Module 1. Theory of consumer behavior. Theory of enterprise

Topic 1. The Subject matter and method of microeconomics

(5Hours)

Key points:

1. The Subject Matter of Microeconomics. The role of Microeconomics

2. The use and limitation of Microeconomic theory

3. Economic methodology. Microeconomic models

Give the definitions to the following terms:

• Method of study

• Economic agent

• Economic good

• Free good

• Economic resource

• Economic model

• Production Possibilities Frontier (PPF)

Answer the following questions:

1. What is the subject matter of Microeconomics?

2. Who is economic agent?

3. What is the role of Microeconomics for modern economic agent and the economy of the country?

4. What are the main study methods used in Microeconomics?

5. Provide the economic models you know that can be used in Microeconomics.

6. Define the difference between normative and positive questions

7. Explain the concept of opportunity costs.

Solve the graphical tasks:

1. Draw a PPF for missiles and automobiles, assuming that they utilize similar but not perfectly transferable resources.

List the factors that would shift the PPF.

Indicate how the frontier will be affected by technological improvements in the production of automobiles but not missiles by drawing a second frontier. Be sure to specify the direction of the movement of the PPF, if applicable, with an arrow pointing from the old towards the new PPF.

2. Questions a) to c ) refer to the production possibilities frontier shown below.

True or false

1. . In the graph shown above, at point B, society is producing the maximum possible amount of butter.

2. To move from point A to point B, society would have to cut down on its gun production and increase butter production.

3. Point D is feasible and effective/

4. Point C shows the combination of guns and butter production under much bigger quantity of used resources.

5. Points C and D are ineffective.

3. Assume that the United States contributes disproportionately more resources to the defense of Western Europe than do other NATO allies, and as a consequence these other countries can invest a larger share of their resources in capital and other goods and services. Use production possibilities curves to show both short- and long-run consequences regarding the economies of the United States and Western Europe.

Give a short answer:

1. “Children should learn to clean up after themselves by the age of six.” Is this a positive or a normative statement? __________________________________________________________________

2. “The business sphere contributed 59% of production in the US in 2000.” Is this a positive or a normative statement? __________________________________________________________________

3. List the three basic economic questions.

__________________________________________________________________

4. A family enjoys a three-week vacation. In order to afford this vacation, the family saved money over the course of a year. Was earning this money a final goal or an intermediate goal? Explain why? __________________________________________________________________

5. Technological innovations can vastly increase a society’s productive capacity. How might a technological innovation affect a society’s production possibilities frontier?

__________________________________________________________________

Think on analytical quiz:

1. What is the opportunity cost of your studying at the University? Provide the money value calculation and explain why did you make the decision to study?

2. Assume that France can produce wine at 25 bottles per worker and cheese at 5 pounds per worker. Assume that Italy can produce 10 bottles of wine per worker and 20 pounds of cheese per worker.

a. In terms of cheese, what is the opportunity cost of producing wine in each country?

b. Who has the comparative advantage in producing cheese?

c. Which country should most likely specialize in cheese? in wine?