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Principle of Microeconomics. Dr. Ou Hu Webpage: Office Hours :13:00-15:00, MTR and by appointment. Chapter 1: What is Economics?. Economics – the social science that s tudies how people (individuals, firms, government) make choices under the condition of scarcity.

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principle of microeconomics
Principle of Microeconomics

Dr. Ou Hu Webpage:

Office Hours:13:00-15:00, MTR and by appointment

chapter 1 what is economics
Chapter 1: What is Economics?

Economics – the social science that studies how people (individuals, firms, government) make choices under the condition of scarcity.

  • Without the problem of scarce resources, there would be no economic issues.
  • Economics analyzes how people achieve their goals – maximizing gratification, profit, and social welfare, etc. with limited resources.
what is economics
What is Economics?

Economic ways of thinking -

  • Scarcity principle
  • Cost-Benefit principle
  • Incentive principle
  • Comparative Advantage principle
  • Increasing Opportunity Cost principle
  • Efficiency principle
  • Equilibrium principle

To apply those principles in the understanding of economic issues and in the decision-making processes faced by individuals, firms, and government.

what is economics1
What is Economics?
  • The Principle of Scarcity
    • People have to face trade-offs when their boundless desires meet limited resources.
    • To choose one more unit of A means to give up a certain amount of B.
  • The Cost-Benefit Principle
    • One chooses one more unit of A only if the benefit of doing so is at least as large as its cost.
    • Example:
      • Gas station X vs. Gas station Y
      • Speeding to work or school
what is economics2
What is Economics?
  • Opportunity Cost (of an activity)
    • The value of what must be given up most unwillingly in order to undertake the activity;
      • Examples:
        • the oppt. cost of going to college;
        • the oppt. cost of investing $1000 in a stock market;
        • the oppt. cost of watching a movie the night before the final exam of Econ 2610.
    • The best alternative;
    • Explicit and implicit costs;
    • Understanding opportunity cost helps us efficiently allocate scarce resources.
what is economics3
What is Economics?
  • Marginal Analysis
    • Marginal Cost - the increase in total cost from one additional unit of an activity.
      • Average cost is total cost divided by the total number of units.
    • Marginal Benefit – the increase in total benefit from on additional unit of an activity.
      • Average benefit is total benefit divided by the total number of units.
    • An activity will be undertaken only if its marginal benefit is at least as large as its marginal cost.
what is economics4
What is Economics?
  • Marginal Analysis: NASA Space Shuttle
  • If the marginal benefit is $6 billion per launch, how many launches should NASA make? What if the marginal benefit is $10?
what is economics5
What is Economics?
  • What is Microeconomics?
    • The study of economic choices or decisions made by individuals and firms.
    • How prices are determined in individual markets?
    • What factors affect supply and demand in a particular market?
    • Assuming rationality
      • Rational agent strives to maximize the chances of success, where success is defined as the achievement of some desired (well-defined) outcome. (fromWikipedia)