 The subject matter

 Use of microeconomics for policy analysis

 The method
 In general, it is the social organization of
economic activity.
 Microeconomics is sometimes called “price
theory”.
 It looks into the behavior of individual
households and firms in the process of
constrained choice.
 Uses of policy analysis
◦ To advise; actions of decision makers depend upon
analytic results
◦ To understand how public policy is, and ought to be
made
 Most public policy involves resource
allocation.
 Microeconomic policy analysis requires a
thorough understanding of conditions which
favor collective over individual action.
 It also requires a means of evaluating the
alternatives in oprder to choose among them.
 Resource allocation decisions are shaped by
public policy. This happens in several ways:
◦ Direct government purchase/supply of different
activities
◦ Raising resources to fund government programs –
how?
◦ Government regulations
◦ Laws: property rights
◦ Redistributive programs
 Use of abstract models
◦ Direct approach
◦ Indirect approach
 General features of models
◦ Ceteris paribus assumption
◦ Optimization assumption
◦ Positive vs normative analysis