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Lecture 1 (Topic 1) : Main Concepts in Microeconomics

This document provides an overview of the key concepts that will be covered in Lecture 1 of a Microeconomics course. There will be 3 assignments worth 30% of the grade and a final exam worth 70%. Core concepts include rational decision making, opportunity costs, sunk costs, and using marginal analysis. A perfectly competitive market has many buyers and sellers of homogeneous goods. Demand and supply determine the equilibrium price and quantity in a market based on factors like income, costs of production, and expectations. Comparative statics examines how events affect market outcomes.

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25 views2 pages

Lecture 1 (Topic 1) : Main Concepts in Microeconomics

This document provides an overview of the key concepts that will be covered in Lecture 1 of a Microeconomics course. There will be 3 assignments worth 30% of the grade and a final exam worth 70%. Core concepts include rational decision making, opportunity costs, sunk costs, and using marginal analysis. A perfectly competitive market has many buyers and sellers of homogeneous goods. Demand and supply determine the equilibrium price and quantity in a market based on factors like income, costs of production, and expectations. Comparative statics examines how events affect market outcomes.

Uploaded by

Jason
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lecture 1 (Topic 1): Main Concepts in Microeconomics

3 assignments: 30% altogether


Final examination: 70%

~~~

- Economic models are only simplified versions of reality:


 It would be too complicated to understand otherwise

- Core assumptions of economic models:


 Rationality
 Same general set of modelling approaches (e.g. forces of demand and
supply)

Core Concepts
- Scarce Resources: Everyone must make choices about the way they utilise their
resources
 Rational decision-makers will use the cost-benefit principle to decide
how to use their resources
 Resources are only used if the extra benefits of the activity outweigh
the additional costs

- Rational Decision Maker: Three main characteristics


 Well-defined objective
 Know the consequences of their decisions or actions
 Only choose decisions or actions that make them better off

- Opportunity Cost: The value of resources used in their next best alternative use

- Sunk Cost: Resources that are already used and cannot be recovered at the
moment of making a decision
 These costs are ignored in the decision making process and are not
part of opportunity cost

- The cost-benefit rule is applied through the use of marginal analysis


 Compare marginal benefit to marginal cost
 Optimal decisions will maximise total benefits relative to total costs

- Even though humans make mistakes and are not perfectly rational, economic
models are not necessarily invalidated:
 As long as there is no systematic bias in the errors then on average the
decisions will correspond to economic theory

Perfectly Competitive Market


- There are many buyers and sellers present and they are price-takers
- Homogenous goods are present in the market
Demand
- Law of Demand: As price increases, the quantity demanded will decrease (holding
all other variables equal)
 The curve has a negative slope as a result
 An increase in price results in a movement along the demand curve

- Substitutes and complements impact the demand for a good


- Income will affect the demand for a good as well:
 Normal Good: Increase in income will increase demand for a good
 Inferior Good: Increase in income will decrease demand for a good

- Price expectations
- Consumer tastes
- Number of buyers

Supply
- Law of Supply: As price increases, the quantity supplied will increase (holding all
other variables equal)
 The curve has a positive slope as a result

- Costs of production
- Price expectations
- Weather
- Number of suppliers

Market Equilibrium
- Quantity demanded of a good is equal to quantity supplied of a good
- The equilibrium price is determined by the interactions between buyers and sellers
in the market

- Comparative Statics: Study of the effect of an event on market outcome by


examining the change in the market equilibrium

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