LECTURE #1: MICROECONOMICS
CHAPTER 1
Society allocates people, land, buildings, and machines to various productive tasks. Society also
allocates the output of goods and services produced.
Society decides who will eat caviar and who will eat potatoes. It must decide who will drive a
Ferrari and who will take the bus.
Allocation is necessary because goods and services are scarce relative to the demand for those
same goods and services.
Scarcity means that society has limited resources and therefore cannot produce all the goods and
services people wish to have. Just as each member of a household cannot get everything he or
she wants, each individual in a society cannot attain the highest standard of living to which he or
she might aspire.
Economics is the study of how society manages its scarce resources. How are resources
allocated and who makes the allocation decisions is the subject of economics.
Ten Principles of Economics
I. HOW PEOPLE MAKE DECISIONS
A. Decision makers face trade-offs.
1. "Guns vs. Butter" argument
2. Clean environment vs. high levels of income argument
3. Efficiency vs. Equality: dividing the pie – the role of gov't
B. All things incur opportunity costs
1. What must you give up in order to get something else?
C. People are economically rational
1. Decision making at the margins
2. The concept of marginal costs vs marginal benefits
D. Incentives Matter
1. What induces a person to act?
2. Government Policy and Social Objectives
II. HOW PEOPLE INTERACT
A. Trade makes every one better off
1. Comparative advantage and opportunity costs
2. Free markets are the most efficient way to organize economic activity
1. Moving the allocation and production decisions to the individual
2. Price is an important allocation criterion
B. Governments can sometimes improve market outcomes
1. The key word is 'sometimes'
2. The property rights issue
3. Market power: ability to influence outcomes
4. Market failure: inefficient allocation of resources
III. HOW THE ECONOMY AS A WHOLE WORKS
A. The Standard of Living reflects the ability to produce goods and services
1. What causes differences in the standard of living across countries?
2. Why is productivity important?
3. Why are property rights and stable democratic governments necessary?
B. Governments can upset the economic cart
1. Financing public services by printing money >>> inflation
C. Is there a short-term trade-off between Inflation and Unemployment
1. What causes inflation: too much money or too much demand or both?
2. Does the economy need some level of inflation to work?
3. The role of governmental policy
CHAPTER 2
I. ECONOMIST AS SCIENTIST/INVESTIGATOR
A. The Scientific Method
1. Collect Data (observation or experimentation)
2. Formulate Behavioral Hypotheses
3. Make Predictions (attention to role of uncertainty)
4. Run Experiments to prove/disprove behavioral hypotheses.
B. The Role of Assumptions
1. Simplifying facts about the world around us
2. Identifying the essential elements of the few to generalize about the many
C. The Role of Models
1. Models are used to describe the way the world works
2. Models consist of diagrams and equations
3. Example 1: The Circular Flow of Money and Goods (Figure 1)
4. Example 2: The Production Possibilities Frontier
a. Points F, A, B, and E are feasible and efficient. Pt C is not feasible. Pt D is
feasible but not efficient.
b. Impact of a Change in Technology – new possibilities frontier (Fig 3)
II. ECONOMIST AS POLICY ADVISOR
A. The Positive vs. Normative [Argument]
1. Positive – the way things are (description)
2. Normative – the way things ought to be (prescription)
B. Business Week (April 27: "WHAT GOOD ARE ECONOMISTS ANYWAY?")
"Why they failed to predict the global economic crisis – and why their help is critical to a
recovery."
1. The "reality" – predicting the future is more art than science. A lot has to do with our
assumptions and our experiential memories.
2. Thomas Sargent (NYU): "…the economy is volatile, in part, because households and
businesses hold 'fragile beliefs' that shift quickly." (pg 031)
III. SOURCES OF DISAGREEMENT AMONG ECONOMISTS
A. Differences in Scientific Judgments (opinions regarding interpretation)
B. Differences in Measuring Impact of Policy
C. The problem of perception versus reality
IV. A QUICK REVIEW OF GRAPHING
A. Cause (X-axis) and Effect (Y-axis)
B. Magnitude (Y) and Time (X)
C. Grade Point Average (Y) and Time Spent Studying (X)
D. Slope and Intercept
1. Slope = the rate of change in Y given a change in X (Δy / Δx)
2. Intercept: The value of Y when X = zero.
V. HOMEWORK:
A. Chapter 1:
1. Questions for Review: 1, 3, 4, 6, 8, 9
2. Problems and Applications: 1 (parts a, b, c, and e), 8, 12 (parts a and b)
B. Chapter 2:
3. Questions for Review: 2, 3, 4, 7, 9
4. Problems and Applications: 4 (parts a, b), 6