etc.
Firms can produce different amounts of outputs using different combinations of inputs
Chapter 6 4

63. Production Decisions of a Firm
Cost Constraints
Firms must consider prices of labor, capital and other inputs
Firms want to minimize total production costs partly determined by input prices
As consumers must consider budget constraints, firms must be concerned about costs of production
Chapter 6

64. Production Decisions of a Firm
Input Choices
Given input prices and production technology, the firm must choose how much of each input to use in producing output
Given prices of different inputs, the firm may choose different combinations of inputs to minimize costs
If labor is cheap, may choose to produce with more labor and less capital
Chapter 6

65. The Technology of Production
The production function for two inputs:
q = F(K,L)
Output (q) is a function of capital (K) and Labor (L)
The production function is true for a given technology
If technology increases, more output can be produced for a given level of inputs
Chapter 6 6

66. The Technology of Production
Short Run
Period of time in which quantities of one or more production factors cannot be changed.
These inputs are called fixed inputs.
Long-run
Amount of time needed to make all production inputs variable.
Short run and long run are not time specific
Chapter 6

67. Production: One Variable Input
Output
per
Month 60
112 A B C D
Total Product
At point D, output is maximized. 1 2 3 4 5 6 7 8 9 10
Labor per Month
Chapter 6 23

68. Production: One Variable Input
Output
per
Worker
Left of E: MP > AP & AP is increasing
Right of E: MP < AP & AP is decreasing
At E: MP = AP & AP is at its maximum
At 8 units, MP is zero and output (TP) is at max 30 E
Marginal Product 20
Average Product 10 8 2 3 4 5 6 7 9 10 1
Labor per Month
Chapter 6 27

69. Production: One Variable Input
From the previous example, we can see that as we increase labor the additional output produced declines
Law of Diminishing Marginal Returns: As the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.
Chapter 6 31

70. The Effect of Technological Improvement
As move from A to B to C labor productivity is increasing over time C O3
Output
100 O2 B A O1 50
Labor per
time period 2 3 4 5 6 7 8 9 10 1
Chapter 6 37

71. Chapter 7
The Cost of Production

72. Topics to be Discussed Measuring Cost: Which Costs Matter?
Cost in the Short Run
Cost in the Long Run
Long-Run Versus Short-Run Cost Curves
Chapter 7 2

73. Fixed and Variable Costs
Total output is a function of variable inputs and fixed inputs.
Therefore, the total cost of production equals the fixed cost (the cost of the fixed inputs) plus the variable cost (the cost of the variable inputs), or…
Chapter 7 11

74. Fixed and Variable Costs
Which costs are variable and which are fixed depends on the time horizon
Short time horizon (SR) – most costs are fixed
Long time horizon (LR) – many costs become variable
In determining how changes in production will affect costs, must consider if affects fixed or variable costs
Chapter 7

75. Fixed Cost Versus Sunk Cost
Fixed cost and sunk cost are often confused
Fixed Cost
Cost paid by a firm that is in business regardless of the level of output
Paid by firm that is operating
Sunk Cost
Cost that have been incurred and cannot be recovered
Eg. Cost of factory with specialized equipment that is no use in another industry
The cost of the factory is not fixed because it cannot be recovered if a firm shut down
Chapter 7 12

76. Cost Curves for a Firm TC VC Cost 400 300 200 VC is 0 when input is 0
Output
Cost
($ per
year)
100
200
300
400 1 2 3 4 5 6 7 8 9 10 11 12 13 VC
Total cost
is the vertical
sum of FC
and VC.
Variable cost
increases with
production and
the rate varies with
increasing &
decreasing returns.
VC is 0 when input is 0
Fixed cost does not
vary with output FC 50
Chapter 7 33

77. Cost Curves MC
ATC
AVC
AFC
Chapter 7

78. Long-Run Average and Marginal Cost
($ per unit
of output
LMC A
LAC
Output
Chapter 7 85

79. Economies and Diseconomies of Scale
Increase in output is greater than the increase in inputs.
Includes increasing return to scale as a special case
But it reflect input proportion to change
Diseconomies of Scale
Increase in output is less than the increase in inputs.
U-shaped LAC shows economies of scale for relatively low output levels and diseconomies of scale for higher levels
Chapter 7 87