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Lecture 1

COMM 220 Lecture Notes - Lecture 1: Ford Excursion, Price Support, Import Quota

Course Code
COMM 220
Loretta Hung

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Source: Pindyck and Rubinfeld (2009), Microeconomics, 7
Ed., Pearson Prentice Hall, Chapter 1.
Key Concepts and Topics
The Themes of Microeconomics
What is a Market?
Real versus Nominal Prices
Why Study Microeconomics?
Study of the behaviour of individual economic units (i.e., consumers, workers,
firms, investors, etc.) and the market that formed by these economic units
Themes of Microeconomics
Microeconomics deals with limits (e.g., budgets, time, ability to produce)
How do we make the most of limits?
How do we allocate scarce resources?
Workers, firms and consumers must make trade-offs
Do I work or go on vacation?
Do I purchase a new car or save my money?
Do we hire more workers or buy new machinery?
How are these trade-offs best made?
Limited incomes
How do consumers maximize their well being, using their preferences, to
make decisions about trade-offs (Consumer Theory)?
How do consumers make decisions about consumption and savings?
Individuals decide when and if to enter the work-force
– Trade-offs of working now or obtaining more education/training
What choices do individuals make in terms of jobs or work places?
How many hours do individuals choose to work?
– Trade-off of labor and leisure

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Source: Pindyck and Rubinfeld (2009), Microeconomics, 7
Ed., Pearson Prentice Hall, Chapter 1.
What types of products do firms produce?
o Constraints on production capacity & financial resources create needs
for trade-offs
How trade-offs are best made (Theory of the Firm)?
Prices and Markets
Trade-offs are often based on prices faced by consumers and producers
Workers made decisions based on prices for labor (i.e., wages)
Firms make decisions based on prices for inputs and on prices for the
goods they produce
How are prices determined?
Centrally planned economies – governments control prices
Market economies – prices determined by interaction of market
Markets – collection of buyers and sellers whose interaction determines the
prices of goods
Theories and Models
Theories are used to explain observed phenomena in terms of a set of basic rules
and assumptions
The Theory of the Firm: assumes firms try to maximize their profits
Theories are used to make predictions
The Theory of the Firm: reveals whether a firm’s output level will increase or
decrease in response to an increase in wage rates or a decrease in the prices of
raw materials
Models are mathematical representations (created from economic theories) used
to make quantitative predictions
A model of a particular firm can be constructed to predict by how much the
firm’s output level will change as a result of a 10% drop in the prices of raw
Validating a Theory
The validity of a theory is determined by the quality of its prediction, given
the assumptions
Theories must be tested and refined
Theories are invariably imperfect (hold true only on the average, not as exact
relationships) – but gives much insight into observed phenomena
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