Principles of microeconomics
Outline
Content of the course
Lecture 1 : Lecture 2 : Lecture 3 :
What is microeconomics Demand, supply and Imperfect maket
and its general principles ? elasticity structures
Lecture 6 :
Lecture 5 :
Lecture 4 : The challenges of
Market failures and State
Strategies on imperfect competition regulation
intervention
markets Presentation of study
cases
Revision and final exam
► Oral presentation (40 % overall grade)
Maximum 4 students in a team.
The preparation will be written on framapad (collaborative software).
The study case must be carried out on power point (minimum 20 slides).
► Routine class participation : read, ask questions, discussions (10 % overall grade)
It’s absolutely essential that you prepare the classes in advance.
On-class and after-class exercises.
► Final written exam (50% overall grade)
1,5 hour
LMS platform
Log in to the LMS platform so as to get more informations about the course of microecnomics :
- The syllabus.
- Examples of the final exam.
- Lessons, exercises, online documentaries…
What is economics and
economy ?
What is economics and
economy ?
Economics and economy
• Economics The science (with theories) which
studies scarcity and choice
Why ? Since most ressources are limited
whereas wants are often unlimted
Economics is a social science concerned
chiefly with description and analysis of
the production, distribution and
consumption of goods.
What is economics and
economy ?
Economics and economy
What is economics and
economy ?
Economics and economy
The economic activities, system of a
• Economy particular area, country…
It concerns especially the relationship
between production, trade and the
supply of money in a particular area.
The economy of a society determines…
→ What is produced ?
→ How is it produced ?
→ Whom to produce it for ?
What is economics and
economy ?
Source : Calina and Gisca, « ENGLISH FOR ECONOMIC STUDIES », Asem 2010
What is economics and
microeconomics ?
Micro and Macroeconomics
• Microeconomics studies the behaviour of The science (with theories) which studies
economic actors (individuals, firms…) scarcity and choice
• These actors are taken individually as if Microeconomics is a social science directed
economist studies them with a at the satisfaction of needs and wants
microscope. through the allocation of scarce resources
• The economist is especially interested in which have alternative uses
decisions and arbitrations reduced to a
unit.
What is economics and
microeconomics ?
Micro and macroeconomics
• Macroeconomics studies entire economy
• Economist is interested into relations between
aggregate variables.
• An aggregate is the concept which is used to
an indactor which collects global results of
economy activities (GDP, inflation…)
• Macro explains equilibrium of the agregate
demand and supply.
• It’s particulary useful to give informations to
policy makers and their economic policies.
• It focuses on betterment and growth of entire
economy
What is economics and
microeconomics ?
Micro and Macroeconomics
• The same question could be investigated by both micro and macro
Ex : the problems of unemployment, minimum wage…
2. Show that these two approaches are complementary.
• → Micro is usefull for a better understanding how agent’s behave following a change :
example with consequences of a change in unemployment benefits on unemployment
behave.
• → Macro is usefull for understanding general equilibrium : example with the impact of a
demand crisis on the unemployment rate.
What is economics and
microeconomics ?
Figures of micro and macroeconomics
John Maynard Keynes who is the
Adam Smith who is the real funder of greatest representative of
microeconomics especially in « The macroeconomics especially in « The
wealth of nations » 1776 General Theory of Employment,
Interest, and Money” 1936
Economics is based on rationality
Economists consider that economic
agents are…
… rational … selfish
• They seek to maximize their • They pursuit their self-interest and free
satisfaction and minimize their costs. trade leads to an outcome that is good for
the society as a whole, it’s the concept of
“invisible hand”.
• According to Adam Smith, “It is not from
the benevolence of the butcher, the brewer,
or the baker that we expect our dinner, but
from their regard to their own interest.”
Economics is based on rationality
Economists use models
Homoeconomicus According to Simon, there are three
conditions
• Reality is too complex so economists • Know all the choices (perfect informations).
try to simplify it to understand how
agents make their choices, like a • Foresee all the consequences of each possible
model used to model a car. choice.
• Agents have an absence of bias in • Rank the consequences and the choices
reflection according to a scale of preference.
Economics is based on rationality
Economic agents make choices that they expect will create the
maximum value of some objective, given the constraints they face
• The consumer seek to maximize his satisfaction level face to his budget constraint.
• The firm seek to maximize its profits face to its production costs.
Research how firms could maximize their profits
Economics is based on rationality
1. Show that all commercial firm is rational.
a. Rechercher la signification des notions d’économie.
b. Analyser si la notion est plurielle pour sélectionner les significations les plus pertinentes.
Ex : rationalité → en finalité ?
→ en valeur ?
c. Comprendre le sens de la consigne.
Ex : montrer que = mettre en avant une argumentation pour expliquer un mécanisme
économique.
Toute = aucune exception
d. Répondre par un paragraphe argumenté.
A (affirmer) = résumer l’idée générale en une phrase précise.
E (expliquer) = expliquer les mécanismes économiques.
I (illustrer) = rechercher un exemple pertinent et précis.
Economics is based on rationality
Quel effet aurait la mise en place d’une semaine de quatre jours (payés cinq)
sur les entreprises et les travailleurs ? Durant six mois, de juin à décembre
2022, 61 entreprises britanniques ont participé à la plus grande
expérimentation jamais menée sur le sujet : le temps de travail de 2 900 salariés
a été réduit de 20 %, et ils ont conservé leur salaire.
2. Explain why, paradoxically, the reduction in working time proposed by certain
companies may be rational for these producers.
3. Show how this decision corresponds to the invisible hand.
Economics is the science of the choices
• Scarcity characterizes virtually evrything.
→ Evident for most goods.
→ Even for other goods which are deteriorated by the human activity.
Ex : natural capital (air with pollution, drinking water…).
• To made a choice, we need to know the degree of sacrcity since it affects the
price.
→ The scarcity of water in France depends on level of dryness (the price is
often not expansive)
→ at the opposite in the desert, water is scarce so agents are incited to scrimp it.
• Scarcity is not always reflected in price (it depends on the demand level).
Economics is the science of the choices
Because of scarcity of the ressources agents have to make choices
or making choice involves to renounce
• The act of renouncement correspond to opportunity cost, in economics, the cost of giving up
the next best alternative.
Economics is the science of the choices
Consider you are studying economics and you just have finished your bachelor, you have to take a decision
and a choice :
- Either continue in an MBA program for two years at HEC Paris which leeds to extra costs.
- Or stop studying and starting your professionnal career (you earn 2800 euros a month).
1. Calculate the explicit costs and the implicit costs (opportunity cost) of carrying on further education.
2. Explain if you rationaly have to stop or carry on education.
The importance of marginal changes
Economists argue that most choices are made « at the margin »
• A choice at the margin is a decision to • Economists argue that the value of
do a little more or a little less of goods depends on their usefullness
something more precisely
→ Produce one more unit. A consumer doesn’t wonder how much
food he needs in total but at one point,
→ Work one more hour. whether an additional unit will provide
1. Explain what is the cost and the him more usefullness than cost
benefit of working one more hour,
what is your reservation wage ?
2. What kind of condition shift could
modify your decision.
The importance of marginal changes
On a scale from 1 to 5, explain which utility procures each more glass water to these sportsmen
Marginal utilty of each glass water
The importance of marginal changes
2. Could you give an economic law using the concept of marginal utility. Is-it a law ?
Marginal utility prouves that consumption of one more glass water will cause less and less
more utilty to the point of satiety, after this point, utility is decreasing.
This is the law (a general law of economics) of diminishing marginal utility.
3. Explain how the market price should evolve, all other things being equal.
Incentives modify the calculations and
behavior of rational agents
If agents reason « at the margin », economists argue that choices
are affected by incentives.
• The price is determined by market laws
or / and State interventions.
• Incentives concern costs or / and
→ Price modifies the behavior of agents
benefits (to rational agents).
in a market economy to achieve to
• The best variable used to change equilibirum between supply and demand
the agents’s behaviour is the (it’s a self regulation).
price.
→ Government wants to increase wealth
• According to Hayek, price is a and welfare so it uses regulation, taxes or
signal that gives informations publics subsidies to modifie opportunity
about scarcity. costs and the behaviour of the agents.
Incentives modify the calculations and
behavior of rational agents
1. Show that the variation in the price of oil since the war in Ukraine sends a
signal (and information) to consumers.
• 2. Explain how this signal can modify the decisions and trade-offs of consumers
(households). Use as many concepts from the course as possible.
The importance of marginal changes
1. Explain why the state intervenes.
2. Show that the legalization of cannabis can be analyzed as a
rational act of the state.
3. Explain the effects of a progressive tax on consumers.
