Microeconomics Supply Chain

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Microeconomics

Introduction : What microeconomics is all about ?

Macroeconomics focus on the economy as a whole. In macro, you outline relationships between variables ( growth, employment rate, investment…).

Micro : focus on economic agents, players, and companies. Focus on how consumers and companies are behaving. In micro you look at the economy as being structured, divided in several individual markets. It is an important difference in focus : from the overall standpoint to the micro one here. For example, you will focus on markets separately : the Real Estate one, the Financial market, the consumer market, etc… That’s why competition is mainly a microeconomics issue. A micro question : what are the conditions for the Real Estate to be balanced ? When a market is balanced in microeconomics, we speak of a “partial equilibrium”. In micro you can (conceptually) move from partial equilibriums to global equilibrium by adding all partial equilibriums.

Rationality, scarcity and opportunity costs.

Rationality

In terms of social sciences : microeconomics is a social science which relies on methodological individualism. It derives from methodology, but in a specific way to look at social realities. It means that if you want to understand a social phenomenon( why a price moves up, a market changes…) you have to first understand individual behavior. By looking in how individuals are behaving, you can derive logical relationships that unable you to understand social phenomenon. It is an assumption. The key driving force explaining why prices are moving up or down, etc is individual behavior.

Another assumption of microeconomics is that people behave in a rational way. People will make decisions in an intentional way. Economic agents are rational. This is a major assumption.

Looking at micro in a historical context : appeared in the XIXth century, and developed really in the early XX. It first appeared as a new school of economics ( neo-classical school of economics) in opposition to the classical economists. They shared some concepts, but bring new ideas in strong opposition with the classical economists. Neo-classical economists shared with classicals a trust in the market. They had a very positive view of the market. They all believed that the market was a very efficient institution.

But the big difference regards to the theory of value. According to neoclassicals, the driver of value is not labor. For classical, the value of a good was driven by the amount of labor embedded into the good. The neo-classicals are at odds with this idea. They asserted that the value of a good is driven by marginal utility ( utilité marginale).

What is “utility” ?
It makes reference to the utility function. It is a function which represents individual preferences. It is not something useful or not. It is about preferences. The idea is that if you are rational, then you will tend to implement actions that would increase your satisfaction. You will maximize your utility level : make decisions which will make you happier.

The main driver of the value of something is the preferences of individuals, it is the satisfaction this value is going to bring to consumers. It is rational.

What is “marginal”?
It is the utility derived of the last unit consumed. The last factor to observe to set a price is the last unit of the good consumed, and the pleasure, the utility it brings to the consumer.

In micro we assume that marginal utility is declining : the more you consume a product, the less attractive and pleasant it is. For example, a new gadget sold : when it is a new one, very appealing, then consumers will want to consume it. But 3 years later, it will bring less satisfaction. The last unit to be consumed is going to be less gratifying to consume. Then the price should go down, or the production, or the product should be remplaced by a new one.

A big assumption is that value is very...
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