Microeconomics• Course: Basic Microeconomics

• Instructor: Wai Chiu WOO

• Textbook: Pindyck and Rubinfield

• Teaching assistants: Geng, Longbo, Wong Tak Yuen

Microeconomics

• Requirements of this course:

• Mid-term: 35%

• Final: 50%

• Assignments: 15%

Midterm

• 29th Feb (Friday): 7:00-8:30pm

• Venue to be announced

• Combined exam for both Class C and D.

• Medical note from Uni clinics, or note endorsed by Uni clinics

• Extra works and/or tests to be assigned

• Time clash with midterm.

Microeconomics

• Assignments 15%

- 6 assignments

- Submitted by a 2-person team.

- Submit the team member list to me on the 21st Jan class.

- Tutorials to discuss answers (schedule to be announced).

- Answers won’t be posted on Web.

Microeconomics

• How to prepare for this course?- Reading textbook (This is a good textbook).

In my opinion, this is a bad habit of not reading textbook.

- Do the assignments yourself, better take the opportunity to train yourself.

- Attending lectures and tutorials.

Microeconomics

• WebCT (http://webct.cuhk.edu.hk/webct/entryPageIns.dowebct):

- For PowerPoints, or other notices, assignments. • E-mail:- Check your university’s accounts, not your private y

ahoo or google account- Don’t send e-mails through WebCT to me. Send to

my e-mail address wcwoo@cuhk.edu.hk.

Microeconomics

• Microeconomics is one of the two major branches in economics. Another branch is macroeconomics.

• Why study economics?• I suppose it is interesting. • Understanding the nature of many important

issues, e.g. development, unemployment, competitiveness, distribution, business strategies etc.

Microeconomics • What is economics?• The most famous definition (by

Lionel Robbins): “Economics is the science which studies human behaviour as a relationship between given ends and scarce means which have alternative uses”

• Human behaviour: subject of all social science

• Scarce means: economics

Microeconomics

• Scarcity is the source of all economic problem.

• Can’t serve all our wants. Have to make trade off. This is econ problem.

• “human behaviour as a relationship between given ends and scarce means”

• This is how economists see the world, differ from other social scientists.

Microeconomics

• Sociologists’ view: human behaviours as members of groups, institutions and society

• Anthropologists’ view: human behaviours in different cultural contexts.

Microeconomics • Economics defined by point of view rather than

area of study. • All human behaviour is economic (or

sociological).• Family life is not economic? Nobel Laureate

Gary Becker says it is. People bear fewer children coz foregone earning is higher.

• But sociologists study family in another perspective (how we learn to be

a member of a society).

Microeconomics

• Human behaviour in the eyes of economists: Making choices to maximize benefit subject to constraints (scarcity resource)

• Consumer: Choose quantity purchased → Max satisfaction (utility) st. budget, prices of goods

• Producer: Choose quantity produced, input employment → Max profit st. production technology, input prices

• Government: Choose taxes, subsidies, public projects → Max social welfare st. nation’s resource

Microeconomics

• In short, “constrained maximization” is the typical model of human behaviour in econ

• The approach also distinguishes economics from other social science.

Student Background of ECO1011C&D

• No advanced maths + no econ: 3

• Advanced maths + no econ: 16

• Perspectives in econ: 33

• HKCEE econ: 14

• HKAL econ: 4

Micro vs Macro

• Micro vs Macro: What’s the difference?

• Macroeconomics: studies aggregate variables (GNP, inflation, unemployment, etc)

• Microeconomics: studies individual actors (consumer, producers etc), their interactions (market)

Micro vs Macro• These are the traditional definitions.

But I don’t like it. • 20-30 years ago: Macro is Keynesian

economics. Micro is economics before the great British economist Keynes (1883-1946).

• Keynesian econ: draw a map of econ, how C, I relates to Y, r, etc

• Pre-Keynes econ: how single consumer, firm behaves

Micro vs Macro

• There was a methodological gap.

• Similar to physics

• Microphysics (Microecon): Quantum physics looks at atoms (individual actors)

• Macrophysics (Macroecon): Theory of Relativity looks at stars (aggregate data)

Micro vs Macro

• Nowadays, all macro textbooks will talk about micro foundations. E.g. individual consumer’s behaviour → aggregate data. Is it micro?

• Furthermore, the last chapter of micro textbook is usually about general equilibrium (how all markets in an economy interact). Is it macro?

Micro vs Macro

• Probably we can only say:

• For macro, our end-point is aggregate data, but we may step back to find out the factors behind aggregates

• For micro, we always start from individual actors, but we may step forward to draw the picture for the whole economy.

Some methodological issues

• Positive vs Normative Analysis:

• Positive analysis: about what is, was, will be. Fact.

• E.g. income up, price up

• Normative statement: about what ought to be, what is good or desirable. Value.

• E.g. should enhance our competitiveness

Some methodological issues

• Economics, as a social science, is positive• But economics is related to public policy

making. Which policy is desirable? • Some normative analysis is needed when

applying economics in public policy analysis. • Shouldn’t confuse fact with value.• Shouldn’t say value must be purely arbitrary.

Some methodological issues

• Theory vs Empirics:• Science: theory → prediction → confirmation/refutation• Scientific statements usually are formulated as

“universal truth”. • E.g. sun rises from the east everyday. • Empirically, you can’t prove universal stateme

nts to be true (there is always a tomorrow).

Some methodological issues• But you can falsify an universal statement (one

counterexample is enough). • Karl Popper: scientific statement is refutable (in

principle). • Karl Marx: Capitalism will eventually break down• No time frame: can’t be refuted even in principle.

Not a scientific statement.

Some methodological issues

• Economics textbook presents you a lot of theories.

• Eventually, they are used to make analysis of the real world and make predictions. We are able to test if these theories are consistent with facts.

Some methodological issues

• Assumptions vs Real World:• Jokes about economists’ making unrealistic as

sumptions are many.• A mathematician, physicist, economist after a

Titanic crash on an island. Starving to death. Find a can of roastbeef. Debating how to open it without can-opener. Math: drop the can from the cliff. Physic: heat the can. Econ: “Let’s suppose the can is opened”

Some methodological issues

• Actually, not so bad!• Common assumptions used in economic models- Individuals are identical. - Only two persons in a society. • Not realistic. Is it a bad thing?

• Market D = D1 + D2. Realistic assumption: n persons in a society.

• The model is complicated without providing additional insights.

Some methodological issues

• Maybe we can’t solve the model.

• Can’t use graph for illustration.

• What’s the benefit by assuming n persons?

• We get the same wanted conclusion: market D = sum of individual D.

• Pros and Cons of realistic assumption → We usually prefer simplifying assumption.

Some methodological issues

• The point is: Is the simplification relevant to the problem?

• E.g. Can one or two soft drink vending machines be installed on ELB? The answer depends on the no of consumers.

• We can’t assume only two persons in this situation. • Coz no of consumers is a relevant point.

Some methodological issues

• Topic: A Study of Effective Measures to Reduce Road Congestion

• Major proposal: Control the traffic of private car

• Major assumption: Private cars are the major contributor of road congestion.

Some methodological issues

• Making good simplifications:

- Depends on experience

- Distinguish good economists from bad

- Realistic assumption is not a must

Some methodological issues

• Maths vs Logics:• To be a good economics student/economist, you must

have a reasonable skill in mathematics and logics. • I find maths is usually not a problem for my students.

If they can’t do basic maths, they will naturally be crowded out.

• However, a good “calculator” is not equivalent to having a logical mind.

• At least you have to understand the “if-then” logical structure.

Some methodological issues

• If profit is maximized, you can’t increase profit by selling more product.

• If you can’t increase profit by selling more product, profit is maximized.

• If route A is shorter than route B, then route B is not the shortest route.

• If route B is not the shortest route, then route A is shorter than route B.

Some methodological issues

• If X then Y: If X is true then Y must be true. X is sufficient to ensure Y is true. But it doesn’t mean we must rely on X to establish Y.

• X is a sufficient condition for Y, but not a necessary condition.

• Now, suppose Y is not true. Then, X must be untrue. Why? Coz if we have X then Y must be true.

• Y is a necessary condition for X.

Some policy questions

• Minimum wage law:

• Why it is opposed by almost all economists?

• Would some workers benefit from such law? Would some suffer from it?

• Would the benefit of the gainers offsets the loss of the losers?

Some policy questions

• Telecommunication companies are regulated by Tele Authority. Why?

• Price cut by the dominating operator needs approvals from the Authority. Wouldn’t it unfair to the operator?

• Why we believe competition is not enough in this sector?

Some policy questions

• Suppose all goods and services are taxed at 5% on their sales values.

• Consumers say: we pay 5% more? Is it correct?

• Retailers say: we lose our consumers. Is it correct?

• Can both of them correct?

• Who really suffer more?

1.Analysis with Demand-Supply Model:Basic demand-supply modelWelfare analysis ElasticityMarket interventionsInter-marker effects

1.Consumer’s Decision-making:Preference and utilityIndifference curveDerivation of demand curveApplicationsDecision-making under uncertaintyReducing risk

1.Producer’s Decision-making:Production technologyCost of productionProfit-maximization: competitive marketProfit-maximization: monopoly

1.Optional Topics:Game theory OligopolyPricing strategies with monopoly powers