Microeconomics: Lecture 1

Introduction and Preliminaries

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About the course

This is a sophisticated introduction to economics for students like you! there will be some challenges, but you will be

surprised by how much you will achieve!

You will learn the most fundamental tools that economists use how modern economic theory allows us to

understand economic phenomena

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Two ‘teaching blocks’

Lecture: formal tools, language and analysis are introduced.

Recitation by TA: go over problem sets and discuss other material

Course Website: http://newclasses.nyu.edu/

1. lecture notes (slides)2. problem sets and answer

keys 3. sample exams

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Grading Policy10 Problem Sets 20%2 Quizzes 10%Midterm 30%Final 40%

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Prerequisites

•Basic Algebra and Calculus

•Math Guide posted online

About your professor

Nationality: British Education: M.A. (Economics), University of Aberdeen,

M.Phil. (Economics), University of Cambridge, Ph.D. (Economics), University of St Andrews

Current Position: Clinical Associate Professor of Economics

Previous Positions: Teaching: University of Edinburgh (Scotland), Florida State, Georgia Tech, University of Colorado at Denver, SUNY, Buffalo, QUT (Australia), Economist: HSBC Markets, (British) Government Economic Service, Cambridge Econometrics

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Today: introduction and some basic concepts (CPI)

Economics as a social scienceMethods and fields of studyBasic concepts:

Normative versus positive analysisMarket definitionPrices & consumer price index (inflation)

Economics: Definition

Economics is the study of how a society uses its limited resources to produce, trade and consume goods and services

Limited budgets and time for consumers

Limited ability to produce for producers

Micro versus Macro

Macroeconomics: branch of economics that deals with aggregate economic variables, such as Growth rate of GDP Interest Rates Unemployment Inflation

Micro versus Macro

Microeconomics: branch of economics that deals with behavior of individual economic units – consumers, firms, workers, investors – and markets that these units comprise

Themes of Microeconomics

Workers, firms and consumers must make trade-offs

Do I work or go on vacation?

Do I purchase a new car or save my money?

Do we hire more workers or buy new machinery?

How are these trade-offs best made?

Theories and models give insight by providing basic structure

Theories and Models

Theories are expressed in the form of economic models

An economic model is a description of an economic situation via words and mathematical expressions

Often mathematical expressions are depicted with diagrams

Models as maps

Finding your way around NYU. Which map is more stylized? Which map has more information? Which map is more useful?

Economic Models: Description

A model usually consists of:

agents: agents: their resources, objectives, preferences, how they behave, …

economic environmenteconomic environment (markets, contractual arrangements, other relevant institutions)

Economic Model: US Open

Some concepts:1)Positive & Normative Analysis

Positive Analysis – statements that describe the relationship of cause and effect

Questions that deal with explanation and prediction

Normative Analysis - analysis examining questions of what ought to be

Often supplemented by value judgments

Positive & Normative Analysis (ctd)

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2) Market Collection of buyers and sellers, through their

actual or potential interaction, determine the prices of products

Buyers: consumers purchase goods, companies purchase labor and inputs

Sellers: consumers sell labor, resource owners sell inputs, firms sell goods

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What is a Market? Many of the most interesting questions in economics concern

the functioning of markets

Why are there a lot of firms in some markets and not in others?

Are consumers better off with many firms?

Should the government intervene in markets?

The Extent of the Market

Are fast-food restaurants in Williamsburg and the Village part of the same market?

Are laptops and Ipads part of the same market or not?

3) Price

Price = signal to agents when making decisions

Not always in a market environment:Centrally planned economies (Cuba,

North Korea, former Soviet Union)by government or regulatory body

Real Versus Nominal Prices

Comparing prices over time requires measuring prices relative to some overall price levelNominal price is the absolute or current

dollar price of a good or service when it is sold

Real price is the price relative to an aggregate measure of prices or constant dollar price

Real Versus Nominal Prices

Consumer Price Index (CPI) is often used as a measure of aggregate pricesRecords the prices of a large market

basket of goods purchased by a “typical” consumer over time

Weighted by expenditure shares Percent changes in CPI measure the rate

of inflation

Real Versus Nominal Prices

Calculating Real Prices

yearcurrent yearcurrent

yearbase Price Nominal x CPICPI

RealPrice baseyear

Real Price of College

Year Nom. Price

CPI Real Price

Summary of Concepts

Definition of economicsMicro vs. MacroTheories and models Positive vs. Normative StatementsMarkets Prices (nominal vs. real, price indexes)

Required Reading

Pindyck and Rubinfeld, Microeconomics, 8th edition, Chapter 1, pp. 3-20.