econ%20501%20ln%201 - Lecture Note 1: Overview Somasree...

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Unformatted text preview: Lecture Note 1: Overview Somasree Dasgupta Econ 501N01 Winter,2008 Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. Two main branches of Economics: Microeconomics and Macroeconomics. Microeconomics: deals with the behavior of individual economic units Consumers Workers Firms Microeconomics describes the trade offs that they face and how these trade offs are best made. Macroeconomics: deals with aggregate economic variables, such as national income, unemployment and inflation. In Microeconomics, prices play a very important role. In a market economy, prices are determined by interactions of consumers, workers and firms. Microeconomics is concerned with both positive and normative questions. Positive analysis: Analysis describing relationships of cause and effect. Deals with explanations and predictions. Normative analysis : Analysis describing questions of what ought to be. Often involves value judgments. Market: Collection of buyers or sellers that, through their actual or potential interactions determine the price of a product or a set of products. Perfectly Competitive Market: A market with many buyers and sellers such that no single buyer or seller has a significant impact on price. Example :agricultural markets. In a perfectly competitive market, buyers and sellers are price takers. This single price is known as the market price. 1 Noncompetitive markets: Individual buyer/seller can affect the price prevailing in the market. Monopoly Monopsony Monopolistic Competition Oligopoly Market definition identifies which buyers and sellers should be included in a given market. Extent of a market: boundaries of a market, both geographical and in terms of the range of products produced and sold within it. Real versus nominal prices: Nominal price: absolute price of a good, unadjusted for inflation. Real price: price of a good relative to an aggregate measure of prices; price adjusted for inflation. The aggregate measure of prices most often used is the Consumer Price Index (CPI). Example: Computing real prices from nominal prices. Suppose nominal price of a pound of butter was $0.87 in 1970 and $ 3.30 in 2001. The CPI was 38.8 in 1970 and rose to 177 in 2001. Find the real price of a pound of butter in 2001(in terms of 1970 dollars). In real terms is the price of butter lower or higher in 2001 compared to 1970? Base year = 1970 Real price of a pound of butter in 2001 in 1970 $= (38.8/177) X 3.3 = $ 0.72 Real price of a pound of butter in 1970 in 1970 $ = (38.8/38.8) X 0.87 = $ 0.87 Compare the two real prices. In real terms,price of butter is lower in 2001 compared to 1970. Read examples 1.1, 1.2,1.3, 1.4 from book. Read the two examples in section 1.4 of your book. 2 ...
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This note was uploaded on 04/28/2008 for the course ECON econ taught by Professor Daspugata? during the Winter '08 term at Ohio State.

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