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Introduction to Microeconomics

  • Core Concepts:

    • Scarcity: Resources are limited, necessitating choices.

    • Tradeoffs: Because of scarcity, choosing one thing means giving up another.

    • Prices: Mechanisms that allocate scarce resources and reflect values.

  • Theories and Models: Simplified representations of complex economic phenomena used to understand and predict behavior.

  • Positive vs. Normative Analysis:

    • Positive Analysis: Describes objective, factual statements about what is or what will be (e.g., "An increase in price will reduce quantity demanded."). These statements can be tested and confirmed or refuted.

    • Normative Analysis: Involves subjective value judgments about what ought to be (e.g., "The government should lower taxes."). These statements cannot be proven or disproven.

  • What is a Market?

    • A collection of buyers and sellers whose interaction determines the price of a product or set of products.

    • Types of Markets: Can vary by structure (e.g., perfectly competitive, monopolistic), geographic scope, or product type.

    • Market Definition: Crucial for understanding competitors, substitutes, and geographic boundaries for policy analysis.

  • Real vs. Nominal Prices:

    • Nominal Price (Current Dollar Price): The absolute price of a good, unadjusted for inflation.

    • Real Price (Constant Dollar Price): The price of a good relative to an aggregate measure of prices, adjusted for inflation to reflect its purchasing power.

    • How to Convert Nominal Prices to Real Prices:

      • Using a Price Index (e.g., CPI - Consumer Price Index): Real Price{YearX} = Nominal Price{YearX} \times \frac{CPI{Base Year}}{CPI{Year_X}}

        • Example: If nominal price in 2020 is 100 and CPI in 2020 is 200, and base year CPI is 100, then real price in 2020 (in base year dollars) is 100 \times \frac{100}{200} = 50.

      • Using an Inflation Rate to Create a Price Index: If you know the inflation rate, you can construct a price index to deflate nominal prices.

  • Why Study Microeconomics?

    • Provides tools for making better business and personal decisions.

    • Helps understand public policy issues and their implications.

    • Explains how individual agents (consumers, firms) behave and interact in markets.