Comm220 Ch 1 - CHAPTER 1 PRELIMINARIES Key Concepts and...

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Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 1. 1 CHAPTER 1 – PRELIMINARIES Key Concepts and Topics The Themes of Microeconomics What is a Market? Real versus Nominal Prices Why Study Microeconomics? Microeconomics Study of the behaviour of individual economic units (i.e., consumers, workers, firms, investors, etc.) and the market that formed by these economic units Themes of Microeconomics Microeconomics deals with limits (e.g., budgets, time, ability to produce) How do we make the most of limits? How do we allocate scarce resources? Trade-Offs 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? Consumers Limited incomes How do consumers maximize their well being, using their preferences, to make decisions about trade-offs ( Consumer Theory )? How do consumers make decisions about consumption and savings? Workers Individuals decide when and if to enter the work-force – Trade-offs of working now or obtaining more education/training What choices do individuals make in terms of jobs or work places? How many hours do individuals choose to work? – Trade-off of labor and leisure
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Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 1. 2 Firms What types of products do firms produce? o Constraints on production capacity & financial resources create needs for trade-offs How trade-offs are best made ( Theory of the Firm )? Prices and Markets Trade-offs are often based on prices faced by consumers and producers Workers made decisions based on prices for labor (i.e., wages) Firms make decisions based on prices for inputs and on prices for the goods they produce How are prices determined? Centrally planned economies – governments control prices Market economies – prices determined by interaction of market participants Markets – collection of buyers and sellers whose interaction determines the prices of goods Theories and Models Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions The Theory of the Firm: assumes firms try to maximize their profits Theories are used to make predictions
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