Kapitel 1 Flashcards
Microeconomics Definition
- social science that analyses decision taking ususally under constraint
- deals with
- individual decision making
- workings of markets
decisions usually cost-benefit approach
Micro vs. Macro
Micro: bottom up approach, individual market participants
Macro: looks to aggregate indicators of performance (GDP growth, inflation etc.) in region, country…
behavior rational at indivudual level might be irrational at aggrgeate level
Economic models
- abstraction and simplification of the real world
- in mathematical terms
- allows exact presentation to check correctness of theories
normative vs positive theories
Normative Theories:
Nature: Prescriptive, focusing on how things should be.
Purpose: Guides behavior based on values and principles.
Example: Prescribes policies deemed morally right or just.
Positive Theories:
Nature: Descriptive, explaining phenomena as they are.
Purpose: Understands and predicts based on empirical evidence.
Example: Analyzes economic decisions without passing moral judgment.
econmics usually better for positive theories
Endogenous vs. exogenous variables
Endogenous variables: Variables that are explained by the model.
Exogenous variables: Variables that are externally given and therefore not explained by the model.
Commodities (Goods)
Commodities (goods) are the object of trade in a market.
- uniquely defined by
– attributes that distinguish them in the eyes of consumers
– location at which they are made available
– date at which they are made available
- not necessarily physical goods
- Depending on the focus of analysis, we typically merge different commodities into a broader category
assumption: finite number of commodities
Prices
Commodities are traded in a market at certain prices which may be expressed in two ways:
absolute: abstract units of some currency (e.g. euro, dollar, yuan)
relative: units of a numeraire commodity as rates of exchange
Markets
Common Language: place where commodities are bought and sold
economics: place where two or more individuals are prepared to enter into an exchange transaction (broader)
perfectly competitive market:
I a great number of market participants;
I each of them acting in an individually optimal and uncoordinated way;
I each of them having no significant individual impact on prices;
I where all costs and benefits to any transaction are explicitly taken into account.
Economic agents
- basic unit of analysis
- can be:
- consumers
- firms
consumers may sell commodities (labour) and firms may buy it
differentiation in the nature of their activity
- consumers buy and sell to consume
- firms buy and sell to sell
in reality definition is more complex (building houses, managers or entrepeneurs)
Rationality and optimization
- basic assumption: all agents act rational
- that means:
I Decision makers set out all feasible alternatives, discarding any which can not be attained.
I All available information is gathered and taken into account for the decision.
I According to their consequences feasible alternatives are ranked in order of preference, which must satisfy certain consistency assumptions.
I The alternative highest in this ordering is chosen; this alternative is the most preferred among all those available
however, gathering information is costly, may act non rational
Cost-benefit approach
Alternative x is chosen if its benefits exceed its costs.
The opportunity cost of choosing x instead of y is the implicit value of y sacrificed by choosing x. They should be accounted as costs of x.
Sunk costs: cost that cannot be recovered at the moment the decision is made. They should be discarded.
Marginal and average magnitudes
Marginal cost: (alt. marginal benefit) is the increase in total costs (alt. increase in total benefit) that results from carrying out one additional unit of a given activity
Average cost (alt. average benefit) of undertaking k units of a given activity is the total cost (alt. total benefit) of the activity divided by k, i.e. cost or benefit per unit undertaken.
when increasing an activity, always compare marginal cost with marginal benefit
Demand curve
horizontal intepretation:
The market demand for a certain commodity is a mathematical relation that tells how many units of the commodity buyers wish to purchase at various possible prices
Vertical interpretation:
price that can be commanded in the market for an additional unit of the commodity for any given number of units currently purchased. It corresponds to the marginal buyer’s reservation price.
Law of demand: on the side of consumers there is usually an inverse relation between price and quantity (downward sloping demand). If the price falls, demand increases. Alternatively, if demand increases, the price that can be commanded in the market falls.
Supply curve
The supply curve is the relation that tells how many units of a commodity are offered to the market at various possible prices.
- usually upwards sloping curve
Equilibrium
equilibrium, when
- individual decision makers do not wish to change their decision
- individual decisions are compatible and can be realized
(Pareto) efficiency
- allocation of commodities is pareto efficient if there exists no feasible allocation that makes at least one individual strictly better off without making any individual worse off
- not ecessarily egalitarian of fair
- an inefficient allocation cannot be an equilibrium
Market failures
may arise, if a free, competitive market is not able to allocate
resources efficiently
reasons:
- nonrival public goods
- external positive or negative effects
- imperfect competition
-asymmetric information
