INTERMEDIATE MICROECONOMIC THEORY:
CHAPTER 1 9/2/2013 11:38:00 PM
SECTION 1.1: THE THEMES OF MICROECONOMICS
Microeconomics describes the trade offs that consumers, workers, and firms
face, and shows how these trade-offs are best made
CONSUMERS: limited incomes, which can be spend on a wide
variety of goods and services, or saved for the future
o Consumer theory: describes how consumers, based on their
preferences, maximize their well-being by trading off the
purchase of more of some goods for the purchase of less of
WORKERS: decisions of when to enter the workforce because of the
kinds of jobs and the trade-off for the hope of earning a higher
future income exists, as well as the trade-offs in the choice of
o EX. Education, security, job typing
FIRMS: face limits in the types of products they can produce, and
the resources available to produce them.
o Theory of the firm: describes how firms work around and
engage in trade-offs given the constraints.
Microeconomics also describes how prices are determined. In a centrally
planned economy, prices are set by the government. In a market economy,
prices are determined by the interactions of consumers, workers, and firms.
These interactions occur in markets, collections of buyers and
sellers that together determine the price of a good.
In addition, economics is concerned with the explanations of observed
THEORIES: developed to explain observed phenomena in terms of a
set of basic rules and assumptions
o Theory of the firm: begins with the assumption that firms
try to maximize their profit, and explains how firms choose the amounts of labor, capital, and raw materials they use for
production and the amount of output they produce.
o Economic theories are the basis for making predictions
Theory of the firm: tells us whether a firm’s output
level will increase or decrease in response to an
increase in wage rates or a decrease in eh price of raw
MODEL: mathematical representation, based on economic theory,
of a firm, a market, or some other entity.
o Theories are invariably imperfect
Microeconomics is concerned with both the positive and normative
POSITIVE: positive questions deal with explanation and predictions
NORMATIVE: normative questions deal with what ought to be
Positive analysis are statements that describe relationships of cause and
effect, and is central to microeconomics.
Normative analysis is an analysis examining questions of what ought to be.
Often supplemented by value judgements. INTERMEDIATE MICROECONOMIC THEORY: