Micro Economics
Lecture 1
15 December, 2021
What is microeconomics?
• Microeconomics is all about scarcity. It's all about how individuals
and firms make decisions given that we live in a world of scarcity.
• Scarcity is key because and we're going to learn a lot about
different ways that individuals make choices in a world of scarcity.
What is microeconomics?
• the study of how individuals and firms make themselves as well off
as possible in a world of scarcity and the effects of their actions
on markets and the entire economy.
What would be the learning in this course
• this course is about various shapes and forms of different types of
constrained optimization.
• Given scarce resources, how the individuals and firms trade off
different alternatives to make themselves as well-off as possible.
• we are not about everyone have everything. We're always the
people who say, no, you can't have everything. You have to make a
tradeoff. You have to give up x to get y.
• how people make their decisions to consume, and firms make
their decisions to produce.
What would be the learning in this course
• We will be focused on two types of actors in the economy: consumers
and producers.
• We are going to build models of how consumers and producers behave.
• A model is a description of any relationship between two or more
economic variables.
• This is not a precise, scientific relationship with modeling. We'll be
making a number of simplifying assumptions that allow us to capture the
main tendencies in the data. That allow us to capture the main insights
into how individuals make consumption decisions and how firms make
production decisions. But it's not going to be as clean and precise as the
kind of proofs like in other courses.
What would be the learning in this course
• About consumers: consumers are constrained by their limited
wealth or what we'll call their budget constraint. And subject to
that constraint they choose the set of goods that makes them as
well off as possible.
• That's what we're going to call utility maximization.
• That's going to be the consumer decision
What would be the learning in this course
• Firms, on the other hand, are going to maximize profits.
• Their goal is to make as much profit as possible, to earn as much
money as possible.
• It depends on both the demands of consumers, and input costs.
three fundamental questions of
microeconomics
• What goods and services should be produced?
• How to produce those goods and services? And
• who gets the goods and services?
• the three fundamental questions that drive our entire economy, are all
solved through the role of one key state variable, which is prices.
Therefore, Microeconomics is often called price theory to emphasize the
important role that prices play
three fundamental questions of
microeconomics
• Consumers and firms will interact in a market place.
• Out of that marketplace will emerge a set of prices,
• those prices will allow firms and consumers to make the relevant
decisions.
theoretical versus empirical economics
• Theoretical economics is the process of building models to explain the world.
• the goal of theoretical economics is essentially to build a model that has some
testable predictions.
• Empirical economics is the process of testing those models to see how good a job
they do in explaining the world.
• the role of empirical economics is to gather the data and go and test them using
statistical methods.
• this course will be about theoretical economics.
positive versus normative economics
Distinction between the way things are and the way things should
be.
Demand
• What does demand curve present. Its willingness to pay
Supply
• What does supply curve present. Its willingness to produce
Misc.
1. Microeconomics: The Allocation of Scarce Resources.
Microeconomics is the study of the allocation of scarce resources.
2. Models. Economists use models to make testable predictions.
3. Uses of Microeconomic Models. Individuals, governments, and
firms use microeconomic models and predictions in decision making.
