Microeconomics 8ed by Pindyck & Rubinfeld
Prepared by Houston H. Stokes.
Goal of the Notes: Allow the student to have an outline of the key ideas and solutions to a number of problems that will be discussed in class. Since the notes are distributed in WORD® format, students can edit the notes.
Quote from Robert Mundell Man and Economics 1968
"Economics is the science of choice. It began with Aristotle but got mixed up with ethics in the Middle Ages. Adam Smith separated it from ethics, and Walrus mathematized it. Alfred Marshall tried to narrow it, and Keynes made is fashionable. Robbins widened it, and Samuelson dynamized it, but modern science made it statistical and tried to confine it again.
But the science won't stay put. It keeps cropping up all over the place. There is an economics of money and trade, of production and consumption, of distribution and development. There is also an economics of welfare, manners, language, industry, music, and art. There is an economics of war and an economics of power. There is even an economics of love.
Economics seems to apply to every nook and cranny of human experience. It is an aspect of all conscious action. Whenever decisions are made, the law of economy is called into play. Whenever alternatives exist, life takes on an economic aspect. It has always been so. But how can it be?
It can be because economics is more than just the most developed of the sciences of control. It is a way of looking at things, an ordering principle, a complete part of everything. It is a system of thought, a life game, an element of pure knowledge.
Chapter 1 Preliminaries
• Economics is concerned with scarcity. If something is not scarce, there is no economic problem.
• Microeconomics => Study of behavior of individual economic units. How they react and how they interact to form larger units.
• Economics uses theory to explain actions and predict future actions. For example if: the Bulls are in the playoffs, then there will be a larger number of people wanting tickets than if they have a poor season. If there is high unemployment, then at the university more students enroll in business courses because their opportunity costs (pay loss due to being in class) are less.
• Theory does not work well all the time. The market test of theory is how well it does in comparison to another theory. A theory must have the possibility to being proved wrong. The statement "all unmarried men are bachelors" is a tautology and cannot be proved wrong. The statement "If American Airlines lowers the ticket price to Bermuda, an increased number of people will fly this weekend." Can be proved wrong or right.
• Marginal utility theory can be used to derive the demand curve. However it will be shown later that to get a downward sloping demand curve the only assumption needed is that consumers buy randomly along the budget line. => a minimalist approach to deriving an important economic concept - downward sloping demand.
• Normative Economics => What should be done. "Microsoft should be allowed to bundle the IE with Windows XP because it benefits consumers."
• Positive Economics => What will happen, not what should be done. "An increase in the property tax in the area of UIC will tend to lower the price of apartments, everything else equal."
• Many decisions involve multiple assumptions. Book example of 1985 decision of Ford to produce the Taurus involved:
1. Consumer tastes vs demand "would they like the car?"
2. How sensitive would demand be to price changes? (elasticity),
3. What would be the production costs? (Depends on assumptions of #'s of cars produced, union demands, inflation, how fast workers learn).
4. How would competitors react (market structure).
5. How much new capital would be...