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University of Illinois
ECON 302
Isaac Dilianni--- Universityof Illinois

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 others.  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 employment. 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 phenomena  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 materials  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 questions.  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: CHAPTE
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