Econ 101 Introduction to Microeconomics

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Econ 101Introduction to Microeconomics

• Why study Economics?
• Whats it all about?

Lorne Priemaza, M.A. Lorne.priemaza_at_ualberta.ca

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Whats it all about?

• Not business or finance
• Not the stock market
• Economics examines issues from a social
  perspective Social Science
• Analysis of human behavior
• Close relative of psychology and sociology
• Economics Social Studies Math

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DEFINITION

• 1. ECONOMICS
• The study of how individuals societies allocate
  limited resources to satisfy unlimited wants
• The study of how choices are made coordinated

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Whats it all about? SCOPE

• MACROECONOMICS
• business cycles
• unemployment/ employment
• inflation
• trade, international markets (global economy)

• MICROECONOMICS
• scarcity
• supply demand
• markets
• consumer
• producer
• changes/impacts
• efficiency
• technology
• resources

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SCOPE

• MACROECONOMICS
• The study of the national economy the global
  economy, the way that overall economic variables
  fluctuate grow, the effects of government
  actions on them.

• MICROECONOMICS
• The study of the decisions and interactions of
  individual people businesses, the effects of
  government regulation taxes on prices
  quantities of goods services.

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DEFINITION

• 1. ECONOMICS
• The study of the problems that arise from
  scarcity, of the institutions that resolve the
  inescapable conflicts over the uses of scarce
  resources.

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DEFINITION

• 2. ECONOMIC RESOURCES
• people or things that possess the ability to help
  produce commodities (goods services) that
  people value.

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DEFINITION

• 2. ECONOMIC RESOURCES
• i) LAND (natural resources)
• sites productive items on
  or under the earths surface

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DEFINITION

• 2. ECONOMIC RESOURCES
• ii) LABOUR
• productive people their efforts to
  produce goods services

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DEFINITION

• 2. ECONOMIC RESOURCES
• iii) PHYSICAL CAPITAL
• all human made items used to produce goods
  services.
• (produced means of production)
• ie Computers and Factories
• not Money

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DEFINITION

• 2. ECONOMIC RESOURCES
• iv) HUMAN CAPITAL
• characterization of the education and training
  of workers
• (productivity of workers)
• ie years of university or years of job
  experience or innate ability

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DEFINITION

• 2. ECONOMIC RESOURCES
• v) Other ENTREPRENEURIAL ABILITY
  the innovator,
  the risk bearer, the initiator

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RETURNS TO RESOURCES

• Rent, Wages, Interest, Profit
• Rent is income earned by land
• Wages are income earned by labour
• Interest is income earned by capital
• Profit is income earned by entrepreneurs

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DEFINITION

• 3. Scarcity

• Peoples wants are greater than the economys
  ability to produce desirable goods services

scarcity scarce (limited)
resources unlimited wants (always want more)
Scarce Resources Unlimited Wants Choice
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Scarcity ? Poverty

• A homeless man who wants to eat but cannot faces
  scarcity
• A university student who wants to own a Mustang
  convertible but cannot faces scarcity
• A millionaire who wants to be Prime Minister but
  cannot faces scarcity (only one spot available)

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Scarcity ? CHOICES
1.)What do we do with our scarce
resources? 2.)How do we make the best
use of our resources?
(Efficiency) 3.)For Whom will things be produced?
(Who will get what is available?)
(Equity)
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Rationing
Scarcity necessitates a rationing device -
which guides choices.
Prices are the rationing device in our Economy
Prices direct scarce resources to their most
valued uses.
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Rationing
Sometimes market forces alone do the rationing,
sometimes other forces are operating as well
E.g. legal moral social
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The Five Basics

• 1.Terminology (definitions)
• 2.Economic Thinking/Reasoning
• 3.Economic Principles/Theory
• 4.Economic Policy Options
• 5.Economic Institutions

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Basics 1.) Terminology

• The language of Economics.
• The world through economics glasses
• You need to learn French to participate in a
  French literature class
• You need to learn chemical notation to succeed in
  Chemistry
• You need economic language to understand Economics

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Basics 2.) Economic Reasoning

• Choices made under conditions of scarcity involve
  tradeoffs
• advantages and disadvantages costs and benefits
  incentives and disincentives.
• Economic reasoning is making decisions by
  comparing costs and benefits.

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The Rationality Assumption

• An individual makes decisions based on maximizing
  his or her own self-interest.
• Therefore
• People do not intentionally make decisions that
  would leave them worse off

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Non-Satiation Assumption
More goods are always preferable to fewer goods
people are never satiated

• People will always pick a job with the highest
  wage
• People will always eat 10 pieces of pizza instead
  of 1

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Costs and Benefits

• The relevant costs and benefits to economic
  reasoning are the expected incremental or
  additional costs incurred and the expected
  incremental or additional benefits of a decision
• That is only the costs and benefits that will be
  affected by the decision are considered
• ADDITTIONAL costs or ADDITIONAL benefits

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Marginal Cost, Marginal Benefit

• M.C.(marginal cost) is the extra cost associated
  with the additional activity.
• M.B.(marginal benefit) is the extra benefit
  associated with the additional activity.
• s are used to measure these in order to
  facilitate comparisons

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No Sunk Costs

• Sunk Costs
• Have already been incurred and will not change as
  a result of the decision you are about to make.
• Represent past decisions.
• Are therefore not counted in a cost benefit
  decision
• Ie Cost of factory, rental costs, training
  costs, membership costs

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ECONOMIC DECISION MAKING RULE (COST/BENEFIT)

• If the benefits of an action exceed the costs

DO IT

• If the costs of an action exceed the benefits

DONT DO IT

• In the case of more than one alternative

CHOOSE THE ACTION WITH THE GREATEST NET ADVANTAGE
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Opportunity Cost

• The basis of economic cost benefit analysis
• When a choice is made in favour of one
  alternative, another alternative is given up
• The next best alternative that is given up when a
  choice is made is called the opportunity cost of
  the choice.

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THE OPPORTUNITY COST of an action is the next
best foregone alternative.
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Cost Benefit ExerciseExample of economic
decision making in action Should I Go To
University?

• Consider the marginal costs and the marginal
  benefits of this decision.
• Consider the Opportunity Cost

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Opportunity Cost Example

• Cost of 1 year of University
• Tuition 5000
• Books 500
• Opportunity Cost of 1 year University
• 40 hr/week, 50 weeks/year,
• 20/hour 40,000
• Total University Cost 45,500

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Basics 3.)Theory

• Simplified statement/ generalization about some
  part of the economy, based on assumptions
• Assumptions define the circumstances under which
  a theory is likely to apply
• ceteris paribus assumption -everything else held
  constant
• Abstraction from reality
• Helps us to understand/explains some part of the
  economy

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Theory Assumptions

• Assumptions

• Why make Assumptions?

? Set the Stage ? Simplify

• In order you understand a theory, you must
  understand the assumptions underlying the theory.

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Theory

• Method
• observe patterns in raw data
• generalize about the observed pattern
• Model
• name for more specific statement of a theory

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Testing Theories

• It is wrong to judge the validity of a theory on
  the basis of
• the unrealistic assumptions.
• how closely it represents reality.
• A model is good if it yields usable
  predictions and explanations of the real world
• when a model is no longer supported by factual
  evidence, it is no good
• we need a new theory

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Basics 4) Policy

• In order to carry out effective policy, the
  policy maker must understand how the economy
  works
• The is called POSITIVE ECONOMICS The economics
  of facts theory
• -ie Minimum wage increase causes unemployment
  increase

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Basics 4) Policy

• In order to conduct policy, the policy maker
  must have some goals in mind
• NORMATIVE ECONOMICS is the study of what the
  goals of the economy should be
• -ie We should lower the minimum wage in order
  to lower unemployment

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Basics 4) Policy

• Formulated to achieve the normative GOALS for the
  economy
• Efficiency use all our resources, (full
  employment), use them in the best way possible.
• Equity in the distribution of income
• Economic Growth
• Stability stable prices, stable growth
• Full Employment Everyone looking for a job finds
  one fairly quickly

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Basics 5.) Economic Institutions

• Economic Institutions emerge from a complicated
  combination of historical circumstance
  economic, cultural, social political pressures.
• Corporations, governments and cultural norms are
  all economic institutions. They differ
  significantly among nations
• Institutions give models context