ESSENTIALS OF MICROECONOMICSECONOMICS 201

How can you find…or avoid me??

Where am I? BDC 230

How to contact me… 664-2026 or jvangilder@csub.edu www.csub.edu/~jvangilder

Office Hours… MW 12:00 pm – 2:00 pm F 1:00 pm – 2:00 pm By appointment

What is Microeconomics?

Two parts: Study of the behavior of the individual Study of the behavior of the firm

What type of Behavior? Consumer

Buying and working Firm

Producing and selling

What are some major changes in the economy that have happened in the last six months?

Objectives

Role of prices Why do we have prices? How are prices determined? Who determines prices?

Supply and Demand What are they? How do we draw them? What changes each?

Competitive markets What makes us competitive? Sports…football vs. tennis

Differing market Characteristics Control over prices Number of firms/customers

Analyze real-life situations Why did the minimum wage change? Why are gas prices increasing again? Why do businesses have sales? Why do doctor visits cost so much?

Textbook

Microeconomics 7th editionRoger Arnold

Attendance Policy

Two phrases to live by:I. If you don’t want to be here…we

don’t want you hereII. If you don’t plan on staying the

entire time…don’t come

Homework

Due at the BEGINNING of class following the assigned questions

Homework review sessions Students do problems Answer need not be correct to receive

credit Grading of homework…What is your

number? Don’t forget it…your grade depends on it

Exams and Quizzes

Midterm Monday February 6th

Quiz 1 Friday January 20th

Quiz 2 Friday February 24th

Final Section 03

Friday March 17th 8:00am - 10:30am Section 04

Wednesday March 15th 2:00pm – 4:30pm

Grade Breakdown

Midterm = 25% Cumulative Final = 30%

Quizzes= 20% Homework = 15%

Participation = 10%

Other Stuff…

Academic DishonestyClassroom Conduct

Disabilities

Chapter 1

What is Economics About

Chapter 1

What is Economics About

Definition of Economics

SCIENCE of how individuals and societies deal with the fact that wants are greater than resources available to satisfy those wants

Scarcity

Wants are greater than the resources available to fill those wants

What do you have scarcity of??? Money Time

What do firms have scarcity of??? Labor Land Capital

Thus….Economics is the SCIENCE of SCARCITY

Normative vs. Positive Economics

Normative What “ought” to be

Positive What is

Examples: Positive or Normative?

The government fought inflation during the early 1980s because it felt the inflation was damaging potential long-term economic growth.

The government should cut taxes in order to stimulate consumption.

Increases in consumer spending improved the Japanese economy last year.

Balancing the federal budget would be good for the economy.

Micro vs. Macro

Microeconomics Study of human behavior and choice Looks at SMALL units (individual,

market, single firm) Macroeconomics

Study of human behavior and choices Looks at LARGE units (aggregated

markets, whole economy)

Economic Way of Thinking

Watch“An economist is someone that sees

something working in practice and asks if it would would in principle”

Think Identify

Why Study Economics?

Social Problems Discrimination Crime

Understand why things happen Coupons Minimum Wage

Understand the Political Process

Homework #1

Chapter 1 Questions 1 and 2

Beginning to Think Like an Economist

…is this a good thing?

Defining Economic Goods

Utility Satisfaction you receive from consuming a

product Good vs. Bad

Tangibility Can the good be touched or is it a service?

Resources or factors of production used Land: natural resources Labor: Physical and mental talents of people Capital: produced goods that can be used as

inputs for further production Entrepreneurship: talent of organizing resources,

seeking new opportunities, and developing new ways of doing things

Remember Scarcity Runs the Show…

What was scarcity?? So…how do we make sure that only

those who REALLY need the good get it??

Prices System of rationing of the good Cause people to compete for the item

Opportunity Cost Value of the next best alternative

foregone Pizza vs CD

Pizza for $1.00 per slice; CD for $15.00 Revolutionary War

The British and their red coats Big Macs

Big Macs in Japan cost $8.25 Highway System

Paid for with taxes

Summary Statement of Scarcity

and Related Concepts

Costs and Benefits at the Margin What is the margin??

The “last” or “additional” Marginal Cost

The cost of the “last” unit employed Marginal Benefits

The benefit of the “last” unit employed Unintended effects

Minimum wage Gun bounties Seat belts

Efficiency

What is the “right amount” of time to study? Right amount = optimal or efficient

amount Marginal Costs = Marginal Benefits

Economic way of thinking includes…

Analyzing scarcity Look at opportunity cost of

decisions Measure costs and benefits Look at marginal effects Examine unintended effects

Economic Thinking Errors

Association vs. Causation You hit red lights because you are

running late Don’t study for a test so you fail

Fallacy of Composition What is good for the individual is good

for the group Forgetting Ceteris Paribus

All else remains constant

What is this?

Model

Simplified version of reality Includes only the “important” aspects

Why is a model necessary??

Parts of a Theory

Variables Magnitudes that can change

Assumptions Ideas about event that will not allow to

change Hypothesis Educated guess Predictions

Based on hypothesis and assumptions

Scientific Approach

What do you want to predict/explain? What variables are important? State assumptions State hypothesis Test If results are good…Yeah You!! If results are bad…amend or reject

theory

Building and Testing a Theory Building and Testing a Theory

a

Evidence rejects the theory, soeither formulate a new theory,

or amend the old theory in termsof its variables, assumptions,

and hypotheses.

Identify thevariables that

you believe areimportant to

what you wantto explain or

predict.

Decide on whatit is you want to

explain orpredict.

State theassumptions of

the theory.

State thehypothesis.

Test the theoryby comparing

its predictionsagainst real-world events.

Return

Either

Or

Evidence supports thetheory. No further action isnecessary, although it is agood idea to continue to

examine the theory closely.

How do we judge theories?

Look at how well they predict NOT by the assumptions Example: Firms try to maximize

profits Do they think about this every second? Probably not Over the course of the year…make

decisions to maximize profits

Appendix A

Working with Diagrams

Types of Relationships between variables

Direct Positive

Inverse Negative

No Relationship Variables are independent

Two-Variable Diagram Representing an Inverse Relationship Two-Variable Diagram Representing an Inverse Relationship

a

20

18

16

14

12

0

Price of CDs ($)

Quantity Demanded of CDs100 120 140 160 180

The variables priceand quantitydemanded areinversely related.

Demand for CDs

A

B

C

D

E

Two-Variable Diagram Representing a Direct Relationship Two-Variable Diagram Representing a Direct Relationship

a

360

300

240

180

120

60

0

Consumption ($)

Income ($)

100 200 300 400 500

The variablesincome andconsumption aredirectly related.

A

B

C

D

E

F

Two Diagrams Representing Independence between Two Variables Two Diagrams Representing Independence between Two Variables

a

(b)(a)

40

30

20

10

010 20 30 40

A B C D

Y

X

Variables X and Y areindependent (neither variable

is related to the other).

40

30

20

10

010 20 30 40

A

B

C

D

Y

X

Variables X and Yare independent.

Slope

Used to see how a variable changes in response to another variable changing

horizontal

vertical

X

YSlope

To calculate slope

Find two points on any straight line

21

21

12

12

XX

YYor

XX

YY

What sign do you expect the slope to have?

Direct relationship Positive

Inverse relationship Negative

No Relationship 0 or infinity

Calculating Slopes Calculating Slopes

a

YX

= +10+5

= +2Slope =Slope=Y

= = –1–10

10

40

30

20

10

010 20 30 40

(a)

A

B

C

D

X

Y

Y

X

40

30

20

10

010 20

(b)

A

B

C

D

X

Y

15

(negative slope)X

(positive

Calculating SlopesCalculating Slopes

a

010

+100

Slope =Y

= = `X(infinite slope)

A

B

C

D

Slope =Y

= = 0X(zero slope)

(d)(c)

40

30

20

10

010 20 30 40

A B C D

Y

X

40

30

20

10

010 20 30 40

Y

X

The 45 Line The 45 Line

a

20

20

Y

X

A

45

Line45

0

Homework

Chapter 1Questions 4, 5, 7, 8

Chapter 1 AppendixQuestions 6, 7, 9

In-class exercise 1

Do we understand Chapter 1?

Appendix B

Should you major in Economics??

Five myths about economics and an economics major

Economics is all mathematics and statistics Economics is only about inflation, interest

rates, unemployment, and other such things People become economists only if they want

to “make money” Economics wasn’t very interesting in high

school, so it isn’t going to be interesting now Economics is a lot like business, but business

is more marketable