Econ 101
Introduction to Microeconomics
•Why study Economics?
•What’s it all about?
Lorne Priemaza, M.A.
What’s 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
DEFINITION
• 1. ECONOMICS
– The study of how individuals & societies allocate limited resources to satisfy unlimited wants
– The study of how choices are made &
coordinated
What’s it all about? SCOPE
• MICROECONOMICS
– scarcity
– supply & demand
• markets
• consumer
• producer
• changes/impacts – efficiency
– technology – resources
• MACROECONOMICS
– business cycles – unemployment/
employment – inflation
– trade, international markets (global
economy)
SCOPE
• MICROECONOMICS
– The study of the decisions and interactions of
individual people &
businesses, & the
effects of government regulation & taxes on prices & quantities of goods & services.
• MACROECONOMICS – The study of the
national economy &
the global economy, the way that overall economic
variables fluctuate
& grow, & the effects of
government actions
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.
DEFINITION
• 2. ECONOMIC RESOURCES:
–people or things that possess the
ability to help produce commodities (goods & services) that people
value.
DEFINITION
• 2. ECONOMIC RESOURCES : –i) LAND (natural resources)
: sites
: productive items on
or under the earth’s surface
DEFINITION
• 2. ECONOMIC RESOURCES:
–ii) LABOUR
:productive people & their efforts to produce goods &
services
DEFINITION
• 2. ECONOMIC RESOURCES : – iii) PHYSICAL CAPITAL
– all human made items used to produce goods & services.
(produced means of production) - ie: ie: Computers and Factories
– not: not: Money
DEFINITION
• 2. ECONOMIC RESOURCES : – iv) HUMAN CAPITAL
– characterization of the education and training of workers
(productivity of workers)
- ie: ie: years of university or years of job
experience or innate ability
• 2. ECONOMIC RESOURCES:
– v) Other: ENTREPRENEURIAL ABILITY :the innovator, the risk bearer,
the initiator
DEFINITION
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
DEFINITION
• 3. Scarcity
•Peoples’ wants are greater than the economy’s ability to produce
desirable goods & services
‘scarcity’
scarce (limited) resources
unlimited wants (always want more)
Scarce Resources + Unlimited
Wants = Choice
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)
Scarcity CHOICES
1.) What What do we do with our scarce resources?
2.) How How do we make the best use of our resources?
(Efficiency)
3.) For For Whom Whom will things be
produced? (Who will get what is available?)
(Equity)
“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.
Rationing
Sometimes market forces alone do the rationing, sometimes other forces are operating as well;
E.g. legal moral social
Rationing
1.Terminology (definitions)
2.Economic Thinking/Reasoning 3.Economic Principles/Theory
4.Economic Policy Options
5.Economic Institutions
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
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.
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
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
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
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
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
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
DON’T DO IT
•In the case of more than one alternative
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.
THE OPPORTUNITY THE OPPORTUNITY COST COST of an action is of an action is
the the next best next best
foregone alternative.
foregone alternative.
Cost Benefit Exercise:
Example 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
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
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
Theory Assumptions
Set the Stage Set the Stage
Simplify Simplify
•Assumptions
Why make Assumptions?
In order you understand a theory, you
• Method
– observe patterns in raw data
• generalize about the observed pattern
• Model:
– name for more specific statement of a theory
Theory
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,
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
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 -
Basics: 4) Policy
• Formulated to achieve the normative GOALS for the economy
– Efficiency:
use all our resources, (fullemployment), use them in the best way possible.
– Equity
in the distribution of income – EconomicGrowth Growth
– Stability:
stable prices, stable growth– Full Employment: Everyone looking for a job finds one fairly quickly