A.  Introduction

• Microeconomics - study of individual economic units (individuals, firms, industries)

• Macroeconomics - study of the economy as a whole, deals with aggregate variables

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1.  Themes of microeconomics

a.  Trade-offs

• Limited resources mean that choices must be made

• Opportunity cost - the value of the next best alternative

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(1)  Consumers - decide between different products

(2)  Firms - decide which products to produce and how to produce them

(3) Workers - decide between labor and leisure, including whether to enter workforce

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b.  Prices and markets

• Prices used to measure extent of trade-offs

• Send signals as to value

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c.  Theories and models

• Theory - group of propositions that try to explain observed phenomena

• Model - representation of theory

- Graphs, tables, mathematical expression

• Assumptions made to simplify reality

• Judge model not by realism of assumptions, but by the ability of model to predict behavior

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d.  Positive vs. normative analyis

• Positive analysis - describes relationships of cause and effect

• Normative analysis - examines questions of what should be, involves value judgments

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2.  Markets

• Collection of buyers and sellers that determine the price of a product through interactions

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a.  Competitive vs. noncompetitive markets

• Perfectly competitive markets - large number of buyers and sellers, no single buyer or seller can significantly impact price

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b.  Market definition

• Extent of market - boundaries of a market, both geographically and in terms of range of products sold

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3.  Real vs. nominal prices

• Nominal price - absolute price of a product

• Real price - price adjusted for inflation

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1.  Price indexes

a.  Consumer price index

• Measure of aggregate price level for final consumer goods

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b.  Producer price index

• Measure of aggregate price level for intermediate or wholesale goods

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2.  Calculating the real price

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