Inbound 3494381804797819186

27/10/2022
Lecturer’s information
• Doan Thi Phuong Anh (MSc. Economics)

• Email: anhdtp@ftu.edu.vn
• Mobile: 0978.084.069
• Office hour: by appointment only
Doan Thi Phuong Anh - FTU
MICROECONOMICS
• Course title: Elementary Microeconomics

• Course code: KTEE201
• Department: Faculty Of International Economics
- Department Of Microeconomics
• Credit hours: 3
READING MATERIALS
• Compulsory reading
• Mankiw, Gregory (2014). Principles of Economics. 7 th edition, International Edition,
South-Western Cengage Learning Mason.
• Optional reading(s)
• Alain Anderton (2015). Economics. 6 th edition, Anderton Press Ltd.
• David Begg, Stanley Fischer, Rudiger Dornbusch (2008). Economics. 9th edition,
McGraw- Hill.
• Krugman, Wells, (2005). Microenonomics: Study Guide and Activation card, Worth
Publisher.
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Assessment Criteria
• Generic Criteria
Students who have formative and mid-term components below 4.0 out of 10 cannot attend the final exam.
• Formative assessment
Class attendance is mandatory. Students are expected to arrive on time, do homework, summaries,
quizzes, and be willing and able to discuss in the lectures.
• Summative assessment
• 1 mid-term test (30 – 45 minutes), consists of 5 short answer questions
• Final exam (50-60 minutes) consists of multiple choice and problem-solving questions covering all
the chapters of the course.
Final Mark = 10% * formative assessment + 30% * midterm test + 60% * final exam
Topics in this course
• Chapter 1: General introduction
• Chapter 2: Supply and demand
• Chapter 3: Elasticity
• Chapter 4: The theory of consumers’ behavior
• Chapter 5: The theory of firms’ behavior
• Chapter 6: Market structure
• Chapter 7: Labor market
• Chapter 8: Market failures and the role of the Government

Chapter 1: General Introduction

Basic concepts
• Some basic concepts
• Three basic questions of an economy
• Market economy and command economy
Economics
• What Economics is about
• Ten principles of Economics
• Microeconomics and Macroeconomics
• Positive and normative economics analysis
Economic models
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Basic concepts
- Economy: comes from the Greek word for “one who manages a household.”
- Household: faces many decisions to allocate limited resources.
- Society: faces decisions to allocate resources and output
- Entities in the economy:
- Household = consumer
- Firm = producer
- Government
- Resources:
- Land (natural resources)
- Labour (L)
- Capital (K): physical capital
- Entrepreneurship
- Scarcity means that society has limited resources and therefore cannot produce
all the goods and services people wish to have.
Three basic questions of an economy:
• What is to be produced?
• How are the goods to be produced? How can resources be used

efficiently?
• For whom are the goods to be produced?
Market economy and Command economy
• Market economy:
• private ownership of the means of production
• voluntary exchanges/contracts
• Decentralised decision
• Command economy /planned economy:

• governments own the factors of production
• government officials determine when, where and how much is produced.
• Centralised decision
 Mixed economy
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What Economics Is All About
• Economics: the study of how society manages its scarce resources, e.g.
• how people decide what to buy,
how much to work, save, and spend
• how firms decide how much to produce,

how many workers to hire
• how society decides how to divide its resources between national defense, consumer
goods, protecting the environment, and other needs
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Ten principles of Economics (1)
The principles of decision making are:

• People face tradeoffs.
• The cost of any action is measured in terms of foregone opportunities.
• Rational people make decisions by comparing marginal costs and

marginal benefits.
• People respond to incentives.
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The principles of interactions among people are:

• Trade can be mutually beneficial.
• Markets are usually a good way of coordinating trade.
• Govt can potentially improve market outcomes if there is a market

failure or if the market outcome is inequitable.
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The principles of the economy as a whole are:

• Productivity is the ultimate source of living standards.
• Money growth is the ultimate source of inflation.
• Society faces a short-run tradeoff between inflation and unemployment.
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HOW PEOPLE MAKE DECISIONS

Principle #1: People Face Tradeoffs
All decisions involve tradeoffs. Example:

• Going to a party the night before your midterm leaves
less time for studying.
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Principle #1: People Face Tradeoffs
• Society faces an important tradeoff:
efficiency vs. equality
• Efficiency: when society gets the most from its scarce
resources
• Equality: when prosperity is distributed uniformly
among society’s members
• Tradeoff: To achieve greater equality,
could redistribute income from wealthy to poor.
But this reduces incentive to work and produce, shrinks
the size of the economic “pie.”
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Principle #2: The Cost of Something Is
What You Give Up to Get It
• Making decisions requires comparing the costs and
benefits of alternative choices.
• The opportunity cost of any item is
whatever must be given up to obtain it.
• It is the relevant cost for decision making.
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Principle #2: The Cost of Something Is
What You Give Up to Get It
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition, books, and
fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.
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Principle #3: Rational People Think at the
Margin
Rational people
• systematically and purposefully do the best they can to
achieve their objectives.
• make decisions by evaluating costs and benefits of marginal
changes – incremental adjustments to an existing plan.
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Principle #3: Rational People Think at the
Margin
Examples:
• When a student considers whether to go to college
for an additional year, he compares the fees &
foregone wages to the extra income
he could earn with the extra year of education.
• When a manager considers whether to increase
output, she compares the cost of the needed labor
and materials to the extra revenue.
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Principle #4: People Respond to Incentives
• Incentive: something that induces a person to act,
i.e. the prospect of a reward or punishment.
• Rational people respond to incentives.
Examples:
• When gas prices rise, consumers buy more hybrid cars.
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ACTIVE LEARNING 1
Applying the principles
You are selling your 1996 Mustang. You have already
spent $1000 on repairs.
At the last minute, the transmission dies. You can pay
$600 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
Doan Thi Phuong Anh - FTU 21
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Answer
A. Compare the marginal benefit of repairing the car with the marginal
cost of repairing it.
- MB = 6500-5700 = 800 ($)
- MC = 600($)
MB> MC  the car should be repaired
B.
MB = 6000-5500=500($)
MC = 600($)
MB<MC  the car should not be repaired
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HOW PEOPLE INTERACT

Principle #5: Trade Can Make Everyone
Better Off
• Rather than being self-sufficient,
people can specialize in producing one good or service
and exchange it for other goods.
• Countries also benefit from trade & specialization:
• Get a better price abroad for goods they produce
• Buy other goods more cheaply from abroad than could be
produced at home
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HOW PEOPLE INTERACT

Principle #6: Markets Are Usually A Good Way
to Organize Economic Activity
• A market economy allocates resources through the
decentralized decisions of many households and firms
as they interact in markets.
• Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.
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HOW PEOPLE INTERACT

Principle #7: Governments Can Sometimes
Improve Market Outcomes
• Important role for govt: enforce property rights
(with police, courts)
• People are less inclined to work, produce, invest, or
purchase if large risk of their property being stolen.
25
HOW PEOPLE INTERACT

• Market failure: when the market fails to allocate
society’s resources efficiently
• Causes:
• Externalities, when the production or consumption
of a good affects bystanders (e.g. pollution)
• Market power, a single buyer or seller has substantial
influence on market price (e.g. monopoly)
• In such cases, public policy may promote efficiency.
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HOW PEOPLE INTERACT

• Govt may alter market outcome to promote equity

• If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can change how
the economic “pie” is divided.
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HOW THE ECONOMY AS A WHOLE WORKS

Principle #8: A country’s standard of living
depends on its ability to produce goods &
services.
Principle #9: Prices rise when the

government prints too much money.
Principle #10: Society faces a short-run

tradeoff between inflation and unemployment
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Microeconomics and Macroeconomics
• Microeconomics
• The study of how households and firms make decisions
• and how they interact in markets.
• Macroeconomics
• The study of economy-wide phenomena, including inflation,
unemployment, and economic growth.
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Positive and Normative

economic analysis
• Positive statements
• Attempt to describe the world as it is
• Descriptive
• Confirm or refute by examining evidence
• Normative statements
• Attempt to prescribe how the world should be
• Prescriptive
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Are the following statements normative or positive?
1. Minimum-wage laws cause unemployment.
2. The government should raise the minimum wage.
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Economic Models
• Assumptions simplify the complex world,
make it easier to understand
• Ceteris paribus assumption: All other things being

equal. The term refers to holding all other variables
constant when one variable is changed
• Economists use models to study economic issues. A

model is a highly simplified representation of a more
complicated reality.
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Some Familiar Models
A model airplane
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Some Familiar Models
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Our First Model: The Circular-Flow Diagram

Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
35
Our Second Model:

The Production Possibilities Frontier
 The Production Possibilities Frontier (PPF):
A graph that shows the combinations of two goods the economy
can possibly produce given the available resources and the
available technology.
 Example:
• Two goods: computers and wheat
• One resource: labor (measured in hours)
• Economy
Doan Thi Phuong has
Anh - FTU hours per month available for production. 36
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PPF Example
 50,000 labor hours
 Producing one computer requires 100 hours labor.
 Producing one ton of wheat requires 10 hours labor.
Employment of
Production
labor hours
Computers Wheat Computers Wheat
A 50,000 0 500 0
B 40,000 10,000 400 1,000
C 25,000 25,000 250 2,500
D 10,000 40,000 100 4,000
E
0 50,000 0 5,000 37
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PPF Example
Wheat
Point Production
(tons)
on Com- 6,000
graph puters Wheat E
5,000
A 500 0 D
4,000
B 400 1,000
3,000 C
C 250 2,500
2,000
D 100 4,000 B
1,000
E 0 5,000 A
0
0 100 200 300 400 500 600
Computers
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Wheat
(tons)
6,000
5,000
4,000
3,000
F
2,000
1,000
0
0 100 200 300 400 500 600
Computers
Doan Thi Phuong Anh - FTU 39 39
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Wheat
(tons)
6,000
5,000
4,000 G
3,000
2,000
1,000
0
0 100 200 300 400 500 600
Computers
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The PPF: What We Know Far

 Points on the PPF (like A – E)
• possible
• efficient: all resources are fully utilized
 Points under the PPF (like F)

• possible
• not efficient: some resources underutilized

(e.g., workers unemployed, factories idle)
 Points above the PPF (like G)

•
Doan Thinot possible
Phuong Anh - FTU 41
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The PPF and Opportunity Cost
 Recall: The opportunity cost of an item is what must be given up to

obtain that item.
 Moving along a PPF involves shifting resources (e.g., labor) from the
production of one good to the other.
 Society faces a tradeoff: Getting more of one good requires

sacrificing some of the other.
 The slope of the PPF tells you the opportunity cost of one good in
terms of the other.
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The PPF and Opportunity Cost

Wheat The slope of a line
(tons) equals the “rise
–1000 over the run” –
6,000 slope = = –10
100 the amount the line
5,000
rises when you
4,000
move to the right
3,000 by one unit.
2,000
Here, the
1,000 opportunity cost of
0 a computer is
0 100 200 300 400 500 600 10 tons of wheat.
Computers
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A C T I V E L E A R N I N G 2:
PPF and Opportunity Cost
In which country is the opportunity cost of cloth lower?
FRANCE ENGLAND
Wine Wine
600 600
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
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A C T I V E L E A R N I N G 2:
Answers
England, because its PPF is not as steep as France’s.
FRANCE ENGLAND
Wine Wine
600 600
500 500
400 400
300 300
200 200
100 100
0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
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Economic Growth and the PPF

With additional Wheat
resources or an (tons) Economic
improvement in 6,000 growth shifts
the PPF
technology, 5,000 outward.
the economy can
4,000
produce more
computers, 3,000
more wheat, 2,000
or any combination 1,000

in between. 0
0 100 200 300 400 500 600
Computers
46
The Shape of the PPF

 The PPF could be a straight line, or bow-shaped
 Depends on what happens to opportunity cost
as economy shifts resources from one industry
to the other.
• If opp. cost remains constant,
PPF is a straight line.
(In the previous example, opp. cost of a
computer was always 10 tons of wheat.)
• If opp. cost of a good rises as the economy
produces more of the good, PPF is bow-shaped.
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The PPF Might Be Bow-Shaped
As the economy
Hamburgers
shifts resources
from hamburgers to
cell phones:
• PPF becomes
steeper
• opp. cost of cell
phones
increases
Cell
phones
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Why the PPF Might Be Bow-Shaped
At point A, At A, opp. cost of
Hamburgers
A cell phones is
most workers are
low.
producing
hamburgers,
even those that
are better suited
to produce cell
phones.
So, do not have to
give up much Cell
hamburgers to get phones
more cell phones.
49

At B, most workers
are producing cell
Hamburgers
At B, opp. cost
phones. rs are the of cell phones
best cooks. is high.
Producing more cell
phones would require B
shifting some of the
best cooks away
from hamburger
production, would
cause a big drop in
Cell
hamburger output. phones
50

 So, PPF is bow-shaped when different workers have different
skills, different opportunity costs of producing one good in terms
of the other.
 The PPF would also be bow-shaped when there is some other

resources, or mix of resources with varying opportunity costs.
• E.g., different types of land suited for different uses
51
17

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27/10/2022

• Doan Thi Phuong Anh (MSc. Economics)

Doan Thi Phuong Anh - FTU

• Course title: Elementary Microeconomics

Doan Thi Phuong Anh - FTU

Doan Thi Phuong Anh - FTU

Doan Thi Phuong Anh - FTU

Topics in this course

• Chapter 1: General introduction

• Chapter 2: Supply and demand

• Chapter 4: The theory of consumers’ behavior

• Chapter 5: The theory of firms’ behavior

• Chapter 6: Market structure

• Chapter 7: Labor market

• Chapter 8: Market failures and the role of the Government

Chapter 1: General Introduction

Three basic questions of an economy:

• How are the goods to be produced? How can resources be used

• For whom are the goods to be produced?

Doan Thi Phuong Anh - FTU

Market economy and Command economy

• Command economy /planned economy:

Doan Thi Phuong Anh - FTU

What Economics Is All About

• how firms decide how much to produce,

Doan Thi Phuong Anh - FTU

Ten principles of Economics (1)

The principles of decision making are:

• The cost of any action is measured in terms of foregone opportunities.

• Rational people make decisions by comparing marginal costs and

• People respond to incentives.

Doan Thi Phuong Anh - FTU

Ten principles of Economics (2)

The principles of interactions among people are:

• Markets are usually a good way of coordinating trade.

• Govt can potentially improve market outcomes if there is a market

Doan Thi Phuong Anh - FTU

Ten principles of Economics (3)

The principles of the economy as a whole are:

• Money growth is the ultimate source of inflation.

• Society faces a short-run tradeoff between inflation and unemployment.

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

All decisions involve tradeoffs. Example:

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

Doan Thi Phuong Anh - FTU

HOW PEOPLE MAKE DECISIONS

Doan Thi Phuong Anh - FTU