Transcript Lecture 1

Lecture 1
Basic Economic Analysis
The Economic Framework
• For our purposes two basic sets of agents:
– Consumers
– Firms
• Both consumers and firms live within an
environment defined by certain economic
characteristics
• Faced with some environment, each agent
makes decisions
• Decisions lead to economic outcomes
Economic Analysis
• Analysis of decisions of individual agents
operating within an economic environment
• Make predictions on the observable outcomes of
these decisions and how these observables are
affected by the economic environment.
• Observable outcomes: Prices, Quantities,
Profits, Product specifications, Advertising,
Contractual Arrangements, Technological
Change
Individual Decision Making
The Basic Principles
PRINCIPLE 1
Individuals are self interested.
Among the feasible alternatives
individuals choose whatever they
most prefer.
PRINCIPLE 2
Every choice results in foregone
alternatives. The value of the
foregone alternative represents
the cost of the choice
(OPPORTUNITY COST)
PRINCIPLE 3
Individuals adjust consumption decisions
in response to prices. The amount of a
good that an individual wishes to
purchase (quantity demanded) falls as its
price increases. The amount an individual
wishes to sell (quantity supplied)
increases when price increases
Competitive Equilibrium
• Demand curve summarizes how the decisions of
individuals wishing to purchase the good are
affected by changes in the price of the good: As
price falls, desired quantity purchased rises.
• Supply curve summarizes how the decisions of
individuals wishing to sell the good are affected
by changes in the good’s price: As price rises,
desired quantity sold rises.
• How are these decisions coordinated to produce
a market outcome?
Equilibrium Cont’d
• Price adjustments are the means by which
individual purchaser’s decision and individual
seller’s decision coordinated.
• As price rises, quantity demanded falls and
quantity supplied rises; as price falls, quantity
demanded rises and quantity supplied falls
• Equilibrium price is the one for which quantity
demanded equals quantity supplied: the amount
that buyers wish to purchase is just equal to the
amount sellers wish to sell.