Week 1 – Day 2
Introduction to Microeconomics

It is the study of how people make choices in
the marketplace
◦ Consumers (you and me)
 How to allocate your time
 Studying versus work versus socializing versus sleep
 How to allocate your income
 Saving versus consuming
 Among various goods
 Food, housing, transportation, “fun”

It is the study of how people make choices in
the marketplace
◦ Firms (and their managers)
 Which goods to produce
 How to allocate your investment (capital)
 How to allocate your labor among various goods or
models of the product
 Which technology to use
 Capital or labor
 Which inputs, quality of inputs

The reason people/firms need to make choices is
because of scarcity
◦ “You can’t have it all”
 Limits on resources, time, money/income “dictate” that
individuals have to choose how to allocate their “scarce”
resources to their maximum value/use
◦ “Opportunity costs” : since resources are scarce and you
will have to make choice
 Means that there are “opportunity costs” of making a
choice
 That is, there are tradeoffs between alternatives


Lionel Robbins (1932):
"the science which studies human behaviour
as a relationship between ends and scarce
means which have alternative uses."
◦ Scarcity :available resources are insufficient to
satisfy all wants and needs.


Absent scarcity and alternative uses of
available resources, there is no economic
problem.
Economics involves the study of choices as
they are affected by incentives and
resources.

What is economics?

More recently (borrowed from Wikipedia)
◦ Greek: okonos: manager or administrator of a household
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Adam Smith (1776): "an inquiry into the nature and causes of the wealth
of nations,"
Thomas Carlyle (1849): coined 'the dismal science' as an epithet for
classical economics linked to the pessimistic analysis of Malthus (1798).[
John Stuart Mill (1844) the science which traces the laws of such of the
phenomena of society as arise from the combined operations of mankind
for the production of wealth, in so far as those phenomena are not
modified by the pursuit of any other object.
Alfred Marshall Principles of Economics (1890): Study of man in the
ordinary business of life. It enquires how he gets his income and how he
uses it. Thus, it is on the one side, the study of wealth and on the other
and more important side, a part of the study of man.
Lionel Robbins (1932): Economics is a science which studies human
behaviour as a relationship between ends and scarce means which have
alternative uses.

Alchian and Allen
◦ Discovery and analysis of the different ways in
which individual goals and activities can be
coordinated without central planning
◦ The unit of analysis is the individual
◦ Economic analysis is scientific, not normative
 Formulates hypothesis about behavior, subjects these
hypotheses to tests/analysis with data, accepts/rejects
the model based on the results
 It helps explains what conditions lead to what
consequences
◦ 2 major fields of inquiry
 Microeconomics
 Study of individual markets and factors that affect market
price, quantity supplied
 two principal actors: consumers/households and
firms/producers
 Macroeconomics
 Study of a system of (national) markets focusing on
national income (gross national product), price levels
(inflation), employment/unemployment and international
trade
 Focuses on the role of government (Congress and
budgets, Federal Reserve Bank), regulation (and regulatory
agencies, business cycles and their effect on the economy
Alchian and Allen
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2.
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4.
5.
6.
For each person, some goods are scarce
Each person desires many goods and goals
Each person is willing to give up some of one
economic good to get more of another economic
good
The more one has of a good, the lower is its
personal marginal value
Not all people have identical tastes and
preferences
People are innovative and rational

For each person, some goods are scarce
◦ Can’t get all that you want
 you will have to make choices between 2 or more
goods – tradeoff comparing benefits and costs of
alternatives
 Shimano Dura-Ace/Ultegra/105 – weight/product quality/
dollars

Each person desires many goods and services
 Carbon fiber frame or carbon fiber wheels or 11-speed
shifters/gears

The more one has of a good, the lower is its
personal marginal value
◦ First unit(s) purchased have a higher value to the
individual than subsequent units purchased
 Satiation accounts for diminishing marginal (use) value
 Implies demand curves are downward sloping
 Basis for the First Law of Demand

Each person is willing to give up some of one
economic good to get more of another economic
good
◦ But will depend on how much of each good you already
have

For each person, some goods are scarce
◦ Can’t get all that you want
 you will have to make choices between 2 or more
goods – tradeoff comparing benefits and costs of
alternatives
 Shimano Dura-Ace/Ultegra/105 – weight/product quality/
dollars

Each person desires many goods and services
 Carbon fiber frame or carbon fiber wheels or 11-speed
shifters/gears or a power meter

Scarcity
◦ For each person, some goods are scarce

What does scarcity mean:
◦ “there is never enough” – time, money, a specific
good or set of goods
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So what?
◦ People have to choose between various goods, how
to spend their money, use their time
◦ Economics develops and uses models to explain
how they make these decisions and what factors
affect their decisions
 Model of human behavior in an economic context

Scarcity / People Desire Many Goods
◦ Scarcity implies that you “can’t have it all”
◦ Have to make choices about which goods to
consume and how much of each good given your
constraints (income and time)
◦ Face tradeoffs when making these choices
 Compare additional benefits and costs of choices
 “opportunity costs”: value of the highest alternative not
chosen – lower bound on the value of the alternative
chosen
 Always an “opportunity cost” associated with any
choice
 Milton Friedman’s “no such thing as a free lunch”

People are innovative and rational
◦ When making decisions, people will rationally
choose the alternative with the highest net
(additional) benefit (net = benefit – cost)
◦ Take into account how much they currently have
when assessing the value of the next unit

People do not have identical tastes and
preferences
◦ May have different personal value for goods
 Will not make identical decisions
 Can be a basis for trade
Ten Principles of Economics (Greg Mankiw)
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