MICROECONOMICS

BLOCK 1: INTRODUCTION TO MICROECONOMICS

 ECONOMICS AS A SOCIAL SCIENCE

 Economics: social science that studies the production, and consumption of goods and
services; and the income distribution.

Lionel Robbins: "Economics is the science which studies human behaviour as a

relationship between ends and scarce means which have alternative uses”. (Without
scarcity and alternative uses, there is no economic problem).

 Market: the concept of market is any mechanism/structure that allows buyers and
sellers to exchange any type of goods, services and information. The market equilibrium
occurs at the price at which quantity demanded and quantity supplied are equal. (€/kg

Pe = Qd =Qs

 MICROECONOMICS VS MACROECONOMICS
 Microeconomics: branch of economics concerned with how the economic agents make
decisions and how these decisions interact.

 Macroeconomics: branch of economics concerned with the overall economy

 Economic growth: growing ability of the economy to produce goods and services
analizing the CPI (index de preus al consumidor)

 POSITIVE VS NORMATIVE ECONOMICS

 Positive economics is the branch of economic analysis that describes the way the economy
actually works. (we use data --- objective)

- Statement of fact

- ‘what is’

A positive statement is one that is objective and can be backed up by evidence.

Economists must always use positive statements when making responses, not normative.

Example: If carbon emissions were cut by 25%, air quality would improve and the number of
people diagnosed with asthma would decrease significantly.

 Normative economics makes prescriptions about the way the economy should work.
(opinion statements --- Subjective)
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- Statement of opinion

- ‘what ought to be’

A normative statement is a value judgement and states what someone thinks ‘ought to be’.
Normative statements are subjective and influenced by personal biases, background,
personal politics etc.

An example of a normative statement:

To clean up air quality and cut down carbon emissions by 25%, 4 x 4 vehicles should only be
sold to farmers and those living in rough terrain areas.

 A forecast is a simple prediction of the future.

 Politicians and members of the general public use normative statements. As Economists,
you must learn to use positive statements.

 MODELS IN ECONOMICS
A model is a simplified representation of a real situation. It is used to better understand
real-life situations.

Models play a crucial role in economics

 Used to study a real but simplified economy

 Used to simulate an economy on a computer

The “other things equal” (ceteris paribus) assumption means that all other relevant factors
remain unchanged.

 FACTORS OF PRODUCTION
 Production function
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K= capital (money) I (interests)

L= human capital (labour) W (salary)

NR&E= Natural resources and energy The price of cold, oil and natural gas

Y= technology Know how

* = entrepreneurship PY (price of)

Prices of the constants (retribució dels factors de producció)

 PRICE VS COST VS VALUE

 Price: result of the marketing equilibrium in notary units. Agreement between the
sellers and the buyers. Price = Cost (cost of production) / value (V.A.)

 Cost: k · I + L · w + NR&E · P. oil + y · P. y

 Value (philosophical point of view, but objectively): with the inputs (when we produce),
we create value.

V. A. value added

VAT = IVA; value added tax

Short run: 1 year or less

Long run: more than a year.

 In the short run the capital is fix, whether the labour is variable. In the long run all
the factors are variable

 ECONOMIC AGENTS
 Households: they buy goods and services to satisfy their needs. When they satisfy their
needs they reach happiness.

 Firms: they goal is to maximise profits. Total benefits= total revenue – total costs
(TB=TR-TC). In order to do that they must increase the revenues and minimise costs
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 State/Administration: regulate the economy by trying to create a third benchmark

where households can reach their goals and firms can compete.

Types of firms/companies

Turnover: facturació

 EFFICACY VS EFFICIENCY
 Efficacy: To reach a goal. Capacity to produce an effect.
 Efficiency: refers to the use of resources so as to maximize the production of goods and
services. Reach the efficacy minimising the costs and maximising the production.
 Equity: analyse if the distribution is fair
OPTIMIZATION:
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- use the same quantity of inputs (factors of production) to get the more outputs
(production)  maximization of production
- to get the same outputs using less inputs  minimization of costs
Pareto efficiency: No one can improve without making damage to someone else. We can’t
increase the production of a good without decreasing the production of another good.

 MARKETS LEADS TO EFFICIENCY

 The incentives built into a market economy already ensure that resources are usually
put to good use.
 Opportunities to make people better off are not wasted.
 Exceptions: market failure, the individual pursuit of self-interest found in markets makes
society worse off. The market outcome is inefficient. Thanks to the market failure we
can define what the role of the government in economics is. The government tries to
solve the market failure in the market mechanism.

 CIRCULAR FLOW DIAGRAM

The circular-flow diagram is a model that represents the transactions in an economy by
flows around a circle.
- Households buy goods and services from firms
- Firms buy factors of production from households
- Inner Flow = goods and services
- Outer Flow = money
The quantity of imputs (factors de
producció is finite, thus the quantity of outputs
is also finite. Needs>outputs scarcity
Saving= future consumption. They can also put
money on factor markets.

The government lives off the

budget. The revenue side of the
budget comes from taxes.
Households pay income taxes Firms
pay the corporate tax (impost sobre
el benefice de les societats).
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The government creates public firms and they spend money on public services such as the
education or health system. They do this thanks to the income taxes payed by households. The
state also regulates the different markets.
Factor markets determine the economy’s income distribution: how total income is divided among
the owners of the various factors of production.
MACROECONOMIC IDENTITY: Income = Production = Expenditure (gasto)

 OPPORTUNITY COST
We have limited resources and unlimited needs, so we have to choose what needs to satisfy
with the resources available. If you decide one option, the opportunity cost is the other
option and its value since you give it up. The option you choose you consider it the best for
you.
The real cost of an item is its opportunity cost: what you must give up in order to get it. It is
the next best alternative.
Ex: the opportunity cost of being at uni is working and gaining money.

 THE PRODUCTION POSSIBILITY FRONTIER (PPF)

It is a graphic that represents the maximum quantity of one good (output) that can be
produced for any given production of the other (input). It illustrates trade-offs.
 If the trade-off remains constant along the PPF then we say they face a Constant
Opportunity Cost and the PPF has a linear slope.
 If the trade-off increases along the PPF than we say they face an Increasing
Opportunity Cost and the PPF has a nonlinear slope.
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The way to compute the opportunity

cost is by the slope.

 O.C is increasing PPF is concave and the choice is efficient

 O.C is constant PPF is a straight line. Factors of production are homogeneous
 O.C is decreasing PPF is convex

 ECONOMIC GROWTH
Economic Growth is the growing ability of the economy to produce goods and services
the PPF shifts rightwards.
Economic Growth can come from two sources:
 Increase in Factors of Production: resources used to produce goods and services
(Natural Resources and Energy, Labour and Capital)
 Technological Improvement: improvement in the technical means of producing
goods and services

 SPECIALISE AND TRADE

 Absolute advantage: who produces the higher quantity. Who does the activity better
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 Comparative advantage: An individual has a comparative advantage in producing a good

or service if the opportunity cost of producing the good is lower for that individual than
for other people.

30 coconuts ----- 40 fish

1 coconut----- x
X= 40/30=1,3

40 fish---- 30 coconuts
1 fish------ x

Solució: power pag 26

 In a market economy, individuals engage in trade:

 Trade: individuals provide goods and services to others and receive goods and services
in return. There are gains from trade: people can get more of what they want through
trade than they could if they tried to be self-sufficient.
 Specialization: when each person specializes in the task that they are good at
performing. The economy, as a whole, can produce more when each person specializes
in a task and trades with others.