Microeconomics: Lecture 1

Introduction and Preliminaries

 About the course

Microeconomics, Spring 2023

Professor: Young Bin Ahn
Email: youngahn@pusan.ac.kr
Class Location: Rm. 304, Econ & International Trade building
Office Hours: By appointment
Office Location: Rm. 504, Econ & International Trade building
 About the course

▪ This is an intermediate economics for

students like you
▪ You will learn
▪ the most fundamental tools that economists use
▪ how modern economic theory allows us to
understand economic phenomena
 Two ‘teaching blocks’
▪ Lecture: introduce formal tools, language and
analysis
▪ Review Questions:
▪ Review Questions in lecture notes
 Course Website:
PNU PLATO Microeconomics

Lecture PDF Slides

 Grading Policy
Class Attendance 10%
Mid-term 30%
Final 60%
• 1 mid-term
• 1 final (cumulative; all materials)
 Prerequisites

•Basic algebra and calculus

•Principles of Economics
 Course Goals
▪ Teach you key microeconomic concepts and how
to use them to analyze real world problems
▪ Key economic concepts include:
▪ Marginal Costs and Marginal Benefits
▪ Opportunity Costs
▪ Supply and Demand
▪ Monopoly and Market Power
▪ Antitrust, economics and the environment
▪ Game theory, the “lemons” problem many more…..
 Some things you should know

▪ Advanced course:
▪ Use and understanding of formal
language, models and math
▪ Interpretation and logic reasoning
▪ Real world implications
 Derivatives
• The derivative of a function indicates the rate of
change of the function with respect to the
argument of the function.
– The derivative of f at point x* is defined as:

– If income I is the function of working time t, then

I=f(t). If I have worked for 6 hours, how does an
additional unit of working time increase my income?
– f’(6)
 Derivatives
• On a graph, the derivative of a function
corresponds to the slope of a curve that
represents the function.
– Ex: y=f(x), where x indicates a consumer’s income per
year, y indicates the amount the consumer saves per
year.

– If f’($25,000)=0.15, then when the consumer has

$25,000 of annual income, an extra dollar of income
results in $0.15 more saving.
 Rules for calculating derivatives
• You should be familiar with rules for finding
derivatives.
 Partial Derivatives
• Often we want to consider functions of more
than one variable.
– Ex.: y = f(x, z), where f(x, z) = 3xz + 4
– We often consider how the value of such function
changes when only one of its arguments changes.
– This is called a Partial Derivative.
– Ex.: Output is function of labor and capital. How does
output change as we increase labor holding capital
fixed.
 Partial Derivatives
• The Partial Derivative of f(x, z) with respect to x,
is simply the derivative of f(x, z) taken with
respect to x, treating z as just a constant.
– Ex.:
Math Examples
Math Examples
Math Examples
Math Examples
Math Examples
 Partial Derivatives
• The Partial Derivative of f(x, z) with respect to x,
is simply the derivative of f(x, z) taken with
respect to x, treating z as just a constant.
– Ex.:
Math Examples
Math Examples
 Today: introduction and
some basic concepts

▪ Economics: a definition
▪ The Market Mechanism
▪ What is a market?
▪ Importance of economic systems
▪ The economic methodology
▪ Normative versus positive analysis
 Economics: Definition

▪ Economics is the study of how a society uses

its limited resources to produce, trade and
consume goods and services

▪ Limited budgets and time for consumers

▪ Limited ability to produce for producers

Importance of Economic Systems
Differences in economic systems create
persistent effects: Germany
Differences in economic systems
create persistent effects
Differences in economic systems
create persistent effects
 Economic differences can create
persistent effects on culture
▪ Esther Boserup (1970): Differences in pre-
industrial farming practice determine cultural
differences
▪ Alberto Alesina, Paola Giuliano, and Nathan
Nunn: “On the Origins of Gender Roles: Women
and the Plow” in the Quarterly Journal of
Economics, 2013
Hoe farming with child
Ploughing in South Korea
 Societies that were plow
users have more defined
gender roles today
▪ Among descendants of
hoe users, women are
more likely in labor force:
▪ Rwanda, Botswana,
Madagascar or Kenya
▪ Among plow users,
women are less likely to
be in labor force:
▪ India, Syria or Egypt
▪ In societies that were plow
users, women are also
▪ Less likely to be in parliament
▪ Less likely to own businesses
 The Market Mechanism

▪ What is a market?

▪ Key decisions:
▪ Workers
▪ Firms
▪ Consumers
▪ Government
 The Market Mechanism

▪ Decentralized but no prices. A market?

▪ Kidney exchanges
▪ Course enrollments
 Microeconomics

▪ Studying individual decisions of economic units

▪ Behavior of consumers (CH 3-5): DEMAND

▪ Production decisions of firms (CH 6-8): SUPPLY

▪ Interaction between agents in market environments

(CH 9-18). (relevant for public policy, antitrust
authorities, etc.)
 Themes of Microeconomics

▪ Studying individual decisions of economic units

▪ Workers, firms and consumers must make trade-
offs
▪ How do consumers make choices?
▪ How do we allocate kidneys to patients?
▪ Why are wages rising faster for the top 1% than
the 99%? How are these trade-offs best made?
 Micro versus Macro

▪ Traditionally, macroeconomics deals

with aggregate economic quantities
▪ Growth rate of GDP
▪ Interest Rates
▪ Unemployment
 The Microfoundations of
Macroeconomics…

▪ Macroeconomics has become more and

more concerned with linking theories
to micro-foundations
▪ “The Macroeconomic Impact of Microeconomic Shocks”, by David Baqaee and Emmanuel Farhi
▪ Main finding: Shocks to the economy in certain sectors can have larger effects on the entire economy than previously
thought.
Nominating economist: Jean Tirole, Toulouse School of Economics, winner of the 2014 Nobel prize in economics
Specialization: Industrial organization
Why? “Baqaee and Farhi open up the black box of aggregate production by modeling the network linkages between
firms and sectors, and demonstrate the emergence of important nonlinearities. This discovery has far-ranging
macroeconomic implications, from the microeconomic origins of business cycles to the identification of key sectors
with a disproportionate influence on the overall economy. For example, it leads to a radical revaluation, by a full
factor of four, of the macroeconomic impact of the 1970s oil shocks. This opens up a fascinating research direction to
build a more realistic macroeconomics, from the grounds up, with realistic microeconomic foundations.”
 The Methodology

How? Construct theories in order to

▪ Understand different forces in the economy
▪ Make predictions of what will happen if these
forces change
▪ Improve on outcomes via changing institutions
 The Methodology

Use data and statistical methods to validate

a theory

▪ Theories are tested and improved

▪ Theories are invariably imperfect – but give

insight into observed phenomena
 The Methodology

▪ We express theories in the form of economic

models.
▪ An economic model is a description of an economic
situation with words and mathematical expressions.
▪ Often mathematical expressions are expressed with
diagrams.
 Economic Models:
Description

A model usually consists of:

▪ Agents: their resources, objectives,
preferences, how they behave, …
▪ economic environment (markets, contractual
arrangements, other relevant institutions)
 An example:
Minimum wage debate

There has been recent debate over raising

the minimum wage

How should we analyze a proposal to raise

the minimum wage?
 An example:
Minimum wage debate
Model
▪ Makes predictions about the effects of a
higher minimum wage
▪ Guides our analysis of data
Data
▪ Tests the predictions
▪ Refines the theory