introduction
Download
Skip this Video
Download Presentation
INTRODUCTION

Loading in 2 Seconds...

play fullscreen
1 / 36

INTRODUCTION - PowerPoint PPT Presentation


  • 115 Views
  • Uploaded on

INTRODUCTION. Review of Key Topics from Micro Principles. Topics of Discussion. Microeconomics: The Allocation of Scarce Resources Models Use of Microeconomic Models Ten Principles. Economics is the study of how society manages its scarce resources.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' INTRODUCTION' - kyna


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
introduction

INTRODUCTION

Review of Key Topics from Micro Principles

topics of discussion
Topics of Discussion
  • Microeconomics: The Allocation of Scarce Resources
  • Models
  • Use of Microeconomic Models
  • Ten Principles
economics is the study of how society manages its scarce resources
Economics is the study of how society manages its scarce resources.
  • Resources such as natural resources, fertile land, labor etc are limited.
  • Therefore not everyone can have everything they want. That is what we mean by scarcity.
  • Microeconomics is the study of how individuals and firms can make themselves as well off as possible in a world of scarcity, and the consequences of those individual decisions for markets and the entire economy
microeconomics the allocation of scarce resources
Microeconomics: The Allocation of Scarce Resources
  • Individuals and firms allocate their limited resources to make themselves as well off as possible
  • Consumers
  • Firms
  • Government
trade offs
TRADE-OFFS
  • A society faces three key trade-offs:
    • Which goods and services to produce?
    • How to produce?
    • Who gets the goods and services?
how prices determine allocations
How prices determine allocations
  • Prices link the decisions about which goods and services to produce, how to produce them and who gets them
models
Models
  • To explain how individuals and firms allocate resources and how market prices are determined, economists use models: a description of the relationship between two or more economic variables
  • Assumptions
  • Testing Theories
  • Maximizing subject to constraints
  • Positive Vs Normative
first 4 principles how people make decisions
First 4 Principles: How people make decisions
  • People face tradeoffs.
  • The cost of something is what you give up to get it.
  • Rational people think at the margin.
  • People respond to incentives.
principle 1 people face tradeoffs
Principle #1: People Face Tradeoffs.

“There is no such thing as a free lunch!”

principle 2 opportunity costs
Principle #2: Opportunity costs:
  • The cost of something is what you give up to get it.
  • The opportunity cost of something is what you would receive in the next best alternative usage.
2 opportunity costs
2. Opportunity costs:
  • Example: Opportunity cost of time spent studying in the university is the money that you have earned if you were working instead.
  • Can you think of any other examples?
principle 3 rational people think at margin
Principle #3: Rational people think at margin
  • When making decisions people often think of the effects of small or incremental changes in the current course of action.
  • Example: Instead of thinking about cost/benefit of getting a PhD they might consider the effects of one or two more years of school.
  • Can you think of any other examples? (Assignment for next time)
3 rational people think at margin
3. Rational people think at margin:
  • People make decisions by comparing costs and benefits at the margin.
  • The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!
3 rational people think at margin1
3. Rational people think at margin:
  • Airline:
  • 30 seats costs $15,000 AC=$500
  • Suppose the plane is scheduled to take off in an hour. What if, at the last minute, a potential passenger offers $300 for a seat on the plane. Should the airline allow this passenger to board?
3 rational people think at margin2
3. Rational people think at margin:
  • If airplane not full, and willingness to pay $300, then for airline the MC of the passenger is small since the plane is still planning to make trip but MB of passenger is $300.
3 rational people think at margin3
3. Rational people think at margin:
  • Consider staying up an extra hour to study:
  • MB of 1 more hour of studying on grade.
  • MC of losing 1 hour of sleep on grade
3 rational people think at margin4
3. Rational people think at margin:
  • Firm’s hiring decision:
    • MB of 1 more worker (increase production)
    • MC of 1 more worker (wages, health insurance)
  • Employee’s work decision:
    • MB of working 1 more hour (more realistically or a few more hours a week)
    • MC of working 1 more hour (less leisure time, less sleep time, less time with friends and family)
principle 4 people respond to incentives
Principle # 4: People respond to incentives:
  • Since people make decisions based on benefits and costs, then decisions may change when costs or benefit change.
  • Example: Increase in wage may encourage workers to work more.
  • Increase in wage will most likely cause firm to hire less workers.
  • Decrease in cost of education may encourage people to attain more years of education
next 3 principles how people interact with each other
Next 3 Principles: How people interact with each other.

5. Trade can make everyone better off.

6. Markets are usually a good way to organize economic activity.

7. Governments can sometimes improve economic outcomes.

principle 5 trade off can make everyone better off
Principle # 5:Trade off can make everyone better off
  • Without trade each family would grow own food, make clothes and houses.
  • Trade allows specialization.
    • Also applies to international trade. Some countries specialize in oil production growing certain crops, manufacturing.
principle 6 markets are good way to organize economic activity
Principle # 6: Markets are good way to organize economic activity
  • Market economy vs. command economy (USSR, state makes all decisions)
  • In a market economy, households decide what to buy and who to work for, and firms decide who to hire and what to produce
  • How is there not chaos when everyone making decisions individually?
    • Idea of invisible hand by Adam Smith 1770
6 markets are good way to organize economic activity
6. Markets are good way to organize economic activity:
    • Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.
  • In most cases p= value to society of a good=cost to society of a good
6 markets are good way to organize economic activity1
6. Markets are good way to organize economic activity:
  • Competition leads to Efficiency: when there is competition firms have to minimize costs, use the least inputs necessary (use inputs efficiently or else they will go out of business)
principle 7 government can sometime improve market outcomes
Principle # 7: Government can sometime improve market outcomes
  • Market failure occurs when the market fails to allocate resources efficiently.
  • In other words, the interaction of supply and demand don’t lead to best outcome
  • Externality: when an action of one person or firm affects many people but the effects are not internalized.
  • A benefit or cost from production or consumer accruing without compensation to non-buyers and non-sellers of the product.
7 government can sometime improve market outcomes
7. Government can sometime improve market outcomes:
  • Examples:
  • Pollution : from production
  • Market power: government regulates monopoly
last 3 principles the forces and trends that affect how the economy as a whole works
Last 3 Principles: The forces and trends that affect how the economy as a whole works.

8. The standard of living depends on a country’s production.

9. Prices rise when the government prints too much money.

10. Society faces a short-run tradeoff between inflation and unemployment.

new topic thinking like an economist
New Topic: Thinking Like an Economist
  • “Assumptions”
  • Assumptions are statements to make world simpler and easier to understand.
assumptions
“Assumptions”
  • We would like to have assumptions that are generally close to reality
  • Menus and sticky prices in short run
  • Rational consumers (lowest price)
assumptions1
“Assumptions”
  • Sometimes we will see assumptions that seem unrealistic
    • Either by ‘loosening’ that assumption doesn’t change model/how we solve problem but assumption makes problem easier to think about.
    • Need a jumping off point and in the future basic model helps economist solve more real model.
review of supply and demand
Review of Supply and Demand
  • Market: a group of buyers and sellers of a particular good or service.
    • May be centralized or not: grocery stores, all selling wheat bread
    • Stock market (more centralized)
    • Buyers determine demand
    • Sellers determine supply
competitive market
Competitive market:
  • large number of buyers
  • large number of sellers
  • homogenous product
  • free entry/exit
  • perfect information
competitive market1
Competitive market:
  • For now, the most important thing to remember is that since there are a large # of buyers and sellers, so one individual or firm cannot significantly have an impact on price. In other words, everyone is a price taker.
    • If all stores are selling milk at $2.50 per gallon but one decides to sell at $5, will anyone buy from that store?
ad