MICROECONOMICS: Theory & Applications
Chapter 1: An Introduction to Microeconomics
By
Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
11th Edition, Copyright 2012
PowerPoint prepared by Della L. Sue, Marist College
Copyright 2012
John Wiley & Sons, Inc.
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Learning Objectives
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Convey the scope of microeconomic theory and explain why
theory, in general, is essential to understanding and predicting
real-world outcomes.
Distinguish between positive and normative analysis.
Differentiate between real and nominal prices.
Introduce the concept of opportunity cost and explain how
economic costs differ from accounting costs.
Show how a production possibility frontier graphically depicts the
basic assumptions economists make about market actors as well
as the concept of opportunity cost.
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The Scope of Microeconomic Theory
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“micro-” derives from the Greek word “mikros-”
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focuses on the behavior of individuals as
fundamental decision makers in a society
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also referred to as “price theory”
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The Nature and Role of Theory
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A theory shows how facts are related to one
another.
 Theory is based on certain assumptions.
 Theory can be used to predict as well as
explain real-world outcomes.
 “Good” theory – a theory that successfully
explains and predicts the phenomena that it is
intended to explain and predict.
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Positive versus Normative Analysis
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Positive analysis – assessment of
expected objective outcomes; draws on
accepted rules of logic and evidence
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Normative analysis – a nonscientific
value judgment; subjective
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Market Analysis and
Real versus Nominal Prices
Markets – the interplay of all potential
buyers and sellers of a particular
commodity or service
 Nominal price – absolute price, not
adjusted for the changing value of
money
 Real price - nominal price adjusted for
the changing value of money
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Table 1.1
Source
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Basic Assumptions about Market
Participants
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Goal-oriented – market participants are interested in
fulfilling their own, personal goals
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Rational behavior – behavior is based on a careful,
deliberate process that weighs expected benefits and
costs
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Scarce resources – availability of resources is
insufficient for individuals to satisfy all desires
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Opportunity Cost
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Explicit costs – money used in the pursuit of a goal
that could otherwise have been spent on an alternative
objective
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Implicit costs – costs associated with the individual’s
use of his or her own time
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Economic cost (aka “opportunity cost”)
= explicit costs + implicit costs
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Other Costs
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Accounting costs = costs reported in
companies’ net income statements
generated by accountants
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Sunk costs = costs that have already
been incurred and are beyond recovery
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Production Possibility Frontier
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A depiction of all the different combinations of
goods that a rational actor with certain
personal goals can attain with a fixed amount
of resources
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Constant versus increasing per-unit
opportunity cost – effect on shape of PPF
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Figure 1.1 - A Production Possibility
Frontier (PPF)
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Figure1.2 - The Typical-Case PPF:
Concave to the Origin
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