Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

8 INTRODUCTION [CHAP. 1
(c)
In the modern world, governments have made economic growth one of their top priorities. Economic growth is
often wanted for its own sake. This is true for developed and underdeveloped nations, regardless of their form
of organization. Serious concern for the environment has only been voiced recently. Governments have used
tax incentives, subsidies, sponsored basic research, etc., to stimulate economic growth.
THE FUNCTION OF MICROECONOMIC THEORY
1.10 (a) Distinguish between microeconomics and macroeconomics. (b) What basic underlying assumption
is made in studying microeconomics?
(a)
(b)
Microeconomic theory or price theory deals with the economic behavior of individual decision-making units
such as consumers, resource owners, and business firms as well as individual markets in a free-enterprise
economy. This is to be contrasted with macroeconomic theory, which studies the aggregate levels of
output, national income, employment, and prices for the economy viewed as a whole.
In studying microeconomic theory, the implicit assumption is made that all economic resources are fully
employed. This does not preclude the possibility of temporary disturbances, but monetary and fiscal policies
are supposed to assure us a tendency toward full employment without inflation. During periods of great
unemployment and inflation, microeconomics is overshadowed by the aggregate problems.
1.11 (a) Draw a diagram showing the direction of the flows of goods, services, resources, and money between
business firms and households. (b) Explain why what is a cost to households represents income for
business firms, and vice versa.
(a) A simple schematic model of the economy is shown in Fig. 1-1.
Fig. 1-1
(b)
The top loop in Fig. 1-1 shows that households purchase goods and services from business firms. Thus, what is
a cost or a consumption expenditure from the point of view of households represents the income or the money
receipts of business firms. On the other hand, the bottom loop shows that business firms purchase the services
of economic resources from households. Thus, what is a cost of production from the point of view of business
firms represents the money income of households.
1.12 (a) With which of the five problems faced by every society is microeconomics primarily concerned?
(b) With reference to the circular-flow diagram in Problem 1.11, explain how the prices of goods,
services, and resources are determined in a free-enterprise economy.
(a)
Of the five problems faced by every society, microeconomics is concerned primarily with the first three (i.e.,
what to produce, how to produce, and for whom to produce). The crucial step in solving these problems is the
determination of the prices of the goods, services, and economic resources that enter the flows shown in the
diagram of Problem 1.11 (hence the name “price theory”).