Ch.1 Notes - Intermediate Microeconomics Professor Yongmin...

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Intermediate Microeconomics Professor Yongmin Chen Topic 1. Introduction to Microeconomic Analysis What is microeconomics? Microeconomics studies the behavior of individual economic agents and their interactions. By economic agents we usually mean consumers and firms. To study the behavior of consumers and firms is to study how consumers make consumption choices and how firms make production decisions. It is the standard approach of microeconomics, although not without controversy, to assume that consumers seek to maximize satisfaction and firms seek to maximize profits. The mechanism through which consumers and firms interact with each other is the market. Microeconomics analyzes the determination of market demand and supply, various forms of market structures, and how they affect economic efficiency. To give you an idea the type of questions that microeconomics deals with, let me start with a simple example. Consider some of the important decisions a firm, say Dell Computer, needs to make. First, Dell needs to decide what kind of computers to produce: the processor, hard disk capacity, RAM, modem, CD-ROM, installed software, monitor, etc. Second, Dell needs to decide how to produce the computers: in one location or in different locations; equipment and technologies to use; make or purchase choices, etc. What may determine Dell’s production decision? Consumer demand; technological feasibility; costs of production; products of other computer producers, and so on. Third, Dell needs to decide how to price its computers. This again will depend on things such as consumer demand and production costs, as well as on the prices of competitors. Now, these decisions are not unique to Dell. Other computer producers will face the similar types of decision problems. In fact, almost all business firms need to make decisions regarding what to produce, how to produce and how to price their products.
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How they make these decisions is studied in microeconomics. Since these decisions are likely to depend on consumer demand, cost conditions, market structures, and the strategies of other firms, microeconomics will study demand, supply, market structures, and the strategic interactions between firms. From our discussion so far, it should be clear that microeconomics is very important for anyone who needs to make business decisions. This can be one practical reason why we study microeconomics--we want to be well prepared if we will be in a position of making business decisions in the future. But that is not the only reason why microeconomics is an important subject. We are all consumers. Knowing how the market works is also important for a consumer. When you shop for a car, for example, it would be useful for you to know the market structure and the pricing strategies of the dealers. More generally, microeconomics is useful for any educated member of a society.
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Ch.1 Notes - Intermediate Microeconomics Professor Yongmin...

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