Introduction to Microeconomics

Microeconomics

A study of decisions of individuals and firms in relation to the scarcity of resources in the market.

Macroeconomics

The study of decisions made in the whole economy, its benefits, and consequences. (Government and industries

General Motors Example:

A voluntary recall request of over 4 million 3rd Generation light trucks was issued by the National Highway Traffic Safety Administration (NHTSA).

Issue:

• The side-mounted tank was vulnerable to rupture and posed a safety hazard, causing explosions.

Class Action Lawsuit

A lawsuit filed on a company on behalf of a group of affected individuals.

Settlement:

• $1000 coupon towards the purchase of a new GM light truck (value of 13%-56% per customer)
  • Coupon is transferable to a third party for $500.
  • Valid for 15 months.
  • Coupons cannot be stacked.
  • 4.7 million coupons were to be mailed.
  • Public perception: "It will cost GM $4.7 Billion."

Proposal Rejected by Judge

Suspected reasons:

• Does not involve much cost on GM.
• Does not provide enough value to affected owners.

Real Costs Incurred for GM:

• Estimated 0.6 million use the coupon, 4.1 million transfer the coupon.
• $600 million for those who use the coupon.
• Roughly 1.4 million potential new buyers when the truck costs $20,000.
• Coupon price will be < $500 (no one will pay more than $500 for a $500 coupon).
• Supply (4.1 million) >> Demand (1.4 million) → Price per coupon estimated to be $20 (due to low demand) → $28 million.
• Total cost incurred on GM: $630 million rather than $4.7 billion.

Microeconomics helps identify that the real cost is $630 million, not $4.7 billion.

Two Prominent Tradeoffs:

1. Consumption vs. Savings
2. Efficiency vs. Equity
   • Efficiency – Output from limited and scarce resources.
   • Equity – Equal distribution of resources across individuals.