Introduction to Microeconomics
Why Study Economics?
• Economics is the study of how individuals and
societies choose to use the scarce resources
that nature and previous generations have
provided.
• How to deal with limited resources in a society
of unlimited wants
Opportunity Cost
• Opportunity cost is the best alternative that
we forgo, or give up, when we make a choice
or a decision.
• Opportunity costs arise because time and
resources are scarce. Nearly all decisions
involve trade-offs.
Marginal= Additional
• In weighing the costs and benefits of a
decision, it is important to weigh only the
costs and benefits that arise from the
decision.
• For example, when deciding whether to
produce additional output, a firm considers
only the additional (or marginal cost), not the
sunk cost.
Efficiency
• An efficient market is one in which profit
opportunities are eliminated almost
instantaneously.
• There is no free lunch! Profit opportunities
are rare because, at any one time, there are
many people searching for them.
Types of Efficiency
• Productive Efficiency• Products are being produced in the least
costly way.
• This is any point ON the Production
Possibilities Curve
• Allocative Efficiency• The products being produced are the ones
most desired by society.
• This optimal point on the PPC depends on
the desires of society.
Micro vs. Macro
• Microeconomics is the branch of economics
that examines the functioning of individual
industries and the behavior of individual
decision-making units—that is, business firms
and households.
• Macroeconomics is the branch of economics
that examines the economic behavior of
aggregates— income, output, employment,
and so on—on a national scale.
Normative vs. Positive
• Normative economics, also called policy
economics, analyzes outcomes of economic
behavior, evaluates them as good or bad, and
may prescribe courses of action.
• Positive economics studies economic behavior
without making judgments. It describes what
exists and how it works.
Ceteris Paribus
• A variable is a measure that can change from
observation to observation.
• Using the ceteris paribus, or all else equal,
assumption, economists study the
relationship between two variables while the
values of other variables are held unchanged.
• The ceteris paribus device is part of the
process of abstraction used to focus only on
key relationships.
Pitfalls
• In formulating theories and models we must
avoid two pitfalls:
– The Post Hoc Fallacy: It is erroneous to believe
that if event A happened before event B, then A
caused B.
– The Fallacy of Composition: It is erroneous to
believe that what is true for a part is also true for
the whole. Theories that seem to work well when
applied to individuals often break down when
they are applied to the whole.
Factors of Production
PPC
• Production Possibilities Curve
• A model that shows alternative ways that an
economy can use its scarce resources
• This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus)
• Fixed Technology
Production Possibilities Curve
Impossible/Unattainable
(given current resources)
A
B
G
Bikes
C
Efficient
D
Inefficient/
Unemployment
E
0
2
4
6
8
10
Opportunity Cost
1.
2.
3.
4.
5.
Moving from a to b
Moving from b to d
Moving from d to b
Moving from f to c
Describe point g
Constructing PPC
A
B
C
D
E
CALZONES
4
3
2
1
0
PIZZA
0
1
2
3
4
More PPC
• Law of Increasing Opportunity Cost• As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
• Why? Resources are NOT easily adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
When does the PPC shift?
3 Shifters of the PPC
– 1. Change in resource quantity or
quality
– 2. Change in Technology
– 3. Change in Trade
• Hope you took good notes!!!
http://quizlet.com/11605256/apmicroeconomics-introduction-flash-cards/