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Fall ‘ 97
Principles of Microeconomics
Slide 1
R. Larry Reynolds
Principles of Microeconomics
· Instructor: r. larry reynolds
· office: B-311
· phone: 208.426.1469
· e-mail: lreynolds@boisestate.edu
Internet students pleas use
EC202-425@boisestate.edu
© R. Larry Reynolds 1997
Fall ‘ 97
Principles of Microeconomics
Slide 2
Objectives in EC202
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To learn the nomenclature used to describe economic events
and relationships
To learn the methodology used in mainstream [Neoclassical]
economics
To understand limitations of Neoclassical economics
To Become aware of the role of ideology our perceptions
To learn to ask relevant questions about events and values
What do I know? How do I know?
What do I believe? Why?
Fall ‘ 97
Principles of Microeconomics
Slide 3
A University is a community
of Scholars
· Student and faculty are members of
community
· Your are participant not a customer
· read material in text and on the syllabus
· awareness of related material in press and other
sources
· thinking about how material in course is related to
historical and current events
· questioning the analysis and position of others
Fall ‘ 97
Principles of Microeconomics
Slide 4
Introduction to Economics
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A finite world
Unlimited wants
Relative Scarcity
Choices must be made
· individual choices
· social choices
Fall ‘ 97
Principles of Microeconomics
Slide 5
Finite world
· individuals and society are confronted
by limited resources
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Fall ‘ 97
inputs or factors of production
time
budgets
information / knowledge / technology
Principles of Microeconomics
Slide 6
Resources
· Typical taxonomy
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land / natural resources
labor
Capital
Entrepreneurial ability
· Alternative view
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Fall ‘ 97
Matter
Energy
Time
Technology
Principles of Microeconomics
Slide 7
Scarcity
· Because of Scarcity, individuals and
societies must make choices
· All Choices in a finite world have
“opportunity costs”
· alternative uses of finite resources
· Opportunity cost is the value of the next best
alternative sacrificed
· Can institutional structure create or increase
scarcity?
Fall ‘ 97
Principles of Microeconomics
Slide 8
Definition of Economics
· economics is a social science that studies
human behavior and institutional
arrangements in societies that influence
the processes by which relatively scarce
resources are allocated to alternative uses
-· social science and decision science
components of economics
Fall ‘ 97
Principles of Microeconomics
Slide 9
Fundamental Economic
Questions
· What should be produced?
· How many?
· How should these goods (and services) be
produced?
· When should these goods be produced?
· Who gets the goods (and services) that
were produced?
Fall ‘ 97
Principles of Microeconomics
Slide 10
“THE BIG QUESTION”
· HOW CAN SOCIETY BE
ORGANIZED IN SUCH A WAY
THAT THE LIBERTY AND
AUTONOMY OF THE INDIVIDUAL
CAN BE PROTECTED YET AT THE
SAME TIME PROVIDE FOR THE
COMMONWEAL?
Fall ‘ 97
Principles of Microeconomics
Slide 11
Economics as a Social
Science
· Human behavior is influenced by a
matrix of complex forces
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Fall ‘ 97
Psychology
Sociology
Anthropology
Economics
Political Science
Religion, ...
Principles of Microeconomics
Slide 12
Economics as Social Science
[cont ...]
· Need for integration of social sciences
· deductive, historical and empirical
[statistical] approaches
· Philosophical and Historical Context
· To speculate about where you are going, you
need to understand where you are
· To fully understand where you are, you need to
know where you came from
Fall ‘ 97
Principles of Microeconomics
Slide 13
Economics as Social Science
[cont ...]
· As a social science economics has a
foundation based on a system of
ethics
· Ethics
· consequentialist [“Utilitarianism”]
· deontological
· ontological
Fall ‘ 97
Principles of Microeconomics
Slide 14
Economics as a Decision
Science
· Optimization
· Maximization of an objective
· Minimization of an objective
· Objectives
· preferences
· individual,
· firm, [organization]
· social
Fall ‘ 97
Principles of Microeconomics
Slide 15
“Scientific Method”
· Scientific method is a subset of Epistemology
· General approach is:
· aware of problem
· develop hypothesis [model]
· gather data to test hypothesis
· test hypothesis
· accept or reject hypothesis
· when hypothesis gathers general acceptance it
becomes a “Theory”
Fall ‘ 97
Principles of Microeconomics
Slide 16
Models
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A model is a representation of reality, it necessarily
abstracts form the “real world”
case of two models: Paper and clay. You model an airplane.
Do the models look alike? No? Which model is “best?”
Which is “best” to demonstrate the principle of lift and
flight? Which model would be “best” in a wind tunnel at
700kph?
What you build your model from determines to some extent
the nature of your model.
What you want to use the model for determines the process.
Fall ‘ 97
Principles of Microeconomics
Slide 17
Goals of Science
· to predict:
On the basis of information currently known
and theories, science would like the ability to estimate with
some degree of probability, future events.
· to explain:
The process by which the causal processes
of an event can be identified. [The identification of causal
relationships.]
· Story telling:
Story telling is the process by which
most societies pass on the cultural values, organizing myths
and traditions that determine values and guide behavior.
Fall ‘ 97
Principles of Microeconomics
Slide 18
Steps to Economic analysis
· Identify the Objective
· Identify all feasible alternatives
· Alternatives are determined by technology
· other constraints [finite resources, law,
custom,...]
· Develop Criteria to evaluate each
alternative with respect to the
objective
Fall ‘ 97
Principles of Microeconomics
Slide 19
Objectives
· The objective is the goal or desired
outcome of a choice
· Individuals may try to maximize utility given
the constraints of income, time, prices, etc.
· Firms may have objectives such as the
maximization of profits, sales, market share,
etc. or the minimization of costs per unit
· Social objective, maximize the well being of
the members of society
Fall ‘ 97
Principles of Microeconomics
Slide 20
Social Objectives
· The philosophical foundation of Neoclassical
economics is “Utilitarianism”
· Jeremy Bentham [1748-1832]
· “The greatest good for the greatest number.” We want
the greatest welfare for the members of a community.
· Individual and Community
· How can we maintain the autonomy of the
individual and at the same time provide for
the commonweal?
Fall ‘ 97
Principles of Microeconomics
Slide 21
A fundamental question
· What is the welfare of the society?
· One view is the the welfare of the
community is the sum of the welfare of
each individual.
· An alternative view is that social welfare is
not the sum of the individual’s welfare.
There is a symbiotic relationship between
the welfare of individuals.
Fall ‘ 97
Principles of Microeconomics
Slide 22
Economics as a Decision
Science
· Economics to analyze choices
· At the margin
· Marginal Benefits [MB]
· Marginal Costs [MC]
· MC is the same as opportunity cost
· It is the value of what you sacrifice as a
result of the choice
· MB = MC as basic rule of optimization
Fall ‘ 97
Principles of Microeconomics
Slide 23
MB = MC
· Individuals optimize welfare when MB = MC
· Neoclassical economics holds that when
each individual maximizes their utility, the
utility of society is also maximized.
· This requires that individuals’ utilities can
be summed, i.e. individual utilities are
additive
· Heterodox economists hold other views
Fall ‘ 97
Principles of Microeconomics
Slide 24
Individualism
· Neoclassical economics starts with
the individual
· Individual preferences are primary
· “voluntary” Individual action
· market exchange is the focus of
neoclassical economic analysis
Fall ‘ 97
Principles of Microeconomics
Slide 25
Coordination and Integration
· Individual choices must be coordinated and
integrated by social institutions
· Integrating / coordinating mechanisms in
society
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Fall ‘ 97
householding
redistribution
reciprocity
market exchange
Principles of Microeconomics
Slide 26
Householding
· each individual household or familial unit
produces all the items they consume
· subsistence type of economy
· not prevalent in modern, industrial
societies
· largely ignored in Neoclassical economics
Fall ‘ 97
Principles of Microeconomics
Slide 27
Redistribution
· Redistribution occurs when a society’s
recourses are distributed by an
authority
· Central organizing authority takes
resource and allocates them by some
criteria
· Authority based on religion, political
power, military strength, etc.
Fall ‘ 97
Principles of Microeconomics
Slide 28
Reciprocity
· Defined in anthropology as
“obligatory gift giving”
· I do something for you and through
social convention you are obliged to
do something for me
· Reciprocity requires a society that
includes members who have a
continuing relationship
Fall ‘ 97
Principles of Microeconomics
Slide 29
Reciprocity [cont. . .]
· When I help you harvest your crop as a member of
a community, you have obligations to help me do
something
· Should you choose to ignore your social
responsibilities often enough, you will eventually
be ostracized. Reciprocity requires a sense of
community
· If I pay you for goods or services, it may
substantially alter the good or service
Fall ‘ 97
Principles of Microeconomics
Slide 30
Market Exchange
· A market exchange is a “quid pro quo”
mechanism. It is a contractual
arrangement were we specify exactly what
you will receive in return for a good or
service rendered.
· “I will give a yellow, #2 pencil for $.50“
· We both know exactly what we are getting
in the exchange
Fall ‘ 97
Principles of Microeconomics
Slide 31
Market exchange
[cont. . . ]
· market exchange may occur between strangers. I
do not need to know the shopkeeper where I buy a
soft drink.
· market exchange works best were exchanges are
voluntary
· this assures that one or both parties to an
exchange benefit and no one is made “worse”
off. Concept of Pareto Efficiency
· “nonattenuated property rights” are required for
markets to produce optimal results
Fall ‘ 97
Principles of Microeconomics
Slide 32
Pareto Efficiency
· Pareto efficiency is the primary
criteria used in Neoclassical
economics to evaluate alternatives
· Pareto efficiency is a condition such
that there are no alternatives that
will improve the welfare of any
person(s) without making some one
else (or others) “worse off”
Fall ‘ 97
Principles of Microeconomics
Slide 33
Pareto Efficiency
[cont. . . ]
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Clearly, if there is an alternative that will improve the
welfare of at least one person and no one is any worse off,
that alternative would improve the welfare of society. This
is a Pareto improvement
If the utility of at least one person can be increased, but
some one else (or others) is made worse off, it is not a
Pareto improvement
Benefit/cost analysis is based on the Pareto criterion
{rate of return on investment and others are also based on
the Pareto criterion
Fall ‘ 97
Principles of Microeconomics
Slide 34
Pareto Efficiency and Voluntary
Exchanges
· Market exchanges that are voluntary are
said to be Pareto Optimal
· It is believed that no one would voluntarily
enter into a voluntary exchange and make
themselves “worse off”
· Therefore, one or both parties to a
voluntary exchange is believed to be better
off and no one is any worse off
Fall ‘ 97
Principles of Microeconomics
Slide 35
Nonattenuated property rights
· To “attenuate” is a legal term that
means to “weaken”
· Nonattenuated property rights are
“strong property rights”
· exclusive
· transferable
· enforceable
Fall ‘ 97
Principles of Microeconomics
Slide 36
Exclusive property rights
· Exclusive property rights means that all
the benefits and costs fall on the “owner.”
Third parties do not benefit nor are there
costs imposed on them
· When property rights are not exclusive,
externalities, public goods, common
property resources are said to exist.”
· “Market Failures” and property rights
failures
Fall ‘ 97
Principles of Microeconomics
Slide 37
Enforceable property rights and
transferability
· Markets do not work well when property
rights are not enforceable. Many early
political philosophers argue that
enforcement of property right is the
principle function of government
· Copyrights, patents, etc. are examples of
attempts to create, assign and enforce
property rights
Fall ‘ 97
Principles of Microeconomics
Slide 38
Summary of Intro
· Relative scarcity of inputs, unlimited wants
· Choices by individuals within societies
· opportunity cost is the value of the next best
alternative that was sacrificed
· Analysis is individual behavior, at the margin, that
optimizes an objective within a set of constraints
· use of “scientific method.” Hypotheses are tested
with empirical data to develop “theories”
· goals are to predict, explain, story telling
Fall ‘ 97
Principles of Microeconomics
Slide 39