Microeconomics Quan Hong Nguyen Lecturer in Microeconomics Faculty of International Economics Hanoi Foreign Trade University Email: hongquannguyen@ftu.edu.vn Tel: 0983 060 987 Copyright © 2014 by Quan Hong NGUYEN SYLLABUS Objectives: to improve economic literacy as well as critical thinking and problem solving skills to explain and predict economic issues Pre-requisites: Math Student task: Class attendance (90%) Actively participate in-class activity Complete all homework and other tasks Don’t have private conversation or arrive at class late, which can disrupt the learning environment of the class Copyright © 2014 by Quan Hong NGUYEN BOOKS AND READING Mankiw, N Gregory Principles of Economics – 5th edition, South Western CENGAGE Learning Pyndick, Robert Microeconomics – 6th edition, Pearson Education International Begg, David Economics, 8th edition, Mc Graw Hill Education Lecture’s slides Copyright © 2014 by Quan Hong NGUYEN TOPICS IN MICROECONOMICS Introduction to Microeconomics Demand and Supply Consumer Behavior Producer Behavior Market Structures Labor Market Copyright © 2014 by Quan Hong NGUYEN LECTURE Introduction to microeconomics Copyright © 2014 by Quan Hong NGUYEN Research Question Why research Microeconomics? Copyright © 2014 by Quan Hong NGUYEN SCARCITY means that society has limited resources and therefore cannot produce all the goods and services people wish to have Copyright © 2012 by Quan Hong NGUYEN I MICROECONOMICS WHAT IS ECONOMICS? 1.1 The economy Economy – “oikonomos” (Greek): “One who manages a household” Household - many decisions of allocate limited resources Society - many decisions Allocate resources Allocate outputs Copyright © 2014 by Quan Hong NGUYEN Our first model: The circular-flow diagram Visual model of the economy Shows how dollars flow through markets among households and firms Decision makers Firms & Households Markets For goods and services For factors of production Copyright © 2014 by Quan Hong NGUYEN Our first model: The circular-flow diagram Firms Produce goods and services Use factors of production / inputs Households Own factors of production Consume goods and services 10 Copyright © 2014 by Quan Hong NGUYEN Economics and Policies o Market economy (Invisible hand – Adam Smith): freely determined prices, free exchange of goods and services in markets Ex: Hongkong o Command economy – Centrally planned economy (Visible hand – Keynes): Government determines prices and production Ex: North Korea, Cuba o Mixed economy: A market economy where the Government plays a large role Ex: US, UK, Japan… 24 Copyright © 2014 by Quan Hong NGUYEN III The optimum economic choice Choice’s principles - Need to choose because of scarce resources If resource is already spent on A, it can not be spent on B Many ways to spend resources => easy to choose However, people face trade-offs: Make decisions: Compare cost with benefits of alternatives Choice’s target - - Household: Optimize utility Firm: Optimize profit Government: Optimize social welfare 25 Copyright © 2014 by Quan Hong NGUYEN III The optimum economic choice Choosing tool Opportunity cost (OC): the value of the best missed chance when making a choice Marginal thinking Marginal cost (MC): the chance in total cost resulting from a change from quantity Marginal benefit (MB): the change in total benefit resulting from a change from quantity 26 Copyright © 2014 by Quan Hong NGUYEN Second model: The production possibilities frontier Production possibilities frontier A graph Combinations of output that the economy can possibly produce Given the available Factors of production Production technology 27 Copyright © 2014 by Quan Hong NGUYEN The production possibilities frontier Quantity of Computers Produced C F 3,000 Production Possibilities Frontier A 2,200 B 2,000 D 1,000 E 28 300 600 700 1,000 The production possibilities frontier shows the combinations of output - in this case, cars and computers - that the economy can possibly produce The economy can produce any combination on or inside the frontier Points outside the frontier are not feasible given the economy’s resources Quantity of Cars Produced Copyright © 2014 by Quan Hong NGUYEN Second model: The production possibilities frontier Efficient levels of production Points on the PPF Trade-off: The only way to get more of one good is to get less of the other good Inefficient levels of production 29 Points inside PPF Copyright © 2014 by Quan Hong NGUYEN Second model: The production possibilities frontier Technological advance Outward shift of the production possibilities frontier Economic growth Produce more of both goods 30 Copyright © 2014 by Quan Hong NGUYEN A shift in the production possibilities frontier Quantity of Computers Produced 4,000 3,000 G 2,300 2,200 A 31 600 650 1,000 Quantity of Cars Produced A technological advance in the computer industry enables the economy to produce more computers for any given number of cars As a result, the production possibilities frontier shifts outward If the economy moves from point A to point G, then the production of both cars and computers increases Copyright © 2014 by Quan Hong NGUYEN MATHEMATICS REVISION Slope of the curve Y 15 10 Slope = (15-10)/(2-1) = 1 X Revision (cont.) Six types of relationship Increasing positive slope Increasing negative slope Decreasing Positive slope Decreasing negative slope Math revision (Cont.) Constant slope Constant positive slope Constant negative slope Facts and impacts Movement along the curve vs shift of the curve Movement along the curve: When x and y changes Shift of the curve: When another variable other than x and y change => A third variable shift the curve Y Y A Y1 Y B Y2 X1 X2 X X1 X2 X Review Economics deals primarily with the concept of a change b power c poverty d scarcity Scarcity exists when a the price of a good rises b society can meet the wants of every individual c there is less of a good or resource available than people wish to have d there is less than an infinite amount of a resource or good 36 Copyright © 2014 by Quan Hong NGUYEN Review Bob spends an hour studying instead of going for a bike ride The opportunity cost to him of studying is a the improvement in his grades from studying for the hour b the enjoyment and exercise he would have received had he gone for a bike ride c the difference between the improvement in his grades from studying minus the enjoyment of a bike ride d zero Since Ryan chose to study rather than to ride his bike, the value of studying must have been greater than the value of the bike ride 37 Copyright © 2014 by Quan Hong NGUYEN Review The opportunity cost of an item is a what you give up to get that item b always equal to the dollar value of the item c always less than the dollar value of the item d the number of hours needed to earn the money to buy it A rational decision maker takes an action only if the a marginal benefit is greater than the marginal cost b average benefit is greater than the average cost c marginal benefit is less than the marginal cost d marginal benefit is greater than both the average cost and the marginal cost 38 Copyright © 2014 by Quan Hong NGUYEN ... cost Thinking at the margin Incentives in individual decision making The role of the markets Market failure 14 Copyright © 2012 by Quan Hong NGUYEN 1.2.2 DEFINITION Economics is to study... (15-10)/(2-1) = 1 X Revision (cont.) Six types of relationship Increasing positive slope Increasing negative slope Decreasing Positive slope Decreasing negative slope Math revision (Cont.) Constant... decisions: Compare cost with benefits of alternatives Choice’s target - - Household: Optimize utility Firm: Optimize profit Government: Optimize social welfare 25 Copyright © 2014 by Quan Hong NGUYEN