Microeconomic for public policy

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Microeconomic for public policy
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Chapter 1

• ECONOMIC MODELS

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• Economics is the study of how scarce resources
  are allocated among alternative use
• Economic models are used for this purpose

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Economic Models

• Economic models are built to address particular
  questions. There is no a 4-W economic model.
• The best model to use will depend on the
  question, the setting, the information available
• Example How do a increase in the price of
  potatoes influence the consumption of potatoes?
• Forces that one could consider
• price effect possibility to substitute its
  consumption. It will depend on possibilities of
  storage, transportation costs, range of products
  available in the market
• income effect consumer if poorer than before
  because he can buy less potatoes
• endowment effect consumer is richer if he
  cultivates potatoes
• nutrition effect less consumption of potatoes
  can decrease calories intake, hence consumer will
  work less and his income decrease further

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Economic Models

• Understanding the interactions of these 4 forces
  can be too complicated
• An economic model will tend to ignore those
  forces that are believed not be important in the
  setting or problem under consideration
• Previous example in New York ignore endowment,
  income, and nutrition effect
• Previous example in a rural village in Bolivia
  ignore substitution effect, and concentrate on
  endowment, income and nutrition effect
• Economic models are not pictures of reality
• They are abstractions from reality, incorporating
  the main forces to simplify the problem
• The forces to incorporate will depend on the
  particular question and setting

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Features of Economic Models

• Ceteris Paribus assumption
• Optimization assumption
• Distinction between positive and normative
  analysis

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Ceteris Paribus Assumption

• Ceteris Paribus means other things the same
• Economic models attempt to explain simple
  relationships
• focus on the effects of only a few forces at a
  time
• other variables are assumed to be unchanged
  during the period of study

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Optimization Assumptions

• Many economic models begin with the assumption
  that economic actors are rationally pursuing some
  goal
• consumers seek to maximize their utility
• firms seek to maximize profits (or minimize
  costs)
• government regulators seek to maximize public
  welfare

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Positive-Normative Distinction

• Positive economic theories seek to explain the
  economic phenomena that is observed
• Normative economic theories focus on what
  should be done