Dr. Duffy Microeconomics . Notes from CHAPTER 1 of Frank and Bernanke. Thinking Like An Economist. “I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.”. What is economics?. Economics is a social science.
CHAPTER 1 of
Frank and Bernanke
“I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.”
Economics has been called the “science of scarcity,”
because many economic problems deal with constraints.
There are so many hours in the day, which must be
allocated to competing ends (work, study, sleep,
recreation). There are so many dollars in a wallet, which
must be allocated to competing products (chips, burgers,
toothpaste, lettuce, books, music, etc.)
Goods are limited, but people are assumed to have
"unlimited wants." (More is preferred to less for most
Economics is the study of choice in a world
How do people make choices given resource limits?
What are the consequences of those individual choices
Also called the “no free lunch” principle.
When there are trade-offs, there are opportunity
The value of the next-best alternative that must be
forgone to undertake an activity
The value of items not produced because
resources were used for another purpose.
In Economics, a “rational” person is someone with well-defined goals who tries to fulfill those goals as best he or she can.
Note: No judgment is made about the social desirability of the goals.
Should I do activity x?
C(x) = the costs of doing x
B(x) = the benefits of doing x
If B(x) > C(x), do x; otherwise don't.
A simple question: How much would someone have to pay you to walk downtown?
If you would walk downtown for $9; the trip’s opportunity cost is $9.
The benefit ($10) exceeds the cost of ($9) of buying the game downtown.
The economic surplus is $1.00.
Pitfall 1 Examples:
Should you use your frequent-flyer coupon to fly to Fort Lauderdale for spring break?
The only costs that should influence a decision about whether to take an action are those that we can avoid by not taking the action.
Sunk Cost: A cost already incurred so it is “sunk” and not recoverable. No future decision can return that cost to you.
Unlike opportunity costs, sunk costs should be ignored.Ignore Sunk Costs!
Average Cost: The total cost of undertaking n units of an activity divided by n.
Average Benefit: The total benefit of undertaking n units of an activity divided by n.
Without more information, we can’t say whether NASA should expand the program. We need to know the marginal cost and the marginal benefit of one more launch per year.
A fifth launch would incur marginal costs of $12 billion. We
would not add a fifth launch unless the extra benefit is greater
than $12 billion. So even if the additional benefit equaled the
average benefit of $6 billion, we would not make a fifth launch.
A person (or firm or society) is more likely to take
an action if its benefit rises or if its costs fall. A
person is less likely to take an action if the benefit
falls or the cost rises.
This principle is sometimes condensed to:
Microeconomics is the study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.
Macroeconomics is the study of the performance of national economies, and of the policies that governments use to try to improve that performance.
. . . is the branch of economics that deals
with the behavior of individual entities,
such as consumers, firms, households,
A major focus of microeconomics is price
This course deals primarily with
. . . is macroeconomics, which is concerned
with overall performance of the economy,
e.g. inflation, unemployment, growth.
Macroeconomics is the more recent of the
two branches. It began around 1935, when
John Maynard Keynes published General
Theory of Employment, Interest, and Money.
Using insights from economics to help make sense of observations from everyday life.
To solve these problems, use cost-benefit analysis.