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Lesson 1

Microeconomics 1 (Đại học Kinh tế Quốc dân)

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Lesson 1.1:

Requirements:
 Note: Students who are absent more than 20% classes will not be allowed to attend final
exam (exclude absence for acceptable reasons).
Midterm-Assessment:
 Assignment 1 (20%): Take-home Exam and In-Class Exam (Open book)
 Presentation (20%): 2 groups present two topics:
o Competitive Market (Chapter 14)
o Monopoly (Chapter 15)
 Final Exams: ???
After this class, the students need to discuss and form two groups for presentation.
Economics is basically the science of economic decision.
Scarcity is an important reasons to make us to study Economics.

Principle 1: People always face tradeoff when making the decisions.

The tradeoffs between efficiency and equality:
The government always face the tradeo昀昀s when implemen琀椀ng the policies:

 You want to focus more on the economic development and ignore the environmental
issues.
 The foreign direct investment (FDI) is good for the economy because it promotes the
economic growth but It also cause the environmental degrada琀椀on in Vietnam.
 Equality or E昀케ciency:
o The restroom for disability: whether we need them or not in NEU?
 If you build them in A1 block, it is a waste of resource because there is few
disable students at NEU it is ine昀昀ec琀椀ve. HOWEVER, you do have this
INEQUALITY.

Principle 2:

You make decisions based on a comparison between bene昀椀ts and costs from decisions.

When you make a mistake o

Even in the case, your decision is free to get it (like the case that you get the free 琀椀cket for music
concert), you s琀椀ll face the opportunity costs, at least 琀椀me for this decision, transporta琀椀on costs…

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Opportunity Cost is what you have to give up:

o Normally, you just think the money you pay when you purchase st (like co昀昀ee, milk
tea…) is the cost. But it is a simple cost.

The decision makers always face the opporturnity cost (Economic Costs):

Opportunity Costs (OC) = Explicit Costs (EC) + Implicit Costs (IC)

Explicit Cost (EC): the costs that you actually pay. For example, hiring the workers and pay the
wages,
Implicit Cost (IC): the costs that you do not have to pay in hand but you must consider it when
making the decision.

Opportunity costs significantly determine the economic decision.

E.g., you want to run your business (clothes shop) by using your the building (space) of your family,
what are the costs you face?

 You must hire workers, buy materials, borrow money from banks (have to pave interest rate)
You have to actually pay money Explicit Costs
 The other important cost is implicit costs that you don’t have to pay but you must count them
when making the decisions. Otherwise, you may make a wrong/irra琀椀onal decision.
o In this example, the IC is the rents you don’t have to pay because the space is yours. BUT
think about the case other people lease them and you can receive money from that if
you do not run your own business.
o Or because you run this business, you have the chance to earn money from other jobs.

What are the EC and IC???

Assignment
EC= 2000+200=2200 because
You are studying at NEU. But you
cannot have a part-time job with IC = 6000
income 6000USD and cannot take a OC = 6000+2200=8200
rest. Tuition fee is 2000USD, buying
materials is 200USD, cost for daily life Note: Opportunity costs must be relevant with the
(food, rent..) is 1400USD. What is the decision.
opportunity cost to be a student?

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Note 1: Opportunity costs are the costs being relevant with your selec琀椀on/decision. It implies the costs
arising from your decision.

You decide between two jobs: Argument:

Job A: Income is 100$ but cost is Selec琀椀ng job A so you cannot take job B at the same
30$. 琀椀me.

 EC= 30
Job B: Income is 120$ but cost is  IC = 120-40=80
40$.  OC=30+80=110

What is the opportunity cost for If we have three op琀椀ons (including Job C), you
con琀椀nue to select job C:
selecting job A.
 EC =30
If we have another job as  IC = 150-10=140
follows:  OC=30+140=170

Job C: Income is 150$ but cost is Based on the de昀椀ni琀椀on of OC, OC should be the best
alterna琀椀ve sacri昀椀ed.
10$.

Note 2:

 We have to consider the net a琀琀ainment from other selec琀椀on when compu琀椀ng the IC.
 We only consider the best alterna琀椀ve op琀椀on among many of op琀椀ons you have.

Note 3: Every economic decision (even you don’t have to pay anything) always includes the opportunity
costs.

Note 4: Every cost in the economy is the opportunity cost (economic cost)

The decision you make will base on the cost-bene昀椀t analysis, thus if you make the mistake on the
opportunity cost, you may also make a wrong decision.

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Principle 3: Ra琀椀onal people think at the margin

Marginal Analysis:

Let talk about the 昀椀rm behavior in the economy. Some of important ques琀椀ons, 昀椀rms must consider:

 What are the price and quan琀椀ty that 昀椀rms should pick to obtain their purpose (e.g., maximizing
their pro昀椀t)?
 Whether 昀椀rms expand their business to obtain their goal?

Marginal analysis can help us to answer this answer.

Important de昀椀ni琀椀on in the economics:

Revenue

 Total revenue (TR): the total amount of income/revenue that 昀椀rm obtain from selling the goods
to the markets. (TR= Price (P) x Quan琀椀ty (Q))
 Marginal revenue (MR): the change in total revenue from selling an addi琀椀onal unit of goods.
The revenue from selling the last unit of product.

For example, your company:

 Sell Q=100 to the market and earn TR(Q=100)= $1500

 You decide to sell more units of product to the market Q’=101 and earn TR’(Q’=101)=$1600
o It implies that selling one addi琀椀onal unit of product cause the TR to increase by $100.
o Or the revenue from selling the 101th unit is $100
  This is the marginal revenue of 101th unit (Note the di昀昀erence in de昀椀ni琀椀on of revenue of 101
(TR) units and revenue of 101th unit (MR)
 MR of 101th = TR(Q=101)-TR(Q=100)
o Where MR is the revenue from selling the 101th
o TR(Q=101) is the revenue from selling 101 units and TR(Q=100) is the revenue from
selling 100 units.

Q= Quan琀椀ty Total Revenue (TR) Marginal revenue (MR)

0 0
1 20 20
2 38 2nd product= 18=38-20
3 53 3rd product =15=53-38
4 65 4th product=12=65-53
5 71
6

How to compute the marginal revenue: MR n=TRn−TR n−1

 MR n: The marginal revenue of the nth product

 TR n: the total revenue from selling/suppling total n units of products
 TRn−1: the total revenue from selling/suppling total (n-1) units of products

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∆ TR ∂TR
Based on the de昀椀ni琀椀on, you also compute the MR as follows: MR= = =TR' (Q)
∆Q ∂Q
Note:∆ means a large amount of change and ∂ means a small amount of change. If the change occurs by
a very small amount, MR=TR’(Q) (the 昀椀rst deriva琀椀ve of total revenue against Q). For example,
TR=Q 2−4 Q → MR=T R' ( Q )=2Q−4.
 The slope of TR is the MR.
 The change occurs by a very small amount, the MR is slope of the line that is tangent with the TR
curve
∆ TR ∂TR
MR= = =TR' (Q)
∆Q ∂Q

TR=Q 2−4 Q → MR=T R' ( Q )=2Q−

When TR is maximized? MR=TR’(Q)=0

Cost:

 Total Costs (TC): The total costs is the amount of money that 昀椀rm pay from producing goods
 Marginal costs (MC): the change in total cost from producing an addi琀椀onal unit of goods.

How to compute the marginal cost: MC n=TC n−TC n−1

 MC n: The marginal cost of the nth product

 TC n: the total cost from producing n products
 TC n−1 : the total costs from producing (n-1) products

∆ TC ∂ TC
Based on the de昀椀ni琀椀on, you also compute the MC as follows: MC= = =TC ' (Q)
∆Q ∂Q
e.g. Q1=10; Q2=11 change in total cost from TC1(Q1)=100 to TC2(Q2)=110

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For simplicity, if you have the func琀椀onal form of TC, you can obtain the func琀椀on of MC by taking the 昀椀rst
deriva琀椀ve of TC func琀椀on.

E.g., TC= Q^2-4Q+100 MC= TC’(Q)= 2Q-4

Adap琀椀ng the marginal analysis, we seek the ques琀椀on:

Ques琀椀on 1: What are the price (P) and quan琀椀ty (Q) to maximize 昀椀rms’ pro昀椀t?

π ( Profit ) =TR−TC
To maximize the pro昀椀t, the 昀椀rst order condi琀椀on is given as:

To maximize pro昀椀t, we need to set up P and Q such that (Pro昀椀t)’=0 (First Order Condi琀椀on, the 昀椀rst
deriva琀椀ve of func琀椀on is equal 0)
'
{ TR ( Q )−TC (Q ) } =0 →T R ' ( Q )=T C' ( Q ) → MR ( Q )=MC (Q)
Conclusion: To mazimize the pro昀椀t, 昀椀rms need set up the price and quan琀椀ty such that MR=MC.

Ques琀椀on 2: whether the 昀椀rms should expand their own business to obtain the pro昀椀t-maximiza琀椀on goal:

 MR>MC Increase in Q (expansion) leads to an increase in pro昀椀t

 MR<MC decrease in Q leads to an increase in pro昀椀t.

Sum up:

 Firms will maximize their pro昀椀t by selling goods and services at the price (P) and quan琀椀ty (Q) at
which MR=MC
 MR>MC Increase Q (expansion) lead to an increase in pro昀椀t
 MR<MC decrease Q lead to an increase in pro昀椀t.

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Marginal Analysis for general problem

Member Households Firms Government

Purposes Maximize their u琀椀lity Maximize their pro昀椀t Maximize the social
(Sa琀椀sfac琀椀on) u琀椀lity
The u琀椀lity, pro昀椀t, social u琀椀lity can be de昀椀ned as Net Bene昀椀t (NB) where NB=TB-TC
 TB: Total Bene昀椀t (this is TR when we study the behavior of 昀椀rms) MB=TB’(Q)
 TC: Total Cost (this is TC when we study the behavior of 昀椀rms) MC = TC’(Q)
All members/agents of economy wish to maximize their own net bene昀椀t. They can achieve this goal
by se琀�ng price (P) and quan琀椀ty (Q) such that:
 MB=MC NB is maximized
 MB>MC increase in Q will lead to an increase in NB
 MB<MC decrease in Q will lead to an increase in NB

Exercise

Total Bene昀椀t (TB) func琀椀on and total cost (TC) func琀椀on are respec琀椀vely:
2
TB=200Q−Q
TC =200+20 Q+0,5 Q2
a. To maximize the total bene昀椀t, what is its quan琀椀ty?

b. To maximize the net bene昀椀t, what is its quan琀椀ty?

c. What the 昀椀rm will do when Q = 50

d. What the 昀椀rm will do when Q = 80

Solu琀椀on:

a. To maximize the total bene昀椀t, what is its quan琀椀ty?

TBmaxMB=TB’(Q)=0200-2Q=0 Q=100

b. To maximize the net bene昀椀t, what is its quan琀椀ty?

NBmax MB=MC

MB=200-2Q

MC=TC’(Q) = 20+Q

 200-2Q=20+Q Q=60

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c. What the 昀椀rm will do when Q = 50

Q=50 MB=200-2*50=100 and MC = 20+50=70  MB>MC the 昀椀rms should produce more (Q
increases NB increases)

d.What the 昀椀rm will do when Q = 80

Q=80 MB=200-2*80=40 and MC = 20+80=100  MB<MC the 昀椀rms should produce less (Q
decreases NB increases)

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Lesson 1.2: Thinking like Economists

Assump琀椀on: Ceteris paribus: We assume that other things hold constant.

E.g., when we study the e昀昀ects of price on quan琀椀ty demanded. In addi琀椀on to price, there are many
other factors that a昀昀ect the demand for goods. BUT when we focus on the price-quan琀椀ty demanded
nexus, you assume that other factors do not change.

Produc琀椀on Possibility Fron琀椀er (PPF):

Some important things, we must understand:

1. Understanding of PPF
2. The shape of PPF and its implica琀椀ons and why
3. Analyse changes in PPF due to the external factors.

1. Understanding of PPF

– De昀椀ni琀椀on: A graph showing combina琀椀ons of output that the economy can possibly produce

– Assump琀椀ons:

– The economic agents own a given factor of produc琀椀on and technology.

– The simple economy only produces two goods (food and clothings), assuming other
goods do not change.

– There is only one type resource: Labor

Possible outputs the economic agents can produce given an

amount of resources and technology.

Note:

 Point I: A琀琀ainable but ine昀케cient point because they do

not use all resource and technology e昀昀ec琀椀vely. They can
improve their produc琀椀vity from point I to either point C
and D.
 Point N: Una琀琀ainable point because they do not have
enough resource to obtain this point.
 All points along the PPF is de昀椀ned as the a琀琀ainable and
e昀케cient point and they use all the resource and use
technology e昀昀ec琀椀vely.

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Quan琀椀ty of Quan琀椀ty of
Clothes Food
Possibili琀椀es

A 10 0
B 9 20
C 7 40
D 4 60
E 0 80

Implica琀椀ons: when moving from point A to point E along the PPF

 Trade-o昀昀 principle: If you want to produce more one goods, you have to reduce resources used
to produce other goods.
o E.g. from A: The economy concentrate all resource to produce clothes: 10 units of
clothes. The maximum amount of clothes that the economy can possibly produce given
resources and technology is 10 units.
o Moving from A to B: (9units of clothes, 20 units food): tradeo昀昀s: reduce 1 unit of clothes
for producing 20 units of food. It implies that the opportunity cost of producing the 昀椀rst
20 unit of food is 1 unit of clothes.
o The slope of PPF re昀氀ect the rate of exchange between food and clothes.

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2. The shape of PPF and its implica琀椀ons and why

The linear PPF The concave (bow-outward) PPF

Shape: Constant slope the opportunity costs of Shape: Increasing slope, implying:
producing the same amount of food remain  AB: produce 昀椀rst 20 units of food, the
unchanged. economy needs to reduce 1 unit of
clothes Opportunity costs: 1
clothes=20 food
 BC: produce the addi琀椀onal 20 units of
food, the economy needs to reduce 2
units of clothes OC: 2 clothes = 20 food
 CD: produce the addi琀椀onal 20 units of
food, the economy needs to reduce 3
units of clothes OC: 3 clothes =20 food
Implica琀椀on: Implica琀椀on: To produce equal addi琀椀onal units of
goods, the society has to trade-o昀昀 an increasing
amount of other goods.
 The opportunity cost is increasing when
moving along the PPF from A to E.
 The costs of producing food are
increasing when we produce more units
of food.

Finding: To produce equal addi琀椀onal units of goods, the society has to trade-o昀昀 an increasing amount
of other goods

Two striking points:

 Slop of PPF re昀氀ects a rate of exchange

 Concave PPF has an increasing slope, thus the trade-o昀昀 to produce equal addi琀椀onal units of
goods is increasing opportunity cost is increasing.

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Why does the cost of producing equal addi琀椀onal units of goods increase???

Assump琀椀on: there is one kind of resource used to produce food and clothes that is the labour. But there
are two type of labor: tailor and chef. Ini琀椀ally, there are 100 tailors and 100 chefs and the economy
stands at point A in the PPF.

 At point A, the economy uses 100 tailors and 100 chefs to produce 10 units of clothes
 When move from point A to point B: the economy has to move some labor from producing
clothes to producing food. Considering two types of labor, they will move the chefs because
they are appropriate for producing food.
o A B: we need 60 chefs to produce the 昀椀rst 20 units of food 60 units of labor, in
general, to produce the 昀椀rst 20 units of food since all labors are appropriate.
o B C: since we only have 40 units of chefs, we need to move some tailors that is
inappropriate for producing food the economy needs 40 units of chefs and 40 units of
tailors80 units of labor, in general, to produce the addi琀椀onal 20 units of food since
some labor is appropriate but some labors are not.
o C D: we run out of chefs, in order to produce the same of food, we need 120 units of
tailors 120 units of labor, in general, to produce the addi琀椀onal 20 units of food since
all labors are inappropriate.

That explain why the opportunity costs of producing the same amount of food are increasing.

Sum up:

• When the produced quan琀椀ty is low, we only use appropriate resources that are inappropriately
produce other goods.

• When the produced quan琀椀ty increases, we have to use less appropriate resources that are
more appropriately used to produce other goods opportunity costs increase.

Some important things, we must understand:

1. Understanding of PPF
o A graph showing combina琀椀ons of output that the economy can possibly produce
2. The shape of PPF and its implica琀椀ons and why
o The tradeo昀昀 pricinple
o The concave (bow-outward) PPF means the opportunity costs of producing the same
amount of good are increasing.
3. Analyse changes in PPF due to the external factors.

Three-step analysis principle to analyse changes in PPF:

Step 1: the shocks and external factor a昀昀ect only one good or both of them

 A昀昀ect two goods: PPF will shi昀琀

o Posi琀椀vely: PPF shi昀琀s outward the possible combina琀椀on between produced
goods increases.

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o Nega琀椀vely: PPF shi昀琀s inward the possible combina琀椀on between produced

goods decreases.
 A昀昀ect one good: PPF will rotate

Step 2: the shocks are nega琀椀ve and positve

Step 3: Using the PPF model for simula琀椀on.

The shocks can be economic growth, technology improvement, natural disaster (like pandemic, 昀氀ood,
drought…) crisis and so on.

PPF shi昀琀s PPF rotates

Reasons Both goods are a昀昀ected by external Either good X or Y is a昀昀ected by the
shocks external shocks
Situa琀椀on Economic growth or technological (A drought occurs)
improvement -Nega琀椀ve shock
-Posi琀椀ve shocks -A昀昀ect only one good (Food)
-A昀昀ect both goods

More  PPF shi昀琀s outward produc琀椀vity

implica琀椀ons of both X and Y increases
 PPF shi昀琀s inward produc琀椀vity
of both X and Y decreases
Opportunity Shape: Increasing slope, implying:
costs  AB: produce 昀椀rst 20 units of
food, the economy needs to
reduce 1 unit of clothes
Opportunity costs: 1 clothes=20
food
 BC: produce the addi琀椀onal 20
units of food, the economy needs
to reduce 2 units of clothes
OC: 2 clothes = 20 food 1
clothe=10 food
CD: produce the addi琀椀onal 20 units of
food, the economy needs to reduce 3
units of clothes OC: 3 clothes =20 food
The case of rota琀椀ng PPF

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Example:

Suppose that the economy experiences a drought. Let explain impacts of this event on the curve?
3-step analysis:
 Step 1: a drought only affects the productivity of food.
 Step 2: it is a negative effect.
 Step 3: Simulation

Conclusion: The effects of a drought are shown below. The drought reduces the amount of food
that can be produced, shifting the production possibilities frontier inward.

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