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ANALYZING ECONOMIC
PROBLEMS
Microeconomics Defined
Microeconomics
The study of how individual economic decisionmakers such as consumers, workers, firms or
managers allocate scarce resources among
alternate uses
This study involves both the behaviour of these
economic agents on their own and the way their
behaviour interacts to form larger units, such as
markets
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Consumer
Allocate more time to work, but have less time
available for leisure activities
Manager
Spend more of a firms resources on advertising,
but have less resources for research and
development
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Microeconomic Modeling
Economic model is like a roadmap
Is an abstract model that serves a particular
purpose
Using visual methods, they simply the process and
facilitate understanding of complex concepts
Shows us where we are and how we can get where we
want to go
Endogenous variable
Variable whose value is determined within the
economic system being studied
E.g. number of workers
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Constrained Optimization
Constrained optimisation
Making the best (optimal) choice, taking into
account any possible restrictions on the choice
Objective function
The relationship that a decision maker seeks to
maximise or minimise
E.g. maximise utility, minimise cost
Constraints
The restrictions or limits imposed on a decision maker
in a constrained optimisation problem
E.g. time, budget, other resources
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PFF + PCC = I
S2 > S 1 > S 0
(FC)1/2 = S2
(FC)1/2 = S1
(FC)1/2 = S0
0
C
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Marginal Reasoning
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Equilibrium
An analysis of a system in a state that will
continue indefinitely
As long as the no outside factor upsets the
equilibrium
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Equilibrium (cont.)
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Comparative Statistics
Examine how a change in some exogenous
variable will affect the level of some
endogenous variable in an economic system
Can be applied to constrained optimisation
problems and equilibrium analyses
Comparing two snapshots of an economic model
Levels of the endogenous variables given a set of
exogenous variables
How endogenous variables change in response to an
exogenous shock
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Microeconomic Analysis
Positive analysis
To explain how an economic system works or to
predict how it will change over time
What has happened?
What is happening?
Normative analysis
Focuses on issues of social welfare, examining
what will enhance or detract from the common
good
What should be done?
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