Econ 2113: Principles of
Microeconomics
Spring 2009
ECU
Two Big Economic Questions
  Two
big questions summarize the scope of
economics:
1. How society determines what, how, and for whom
goods and services get produced?
2. When do choices made in the pursuit of self-interest
also promote the social interest?
Two Big Economic Questions
1. What, How, and For Whom?
  Goods
and services are the objects that people value and
produce to satisfy human wants.
  What?
  What
we produce changes over time.
  Seventy years ago, almost 25 percent of Americans worked
on farms. Today that number is 3 percent.
  Seventy years ago, 45 percent of Americans produced
services. Today, almost 80 percent of Americans have service
jobs.
Two Big Economic Questions
  How?
  Goods
and services are produced by using
productive resources that economists call factors of
production.
  Factors of production are grouped into four
categories:
o  Land
o  Labor
o  Capital
o  Entrepreneurship
Two Big Economic Questions
  The work time and work effort that people devote to
producing goods and services is labor
  The
quality of labor depends on human capital, which is
the knowledge and skill that people obtain from education,
on-the-job training, and work experience
  The
tools, instruments, machines, buildings, and other
constructions that are used to produce goods and services
are physical capital
  The
human resource that organizes land, labor, and
capital is entrepreneurship.
Two Big Economic Questions
 For
Whom?
  Who
gets the goods and services depends
on the incomes that people earn.
  Land
earns rent.
  Labor earns wages.
  Capital earns interest.
  Entrepreneurship earns profit.
Two Big Economic Questions
2. When Is the Pursuit of Self-Interest in the Social
Interest?
  Every day, 6.6 billion people make economic choices
that result in What, How, and For Whom goods and
services get produced.
  Do we produce the right things in the right
quantities?
  Do we use our factors of production in the best way?
  Do the goods and services go to those who benefit
most from them?
Two Big Economic Questions
  You
make choices that are in your selfinterest—choices that you think are best for
you
  Choices
that are best for society as a whole
are said to be in the social interest.
 Is
it possible that when each one of us makes
choices that are in our self-interest, it also
turns out that these choices are also in the
social interest?
Two Big Economic Questions
  Adam
Smith: When individuals take actions
that pursue their own self interest, they often
also achieve the society’s interest
  Markets
are the mechanism trough which
actions taken on individuals self interest
translate into socially desirable actions
Two Big Economic Questions
  Markets,
trough prices, transmit information
  When members of society desire a good or
service, they bid the price of it up
 That higher price encourages individuals,
acting in their own interest, to provide those
goods or services
 Then by pursuing their self interest they also
pursue society’s interest
 The market transmits information and aligns
individuals’ and society’s goals
Economics: A Social Science
  Economics
is a social science.
  Economists distinguish between two types of
statement:
  What is—positive statements
  What ought to be—normative statements
  A positive statement can be tested by checking it
against facts.
  A normative statement cannot be tested, it is a value
judgment
  In this course we are interested mainly in Positive
Economics
Brief Math Review

Before we go on into economic models,
it will be useful to review a few math
concepts that will be used later on

This material is in the appendix to
chapter 1

You should read that appendix
Graphing Data
  A
graph reveals a relationship among
variables
  A graph represents “quantity” as a distance.
  A two-variable graph uses two perpendicular
scale lines.
  The vertical line is the y-axis.
  The horizontal line is the x-axis.
  The zero point in common to both axes is the
origin.
Graphs Used in Economic
Models
  Variables
That Move in the Same Direction
  A relationship between two variables that move in the
same direction is called a positive relationship or a
direct relationship.
  A line that slopes upward shows a positive
relationship.
  A relationship shown by a straight line is called a
linear relationship.
  The three graphs on the next slide show positive
relationships.
Graphs Used in Economic
Models
Graphs Used in Economic
Models
  Variables
That Move in Opposite Directions
  A relationship between two variables that move in
opposite directions is called a negative relationship or
an inverse relationship.
  A line that slopes downward shows a negative
relationship.
  The three graphs on the next slide show negative
relationships
Graphs Used in Economic
Models
Graphs Used in Economic
Models
  Variables
That Have a Maximum or a Minimum
  The two graphs on the next slide show relationships
that have a maximum and a minimum.
  These relationships are positive over part of their
range and negative over the other part.
Graphs Used in Economic
Models
 Variables
That are Unrelated
  Sometimes, we want to emphasize that two variables
are unrelated.
  The two graphs on the next slide show examples of
variables that are unrelated.
The Slope of a Relationship
  The
slope of a relationship is the change in the value
of the variable measured on the y-axis divided by the
change in the value of the variable measured on the xaxis.
  We use the Greek letter Δ (capital delta) to represent
“change in.”
  So Δy means the change in the value of the variable
measured on the y-axis and Δx means the change in
the value of the variable measured on the x-axis.
  The slope of the relationship is Δy/Δx.
  Intuitively, the slope represent the rate of change in y
per unit of change in x
The Slope of a Relationship
  The
  The
Slope of a Straight Line
slope of a straight line is constant.
  Graphically, the slope is calculated as the
“rise” over the “run.”
  The slope is positive if the line is upward
sloping.
  The slope is negative if the line is downward
sloping.
The Slope of a Relationship
  The
Slope of a Curved Line
  The
slope of a curved line at a point varies
depending on where along the curve it is calculated
  Slope
at a Point
  The slope of a curved line at a point is equal to the
slope of a straight line that is the tangent to that point.
  Here, we calculate the slope of the curve at point A:
Linear Equations and Graphs


A straight line can be represented by an equation
The general form of a linear equation is
y=a+bx




The graph of a linear equation is a straight line
In this equation, a represents the intercept of the
graph of the equation, that is, the point at which the
graph intersects the vertical axis
b represents the slope of the graph
The horizontal intercept can be computed easily, and
it is equal to (a/b)
Linear Equations and Graphs
y
a
(a/b)
x
Example: Demand function
P = 100 – 2Q
Price
Quantity
0
50
20
40
40
30
50
25
60
20
80
10
100
0
Linear Equations and Graphs
Demand: P = 100 – 2Q
P
100
80
60
40
20
0
10
20
30
40
50
Q