Let's Talk about Microeconomics

Mihaela Roberta Stanef-Puică

Nicolae Moroianu
Carlos Ramírez Valdebenito

Let's Talk about Microeconomics

Colecția
Teorie economică

Editura ASE
București
2022
 Academia de Studii Economice din București

Copyright © 2022, Editura ASE

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Descrierea CIP a Bibliotecii Naţionale a României

STANEF-PUICĂ, MIHAELA ROBERTA
Let's talk about microeconomics / Mihaela Roberta Stanef-
Puică, Nicolae Moroianu, Carlos Ramírez Valdebenito. -
Bucureşti : Editura ASE, 2022
Conţine bibliografie
ISBN 978-606-34-0402-3

I. Moroianu, Nicolae
II. Valdebenito, Carlos Ramírez

330

Redactor: Daniela Vorovenci

Tehnoredactori: Silvia Despa, Rareș Mihai Nițu
Corector: Alexandra Barbu
Copertă: Violeta Rogojan, Bogdan Gabriel Sarchisian

Autorii își asumă întreaga responsabilitate pentru: ideile exprimate, corectitudinea științifică,
originalitatea materialului și sursele bibliografice menționate.
 Contents

Introductory Notions .............................................................................................. 7

1 Principles of Economics .................................................................................... 13
1.1 How Individuals Make Decisions............................................................... 13
1.2 How Individuals Interact............................................................................ 16
1.3 In What Way does The Economy Work as a Whole............................... 19
2 Economic Way of Thinking.............................................................................. 22
2.1 Economics as a Science ............................................................................... 22
2.2 The Economist and the Economic Policy Decision................................... 25
3 Opportunity Cost. Frontier of Production Possibilities. Specialization
of Producers....................................................................................................... 26
3.1 Opportunity Cost ........................................................................................ 26
3.2 Border of Production Opportunities (BPO) or the Frontier
of Production Possibilities (FPP) ............................................................... 29
3.3 Specialization of Producers ........................................................................ 31
3.4 The Comparative Advantage Model ......................................................... 31
3.5 Applications ................................................................................................. 32
4 Consumer Theory. Utility ................................................................................ 41
4.1 The Relationship between Total Utility and Marginal Utility ................ 42
4.2 Consumer Equilibrium ............................................................................... 43
4.3 Applications ................................................................................................. 44
5 Demand. Elasticity of Demand ........................................................................ 50
5.1 Factors Influencing the Change in Demand ............................................. 50
5.2 Elasticity of Demand Depending on Price ................................................ 52
5.3 Applications ................................................................................................. 56
6 Manufacturer Theory. Productivity................................................................ 61
6.1 Short-Term Production Evolution ............................................................ 61
6.2 Relationship between Marginal Labor Productivity
and Average Labor Productivity............................................................... 62

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 LET’S TALK ABOUT MICROECONOMICS

6.3 Short-Term Production Cost Analysis ...................................................... 63

6.4 The Relationship between Total Cost, Fixed Cost and Variable Cost ... 65
6.5 Break-Even Point ........................................................................................ 67
6.6 Long-Term Manufacturer's Theory.......................................................... 68
6.7 Scale Efficiencies Based on a Cobb-Douglas Production Function ........ 70
6.8 Isoproduction Curve ................................................................................... 71
6.9 The Isocost ................................................................................................... 72
6.10 Manufacturer’s Equilibrium ................................................................... 73
7 Supply. Supply Elasticity ................................................................................. 75
7.1 General Law of Supply ............................................................................... 75
7.2 Terms of the Supply .................................................................................... 76
7.3 Supply Elasticity.......................................................................................... 77
7.4 Applications ................................................................................................. 79
8 Markets. Competition. Prices .......................................................................... 83
8.1 The Market with Perfect Competition ...................................................... 83
8.2 Imperfect Competition. Monopoly ............................................................ 86
8.3 Oligopoly Concept and Characteristics .................................................... 88
8.4 Oligopoly Markets and Price Formation .................................................. 95
8.5 Monopolistic Competition ........................................................................ 101
Applications – Recapitulation ............................................................................ 107
References ............................................................................................................ 115

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 Introductory Notions

This book is addressed to all those who want to make a venture

into the world of Microeconomics.
The authors

Each science has its own language and way of thinking. The economy is no
exception to this reality. For example, economists use their own concepts:
supply and demand, elasticity, comparative advantage, consumer surplus, and
social loss.
Economists try to approach their analyzes with specific objectivity science:
they formulate a theory, collect data, and then analyze the data to check if the
formulated theory is supported or rejected.
In essence, Microeconomics is about scarcity, about how individuals and
companies make decisions in the context of scarce resources. The idea is to
optimize these constraints and make compromises between different
alternatives to make the best decision. It can be affirmed that the label of
"dismal science" results from here = gloomy science - because you cannot
have anything, anytime, but you must make a compromise, you have to give
X to have Y. For example, if Dan has only one apple, he cannot eat the apple
and, at the same time, make apple jam.
Emphasis is placed on two types of actors in the economy, Consumers and
Manufacturers, whose behaviors can be described by different models
(which, in essence, approximate, do not necessarily give precise results, as
they are obtained for example in physics or other sciences. exact); they start
from certain hypotheses and can provide support for describing a general trend.
• Consumers are constrained by income (budget constraint), depending on
which they choose the goods they consume, to maximize their usefulness,
so the assumption from which to analyze consumer behavior is to maximize
utility in the context of limited income.

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• On the other hand, companies seek to maximize profits, constrained by both

consumer demand and production costs (costs with factors of production).
Therefore, the four fundamental questions of Microeconomics arise:
1. What goods and services need to be produced?
2. How much should be produced?
3. How should they be produced?
4. For whom?
The answer to these questions is provided by the price mechanism, prices that
are formed in the market (market of factors of production, market of goods
and services), by meeting demand with supply, and according to which
companies and consumers make decisions.
Simply put, prices serve as signals that allocate resources. High-demand
goods have high prices, and low-demand goods have low prices. Because
companies usually want to increase their profits, they follow the evolution of
price signals in the markets and will produce more of the goods that have high
prices and less of those that have low prices. In this sense, markets tend to
allocate limited resources efficiently and use them to produce the goods that
people want most, or at least for which people are willing to pay the most.
However, there are some issues/limitations in terms of markets. First, markets
produce any goods/services that people are willing to pay for, even if they are
not necessarily good for people or the environment. Second, markets are
amoral: they do not guarantee fairness or fairness.
As presented above, Microeconomics refers to scarcity - or how individuals
and firms make decisions and meet their needs, in the context of the
availability of scarcity resources. The problem is how to optimize these
constraints and make trade-offs between different alternatives to make the
best decision.

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 INTRODUCTORY NOTIONS

Positive and normative economy

The positive approach to Economics describes and explains the real economic
phenomena. It seeks to identify the relationships between economic variables,
to quantify, to measure these relationships, and to make predictions. He deals
with "what is" and answers the question "Why?"
Example:
• An increase in income tax leads to a reduction in consumer spending (?);
• The inflation rate in August 2021 was 7.8% and, ceteris paribus, the
purchasing power of the population decreased (?);
• The real earnings index for June 2021 compared to the previous month,
calculated as a ratio between the net nominal earnings index and the
consumer price index, was 95.7%.
As you can see, these are positive statements, based on verifiable facts in real
life, as it happens.
Now, if you are a policy maker (government) trying to find the best way to
reduce, for example, infant mortality (or reduce youth unemployment, combat
tax evasion, distribute more equitably) educational opportunities, etc.), it is
important to obtain the best positive economic analysis of each policy
alternative that is considered. First, it is important to know what the real
impact of each policy will be before trying to choose the ‘best’ policies. The
same is true if you are an entrepreneur trying to determine the selling price of
a good; you need to know how people will respond at different prices, not just
how you would like them to respond.
The normative economy shows how economic activities should be conducted.
It operates with value judgments, with assessments based on many other
criteria than economic ones (such as those related to equity, ethics, ideology).
He deals with "what should be" and answers the question ‘How?’
The normative economy thus goes beyond the analysis of simple facts and
what happens if incentives/conditions change. After the positive economist
presents their best prediction of what will happen because of possible policy
alternatives, a normative economist will try to use tools that include explicit

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value judgments about what results are ‘good’ and what results are ‘bad’ to
determine what is the best policy for society.
Therefore, normative economists use disciplines such as political philosophy
or ethics to formalize mechanisms to translate particular values into policy
recommendations based on a positive analysis of the expected impact of
different incentives.

Example:
• High-income businesses should pay higher taxes than low-income ones;
• Romania should charge higher tariffs on car imports;
The examples of normative statements presented above represent two classic
issues: the issue of equity and the issue of protectionism. Let us look at the
second situation. Economists normally consider that free trade (trade between
countries without restrictions - taxes, regulated quantities - on imports or
exports) is a good thing, because, in general, welfare increases, prices fall
(being a higher supply) and consumers benefit from better, cheaper, and more
varied products.
At the same time, it is possible that many domestic companies will leave the
market because of the entry of more competitive foreign companies with
better products. Because they cannot cope with the competition, some local
companies are forced to stop working and lay off their employees. Normally,
there is an increase in unemployment in the national economy.
Noticing these negative effects of free trade, the government decides to
impose taxes on the import of goods. The number of foreign companies
decreases, the total supply of goods decreases, domestic prices increase, and
the welfare of consumers is assumed to have decreased. However, the jobs of
domestic companies have been protected and the policy has achieved its goal.
As it turns out, there is a significant evil, even if the best option was chosen.

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 INTRODUCTORY NOTIONS

Another way of looking at things or an alternative overview on this topic:

online resources
Should You Become an Economist?:
https://www.youtube.com/watch?v=kKnRq6u5Z9Y

What is Economics and What do Economists do?:

https://www.youtube.com/watch?v=VxGwVEqPm_k

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 LET’S TALK ABOUT MICROECONOMICS

What is Economics?:
https://www.youtube.com/watch?v=nWPrMmv1Tis

Why Should I Study Economics?:

https://www.youtube.com/watch?v=2sfohnSTFAw

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