CSUN, ECON 310, PRICE THEORY AND APPLICATION

Microeconomic principles and review.

Microeconomics is the study of the behavior and decision-making of individuals or small groups. Individuals and small groups consist of: consumers, savers, businesses, firms, workers, families, governmental agencies, etc. British economist Lionel Robbins called microeconomics the study of how scarce resources are allocated among competing ends. For example, firms decide how many workers to hire, how much to produce, how much to buy from other firms, etc. Consumers decide how much to consume, how much to save, where to work, where to buy, etc. Microeconomics theory studies the factors that influence the choices of the consumers and producers. It also looks at the way these small decisions merge to determine the workings of the entire economy. Aggregating the small decision makers determine the workings mechanism of the economy. Prices play an important part in individual decision makers and thus microeconomics is frequently called price theory.  

Microeconomics is essential to understand and predict real-world outcomes. It is use to predict and explain the decision maker maximum outcome. For example in a firm, microeconomics can predict and explain the optimal amount to produce or the optimal amount of workers to hire. A supply and demand model can explain the effects of increase or decrease in taxes. Microeconomics can help evaluate the results of real-world outcome, but it does not demonstrate whether the results are either good or bad.

Microeconomics analysis is broken down into two components; positive (objective) analysis and normative (subjective) analysis. An economist would use both types to analyze a real-world outcome. For example an increase in taxes; the objective analysis is how much to increase, changes in consumption and by how much, etc. The subjective part of the analysis is whether the tax is desirable or if it was a good policy or bad to increase taxes.  Microeconomics evaluates real-world phenomena and the agent decides whether the policy was good or bad. Just as there are two economic analysis there is a difference in price.

Price can be broken down into nominal price and real price. Prices are created in the markets. Markets are the interplay of all potential buyers and sellers. Prices results from market transaction and influence buyers and sellers. For example, if there are two complement normal goods and the price of one of the goods is lower, there would be more of a demand of the good with the lower price. Nominal price is the absolute price that is not adjusted for the changing value of money. The real price is the nominal price plus adjustment for the changing value of money. CPI is the most common tool use to adjust for the changing value of money. The changing value of money is shown by inflation. For example; if inflation increases, the value of money has reduced and if inflation reduces the value of money increases. When inflation reduces is called deflation. The price can be seen as the inverted version of cost. Cost can be broken down into different types and economist focuses’ on opportunity cost.