Consumption - What is Microeconomics? Welcome to Oxford 1. Who am I? Chris Wallace, Lecturer at the Department of Economics, Oxford University and Fellow in Economics at Trinity College 2. What do i do? Teach economics and research in the field of game theory 3. Who are you? First year students taking either the Philosophy, Politics and Economics(PPE) degree, the Economics and Management(EM) degree, the Iodern History and Economics(MHE) degree, or second years on one of the Joint degrees with Engineering and Materials(EEM/MEM) at Oxford. 4. What do you do? Attend these lectures, attend tutorials and write essays You should also attend the mathematics lectures provided by the Department Consumption- What is Microeconomics? Teaching at Oxford These lectures run from week 1 to 8 inclusive. They are here, in Schools, at 11 to 12 on Monday and tuesdays Tutorials are organised by your colleges .Thecoursehomepagecanbefoundat:http://malroy.econox.ac.uk/or fromthelinkathttp://www.economics.ox.ac.uk/intra/unDer/ppe.htm This page contains all the lectures in individual PDFs as well as the course outline in a PDF and other relevant resources. You should get them since future lectures will be in a smaller font! If you don't already have the free software Adobe Acrobat(needed to view Pdfs),goto:http://www.adobe.com/
Consumption — What is Microeconomics? 1 Welcome to Oxford 1. Who am I? Chris Wallace, Lecturer at the Department of Economics, Oxford University and Fellow in Economics at Trinity College. 2. What do I do? Teach economics and research in the field of game theory. 3. Who are you? First year students taking either the Philosophy, Politics and Economics (PPE) degree, the Economics and Management (EM) degree, the Modern History and Economics (MHE) degree, or second years on one of the Joint degrees with Engineering and Materials (EEM/MEM) at Oxford. 4. What do you do? Attend these lectures, attend tutorials and write essays. You should also attend the mathematics lectures provided by the Department. Consumption — What is Microeconomics? 2 Teaching at Oxford • These lectures run from week 1 to 8 inclusive. They are here, in Schools, at 11 to 12 on Monday and Tuesdays. • Tutorials are organised by your colleges. • The course homepage can be found at: http://malroy.econ.ox.ac.uk/ or from the link at http://www.economics.ox.ac.uk/Intra/Under/ppe.htm • This page contains all the lectures in individual PDFs as well as the course outline in a PDF and other relevant resources. You should get them since future lectures will be in a smaller font! • If you don’t already have the free software Adobe Acrobat (needed to view PDFs), go to: http://www.adobe.com/
Consumption - What is Microeconomics? Books My lectures will follow: Varian, H R.(2002), Intermediate Microeconomics: A Modern Approach 6th Edition, Norton. Buy it A secondary text which may be useful is: Katz, M. L. and Rosen, H. S.(1998) Microeconomics 3rd Edition. McGraw-Hill references in the course outline refer to Varian and K-references to Ro International trade is briefly covered in the last lecture. The text is Krugman, P and Obstfeld, M.(2003), International Economics 6th Edition, Addison-Wesley(KO-references in the course outline) There are some other suggestions for 'fun'reading on the course outline Consumption- What is Microeconomics? The Course The course is arranged into four parts: 1. Consumption: Lectures l to 6. 2. Production: Lectures 7 to 11 3. Market: Lectures 12 to 1 4. International Trade: Lecture 16 Elementary mathematics is required. Material is graphically presented, but algebra and calculus appear often You will not be re-taught this material in the second year- but you will need to know it in finals! Take notes during the lectures. They will be invaluable
Consumption — What is Microeconomics? 3 Books • My lectures will follow: Varian, H. R. (2002), Intermediate Microeconomics: A Modern Approach 6th Edition, Norton. Buy it. • A secondary text which may be useful is: Katz, M. L. and Rosen, H. S. (1998), Microeconomics 3rd Edition, McGraw-Hill. • Both are excellent. V -references in the course outline refer to Varian and K-references to Katz and Rosen. • International trade is briefly covered in the last lecture. The text is Krugman, P. and Obstfeld, M. (2003), International Economics 6th Edition, Addison-Wesley. (KO-references in the course outline). • There are some other suggestions for ‘fun’ reading on the course outline. Consumption — What is Microeconomics? 4 The Course • The course is arranged into four parts: 1. Consumption: Lectures 1 to 6. 2. Production: Lectures 7 to 11. 3. Market: Lectures 12 to 15. 4. International Trade: Lecture 16. • Elementary mathematics is required. Material is graphically presented, but algebra and calculus appear often. • You will not be re-taught this material in the second year — but you will need to know it in Finals! • Take notes during the lectures. They will be invaluable
Consumption - What is Microeconomics? What is Economics? Biology is the study of living things. History is the study of the past Economics is the study of Resource allocation How do people and societies deal with scarcity? Three questions are generated What is to 2. How is it to be produced? 3. Who gets the output? In fact, economics has grown to study many other social phenomena How do economists answer questions like these? Using models Consumption- What is Microeconomics? Models A model is not the real world. A model is not realistic. A model may be based on assumptions that are dubious or sometimes plainly false. A model is an abstraction implification and an explanatory tool. A model takes some salient feature(s)of the world and explores it within a logical framework Economists do not even try to build a"general theory of the world. Instead models of particular phenomena are proposed. The idea is to gain insight into elationships between real world objects The aim is to explain, describe and predict and one day in the far far future erhaps to advise
Consumption — What is Microeconomics? 5 What is Economics? • Biology is the study of living things. History is the study of the past. Economics is the study of... Resource allocation? • How do people and societies deal with scarcity? Three questions are generated: 1. What is to be produced? 2. How is it to be produced? 3. Who gets the output? • In fact, economics has grown to study many other social phenomena. • How do economists answer questions like these? Using models. Consumption — What is Microeconomics? 6 Models • A model is not the real world. A model is not realistic. A model may be based on assumptions that are dubious or sometimes plainly false. A model is an abstraction, a simplification and an explanatory tool. • A model takes some salient feature(s) of the world and explores it within a logical framework. • Economists do not even try to build a “general theory of the world”. Instead models of particular phenomena are proposed. The idea is to gain insight into relationships between real world objects. • The aim is to explain, describe and predict — and one day in the far far future perhaps to advise
Consumption - What is Microeconomics? Normative and positive economics Positive Economic questions are ones which start "what would happen if native Economic questions are ones which start "what should happen if economics courses describe themselves as positive. This is one of them However, normative issues creep into everything the two types of economic uestion cannot be separated so easily. Consumption- What is Microeconomics? Microeconomics and macroeconomics Microeconomics is the study of little things: Firms, consumers etc. Macroeconomics is the study of big things: Economies as a whole etc. As easy as that, right? Well, yes and no. Often both macro and micro study the same phenomenon Another way of distinguishing between the two is the method they use to study Micro starts with the little things and works up- macro starts with the big hings and works down Often it is the modelling metholodogy which separates the two
Consumption — What is Microeconomics? 7 Normative and Positive Economics • Positive Economic questions are ones which start “what would happen if...” • Normative Economic questions are ones which start “what should happen if...” • Most economics courses describe themselves as positive. This is one of them. • However, normative issues creep into everything — the two types of economic question cannot be separated so easily. Consumption — What is Microeconomics? 8 Microeconomics and Macroeconomics • Microeconomics is the study of little things: Firms, consumers etc. • Macroeconomics is the study of big things: Economies as a whole etc. • As easy as that, right? Well, yes and no. Often both macro and micro study the same phenomenon. • Another way of distinguishing between the two is the method they use to study these phenomena. • Micro starts with the little things and works up — macro starts with the big things and works down. • Often it is the modelling metholodogy which separates the two
Consumption - What is Microeconomics? Demand and Supply If prices for beef go up, people would want less of it If prices for beef go up, farmers would like to sell more Price · The above diagram is the famous“ demand and supply diagram” It is a model of the market for beef. The market price is p and quantity is q Consumption- What is Microeconomics? Equilibrium Equilibrium is a central concept. For example, it is the price and quantity at hich demand and supply are equal. In the demand and supply diagram of the last page p was the equilibrium price and q the equilibrium quantity. No-one wished to purchase any more at that price, and no farmer wished to supply any less- equilibrium Is that all there is? Well, no. But this is where the course is going The lectures on consumption lead to the demand curve. The lectures of production lead to the supply curve. Finally, the lectures on market examine equilibrium more closel
Consumption — What is Microeconomics? 9 Demand and Supply • If prices for beef go up, people would want less of it. • If prices for beef go up, farmers would like to sell more. ................................................................................................................................................................................................................................................................................ . . 0 Price Quantity Demand Supply p q . . . . . . ............. ............. ............. ............. ............. ........... • The above diagram is the famous “demand and supply diagram”. • It is a model of the market for beef. The market price is p and quantity is q. Consumption — What is Microeconomics? 10 Equilibrium • Equilibrium is a central concept. For example, it is the price and quantity at which demand and supply are equal. • In the demand and supply diagram of the last page p was the equilibrium price and q the equilibrium quantity. • No-one wished to purchase any more at that price, and no farmer wished to supply any less — equilibrium. • Is that all there is? Well, no. But this is where the course is going. • The lectures on consumption lead to the demand curve. The lectures on production lead to the supply curve. Finally, the lectures on market examine equilibrium more closely
Consumption - What is Microeconomics? Prices Prices have many functions in economics. Here are three 1. Information: Most importantly, prices convey information- they tell people about the relative scarcity of different goods without requiring people to know how much is being produced or how, where and when 2. Rationing: Prices prevent scarce resources from running out higher prices will prevent over-demand 3. Income: Prices determine income - in particular, labour's price(wages Prices change all the time. Can the simple model developed so far explain this? Consumption- What is Microeconomics? Comparative Statics Suppose the supply of beef falls due to an outbreak of foot and mouth disease Price New Supply Old Supply Old p Quantity lew g old q The supply curve shifts to the left. For all prices there is less beef supplied. Equilibrium quantity falls and equilibrium price rises. No surprise there This is a comparative static. Comparative statics provide testable predictions
Consumption — What is Microeconomics? 11 Prices • Prices have many functions in economics. Here are three: 1. Information: Most importantly, prices convey information — they tell people about the relative scarcity of different goods — without requiring people to know how much is being produced or how, where and when. 2. Rationing: Prices prevent scarce resources from running out — higher prices will prevent over-demand. 3. Income: Prices determine income — in particular, labour’s price (wages). • Prices change all the time. Can the simple model developed so far explain this? Consumption — What is Microeconomics? 12 Comparative Statics • Suppose the supply of beef falls due to an outbreak of foot and mouth disease. ................................................................................................................................................................................................................................................................................ . . . ....................................................................... ............... ..................... 0 Price Quantity Demand New Supply Old Supply New p New q Old p Old q . . . . . ............. ............. ............. ............. ............. ............. ............. . . . . . . . ............. ............. ............. ............. ......... • The supply curve shifts to the left. For all prices there is less beef supplied. • Equilibrium quantity falls and equilibrium price rises. No surprise there. • This is a comparative static. Comparative statics provide testable predictions
