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Principle of Microeconomics

Principle of Microeconomics. Dr. Ou Hu Webpage: www.as.ysu.edu/~ohu 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

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  1. Principle of Microeconomics Dr. Ou Hu Webpage: www.as.ysu.edu/~ohu Office Hours:13:00-15:00, MTR and by appointment

  2. 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.

  3. 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.

  4. 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

  5. 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.

  6. 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.

  7. 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?

  8. 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)

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