Microeconomics
ECON 2302
Spring 2011
Marilyn Spencer, Ph.D.
Professor of Economics
Introduction to course & Chapter 1
Please fill out and return index card PRINT LEGIBLY:
1. Your name
2. year in college (1st, 2nd, etc.)
3. major - or “deciding”
4. ECON course in high school “yes” or “no”
5. If you’re working this semester,
whether as volunteer or for pay,
approx. # of hours/week, - or
“N/A”
6. Last math class successfully
completed in college - or
“N/A”
7. Last economics class
successfully completed in
college - or “N/A”
8. Usual source of local &
national news
9. Any particular topic you’d
like us to consider as part of
this course
10. Career goal(s)
Today’s topics:
Introduction to course
Introduction to/review of basic
economics concepts
Online Syllabus – go to my site
and make a few clicks:
 Contact information
 Texts
 Course description
 Course outline
 Role of course in you undergraduate curriculum
 Course methodology
 Course content
 Grades
Reality check, to be completed before the next
class:
 Read Chapter 1 of Hubbard & O’Brien and be able to
answer:
 3rd edition: Review Questions p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22,
3.1 & 3.3 (2nd edition: p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 &
3.3 ; 1st edition: p. 19, 1, 3, 5, 6 & 8)
 3rd edition: Problems and Applications p. 22, 2.7; p. 23, 3.8 (2nd
edition: p. 22, 2.7; p. 23, 3.8 ; 1st edition: p. 20, 13 and 15)
CHAPTER
1
Economics:
Foundations
and Models
Bill Gates, chairman of
Microsoft, testified before
Congress in 2008 that limiting
the number of foreign
technical workers allowed
into the United States was
resulting in a “critical
shortage of scientific talent.”
1.1
Three Key Economic Ideas
Explain these three key economic ideas: People are rational. People
1respond to incentives. Optimal decisions are made at the margin.
1.2
The Economic Problem That Every Society Must Solve
Discuss how an economy answers these questions: What goods and
services will be produced? How will the goods and services be produced?
Who will receive the goods and services produced?
1.3
Economic Models
Understand the role of models in economic analysis.
1.4
3
Microeconomics
and Macroeconomics
Distinguish between microeconomics and macroeconomics.
1.5
A Preview of Important Economic Terms
4
Become familiar with important economic terms.
APPENDIX: Using Graphs and Formulas
5
Review
the use of graphs and formulas.
Economics: Foundations & Models
We use economics to answer questions such as the
following:
•
How are the prices of goods and services determined?
•
How does pollution affect the economy, and how
should government policy deal with these effects?
•
Why do firms engage in international trade, and how do
government policies affect international trade?
•
Why does government control the prices of some goods
and services, and what are the effects of those controls?
4.1
Economics: Foundations and Models, cont.
Scarcity A situation in which unlimited wants exceed
the limited resources available to fulfill those wants.
Economics The study of the choices people make to
attain their goals, given their scarce resources.
Economic model A simplified version of reality used to
analyze real-world economic situations.
1.1 LEARNING OBJECTIVE
Explain these three key economic ideas: People are rational. People
respond to incentives. Optimal decisions are made at the margin.
Three Key Economic Ideas
Market A group of buyers and sellers of a good or
service and the institution or arrangement by which they
come together to trade.
Throughout this book, as we study how people make
choices and interact in markets, we will return to three
important ideas:
1. People are rational.
2. People respond to economic incentives.
3. Optimal decisions are made at the margin.
Economics rationality assumption:
1.
People behave rationally. That is, we make
rational choices. We generally assume that
rational people:
a) Feel that more is better than less.
b) Strive to do what will make them better off,
given the information they have.
Assumption that we respond to incentives:
2.
People respond to the conditions that we operate
under, by responding to both:
a) Positive incentives
b) Negative incentives
“Marginal” assumption:
3.
People make decisions based on what is
currently relevant:
Marginal analysis Analysis that involves
comparing marginal benefits and marginal costs,
where marginal refers to the benefit or cost of the
next, or last, choice.
Implications
 Being self-interested, people will weigh the costs and
benefits of various alternatives, choosing that alternative
that makes them best off at the margin.
 This behavior is called “economic decision making.”
 Costs and benefits are sometimes referred to as negative
and positive incentives. Hence, according to the economic
reasoning, incentives matter.
Making
Will Women Have More Babies if the
Connection Government Pays Them To?
the
More than 45
countries in Europe
& Asia have taken
steps to try to raise
their birthrates.
These policies
suggest that people
may respond to
economic incentives
even when making
the very personal
decision of how
many children to
have.
1.2 LEARNING OBJECTIVE
Discuss how an economy answers these questions: What goods and services
will be produced? How will the goods and services be produced? Who will
receive the goods and services produced?
The Economic Problem Every Society
Must Solve
Trade-off The idea that because of scarcity, producing more
of one good or service means producing less of another good
or service.
Opportunity cost The highest-valued alternative that must
be given up to engage in an activity.
Trade-offs force society to make choices when answering the
following 3 fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
Economic Problem Every Society Must Solve, cont.
Centrally Planned Economies v. Market Economies
Centrally planned economy An economy in which the
government decides how economic resources will be
allocated.
Market economy An economy in which the decisions of
households and firms interacting in markets allocate
economic resources.
Economic Problem Every Society Must Solve, cont.
 The Modern “Mixed” Economy
Mixed economy An economy in which most economic
decisions result from the interaction of buyers and sellers
in markets but in which the government plays a significant
role in the allocation of resources.
What economic agents are involved in a mixed economy?
 Buyers and sellers
 Federal, state and local governments
 Private non-profit agencies
 Foreign governments
Economic Problem Every Society Must Solve, cont.
 Efficiency and Equity
Productive efficiency A situation in which a good or service
is produced at the lowest possible cost.
Allocative efficiency A state of the economy in which
production is in accordance with consumer preferences; in
particular, every good or service is produced up to the point
where the last unit provides a marginal benefit to society
equal to the marginal cost of producing it.
Voluntary exchange A situation that occurs in markets
when both the buyer and seller of a product are made better
off by the transaction.
Equity The fair distribution of economic benefits.
1.3 LEARNING OBJECTIVE
Understand the role of models
in economic analysis.
Economic Models
To develop a model, economists generally follow these steps:
1. Decide on the assumptions to use in developing the
model.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain well the economic
data.
5. Retain the revised model to help answer similar
economic questions in the future.
Economic Models, cont.
 The Role of Assumptions in Economic Models
Economic models make behavioral assumptions about the
motives of consumers and firms.
Forming and Testing Hypotheses in Economic Models
Economic variable Something measurable that can have
different values, such as the wages of software
programmers.
 Normative and Positive Analysis
Positive analysis Analysis concerned with what is.
Normative analysis Analysis concerned with what ought
to be.
1.3 LEARNING OBJECTIVE
Understand the role of models in economic analysis.
Making
Should the Federal Government Have Increased
Connection Restrictions on the Immigration of Skilled Workers?
the
Does restricting the immigration
of skilled workers affect the
employment opportunities of
recent U.S. graduates?
Like many other policy
debates, the debate over
the immigration of skilled
workers has both positive
and normative elements.
The debate over the
immigration of skilled
workers demonstrates that
economics is often at the
center of important policy
issues.
Economic Models, cont.
 Economics as a Social Science
Because economics studies the actions of individuals, it is
a social science.
Economics is therefore similar to other social science
disciplines, such as psychology, political science, and
sociology.
As a social science, economics considers human behavior
- particularly decision-making behavior - in every context,
not just in the context of business.
1.4 LEARNING OBJECTIVE
Distinguish between microeconomics and
macroeconomics.
Microeconomics and Macroeconomics
Microeconomics The study of how households and
firms make choices, how they interact in markets, and
how the government attempts to influence their choices.
Macroeconomics The study of the economy as a whole,
including topics such as inflation, unemployment, and
economic growth.
AN INSIDE
LOOK
at Policy
>> Do Immigrants Displace or Complement
Domestic Workers?
Figure 1. Foreign-Born Scientists
and Engineers as a Percentage of
All Scientists and Engineers in
the United States
Figure 2. Foreign Recipients
of U.S. Science and
Engineering Doctorates,
1985–2005
KEY TERMS
Allocative efficiency
Centrally planned
economy
Economic model
Economic variable
Economics
Equity
Macroeconomics
Marginal analysis
Market
Market economy
Microeconomics
Mixed economy
Normative analysis
Opportunity cost
Positive analysis
Productive efficiency
Scarcity
Trade-off
Voluntary exchange
1.5 LEARNING OBJECTIVE
Become familiar with important
economic terms.
Preview of Important Economic Terms
•
Entrepreneur
•
Profit
•
Innovation
•
•
Technology
Firm, company, or
business
•
•
Household
Factors of production,
or economic resources
•
•
Capital
Human capital
•
Goods
•
Services
•
Revenue
If you had to choose only one word
to tell someone what economics is
all about, what would that
one word be?
?
Solved Problem
1-1
Apple Computer Makes a Decision
at the Margin
Should Apple produce an additional 1 million iPhones?
In solving the problem, consider the following:
• Optimal decisions are made at the margin.
• An activity should be continued to the point where the
marginal benefit is equal to the marginal cost.
• In this case, the correct decision requires information
about additional revenue and additional cost.
Introduction/Chapter 1 definitions:
 Syllabus
 Definitions:
 economics
microeconomics/macroeconomics
 resources
 allocation
 distribution
 scarcity
 opportunity cost
 market
efficiency
equity
Quiz 1
Before class on Friday, January 21, send
me an email from the email address
you’ll be using regularly during this
course.
My email address is
marilyn.spencer@tamucc.edu.
4 points
Questions?
Reality check, to be completed before the next
class:
 Read Chapter 2:
 3rd edition: Review Questions p. 58, 1.2, 1.3; p. 60, 2.2; p. 62,
3.1 (2nd edition: p. 60, 1.2, 1.3; p. 62, 2.2; p. 63, 3.1; 1st edition:
pp. 56-57, 2, 3, 5, 6 & 11).
 3rd edition: Problems and Applications p. 58-59, 1.4 & 1.8; p.
60, 2.4 (2nd edition: p. 60-61, 1.4 & 1.8; p. 62, 2.4 ; 1st edition:
pp. 57 & 59, 1, 5 and 11).