MicroeconomicsECON 2302

Summer 2011

Marilyn Spencer, Ph.D.

Professor of Economics

Introduction to course & Chapter 1

Please fill out and return index card - PRINT LEGIBLY:

1. Your name

2. year in college (1st, 2nd, etc.)

3. major - or “deciding”

4. ECON course in high school - “yes” or “no”

5. If you’re working this semester, whether as volunteer or for pay, approx. # of hours/week, - or “N/A”

6. Last math class successfully

completed in college - or

“N/A”

7. Last economics class

successfully completed in

college - or “N/A”

8. Usual source of local &

national news

9. Any particular topic you’d

like us to consider as part of

this course

10. Career goal(s)

Today’s topics: Introduction to course

Introduction to/review of basic economics concepts in Chapter 1

Online Syllabus – go to my site and make a few clicks:

Contact information Texts Course description Course outline Role of course in you undergraduate curriculum Course methodology Course content Grades

CHAPTER 1

Economics: Foundationsand Models

Bill Gates, chairman of Microsoft, testified before

Congress in 2008 that limiting the number of foreign

technical workers allowed into the United States was

resulting in a “critical shortage of scientific talent.”

1

3

4

5

1.1 Three Key Economic IdeasExplain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin.

1.2 The Economic Problem That Every Society Must SolveDiscuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?

1.3 Economic ModelsUnderstand the role of models in economic analysis.

1.4 Microeconomics and MacroeconomicsDistinguish between microeconomics and macroeconomics.

1.5 A Preview of Important Economic TermsBecome familiar with important economic terms.

APPENDIX: Using Graphs and Formulas Review the use of graphs and formulas.

Chapter Outline and Learning Objectives

Economics: Foundations & ModelsWe use economics to answer questions such as the following:

• How are the prices of goods and services determined?

• How does pollution affect the economy, and how should government policy deal with these effects?

• Why do firms engage in international trade, and how do government policies affect international trade?

• Why does government control the prices of some goods and services, and what are the effects of those controls?

Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Economics The study of the choices people make to attain their goals, given their scarce resources.

Economic model A simplified version of reality used to analyze real-world economic situations.

4.1

Economics: Foundations and Models, cont.

Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Three Key Economic Ideas

Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas:

1. People are rational.

2. People respond to economic incentives.

3. Optimal decisions are made at the margin.

Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin.

1.1 LEARNING OBJECTIVE

Economics rationality assumption:

1. People behave rationally. That is, we make rational choices. We generally assume that rational people:

a) Feel that more is better than less.b) Strive to do what will make them better off,

given the information they have.

Assumption that we respond to incentives:2. People respond to the conditions that we operate

under, by responding to both:

a) Positive incentivesb) Negative incentives

3. People make decisions based on what is currently relevant:

Marginal analysis Analysis that involves comparing marginal benefits and marginal costs, where marginal refers to the benefit or cost of the next, or last, choice.

“Marginal” assumption:

Implications Being self-interested, people will weigh the costs and

benefits of various alternatives, choosing that alternative that makes them best off at the margin.

This behavior is called “economic decision making.”

Costs and benefits are sometimes referred to as negative and positive incentives. Hence, according to the economic reasoning, incentives matter.

Will Women Have More Babies if the Government Pays Them To?

Makingthe

Connection

More than 45 countries in Europe & Asia have taken steps to try to raise their birthrates. These policies suggest that people may respond to economic incentives even when making the very personal decision of how many children to have.

Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Trade-offs force society to make choices when answering the following 3 fundamental questions:

1. What goods and services will be produced?

2. How will the goods and services be produced?

3. Who will receive the goods and services produced?

The Economic Problem Every Society Must Solve

Opportunity cost The highest-valued alternative that must be given up to engage in an activity.

Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?

1.2 LEARNING OBJECTIVE

Centrally planned economy An economy in which the government decides how economic resources will be allocated.

Economic Problem Every Society Must Solve, cont.

Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Centrally Planned Economies v. Market Economies

Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Economic Problem Every Society Must Solve, cont.

The Modern “Mixed” Economy

What economic agents are involved in a mixed economy? Buyers and sellers

Federal, state and local governments

Private non-profit agencies

Foreign governments

Productive efficiency A situation in which a good or service is produced at the lowest possible cost.

Economic Problem Every Society Must Solve, cont.

Efficiency and Equity

Allocative efficiency A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Voluntary exchange A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.

Equity The fair distribution of economic benefits.

To develop a model, economists generally follow these steps:

1. Decide on the assumptions to use in developing the model.

2. Formulate a testable hypothesis.

3. Use economic data to test the hypothesis.

4. Revise the model if it fails to explain well the economic data.

5. Retain the revised model to help answer similar economic questions in the future.

Economic Models

Understand the role of modelsin economic analysis.

1.3 LEARNING OBJECTIVE

Economic models make behavioral assumptions about the motives of consumers and firms.

Economic Models, cont.

The Role of Assumptions in Economic Models

Economic variable Something measurable that can have different values, such as the wages of software programmers.

Forming and Testing Hypotheses in Economic Models

Normative and Positive AnalysisPositive analysis Analysis concerned with what is.

Normative analysis Analysis concerned with what ought to be.

Should the Federal Government Have Increased Restrictions on the Immigration of Skilled Workers?

Makingthe

Connection

Does restricting the immigration of skilled workers affect the employment opportunities of

recent U.S. graduates?

Like many other policy debates, the debate over the immigration of skilled workers has both positive and normative elements.

The debate over the immigration of skilled workers demonstrates that economics is often at the center of important policy issues.

Understand the role of models in economic analysis.1.3 LEARNING OBJECTIVE

Economic Models, cont. Economics as a Social Science

Because economics studies the actions of individuals, it is a social science.

Economics is therefore similar to other social science disciplines, such as psychology, political science, and sociology.

As a social science, economics considers human behavior - particularly decision-making behavior - in every context, not just in the context of business.

Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Microeconomics and Macroeconomics

Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Distinguish between microeconomics and macroeconomics.

1.4 LEARNING OBJECTIVE

Do Immigrants Displace or Complement Domestic Workers?

AN INSIDE LOOK at Policy

>>

Figure 1. Foreign-Born Scientists and Engineers as a Percentage of All Scientists and Engineers in the United States

Figure 2. Foreign Recipients of U.S. Science and Engineering Doctorates, 1985–2005

Allocative efficiency

Centrally planned economy

Economic model

Economic variable

Economics

Equity

Macroeconomics

Marginal analysis

Market

Market economy

Microeconomics

Mixed economy

Normative analysis

Opportunity cost

Positive analysis

Productive efficiency

Scarcity

Trade-off

Voluntary exchange

KEY TERMS

Preview of Important Economic Terms

• Entrepreneur

• Innovation

• Technology• Firm, company, or

business

• Goods

• Services

• Revenue

• Profit

• Household• Factors of production,

or economic resources

• Capital• Human capital

Become familiar with importanteconomic terms.

1.5 LEARNING OBJECTIVE

If you had to choose only one word to tell someone what economics is

all about, what would that one word be?

?

Solved Problem 1-1Apple Computer Makes a Decision at the Margin

Should Apple produce an additional 1 million iPhones?

In solving the problem, consider the following:

• Optimal decisions are made at the margin.

• An activity should be continued to the point where the marginal benefit is equal to the marginal cost.

• In this case, the correct decision requires information about additional revenue and additional cost.

Introduction/Chapter 1 definitions: Syllabus Definitions:

economicsmicroeconomics/macroeconomics resources allocation distribution scarcity opportunity cost marketefficiencyequity

Quiz 1Before class on Thursday, June 2, send me an email from

the email address you’ll be using regularly during this course.

My email address is marilyn.spencer@tamucc.edu.

3 points

Questions?

Reality check, to be completed before our next class:

Read Chapter 1 of Hubbard & O’Brien and be able to answer:

3rd edition Review Questions:

p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 (2nd edition: p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 ; 1st edition: p. 19, 1, 3, 5, 6 & 8)

3rd edition: Problems and Applications:

p. 22, 2.7; p. 23, 3.8 (2nd edition: p. 22, 2.7; p. 23, 3.8 ; 1st edition: p. 20, 13 and 15)

Reality check, to be completed before our next class: Read Chapter 2 and be able to answer:

3rd edition Review Questions:

p. 58, 1.2, 1.3; p. 60, 2.2; p. 62, 3.1 (2nd edition: p. 60, 1.2, 1.3; p. 62, 2.2; p. 63, 3.1; 1st edition: pp. 56-57, 2, 3, 5, 6 & 11).

3rd edition Problems and Applications:

p. 58-59, 1.4 & 1.8; p. 60, 2.4 (2nd edition: p. 60-61, 1.4 & 1.8; p. 62, 2.4 ; 1st edition: pp. 57 & 59, 1, 5 and 11).

Reality check, to be completed before we begin Chapter 3:

Read Chapter 3 introduction and major topic headings.

Read Review Questions, 3rd ed.: #1 “In a market system, who ultimately decides which goods

and services will be produced?” p. 90, 1.2, 1.3, 1.4; p. 91, 2.2; p 92, 3.1, 3.2; and also: What happens to the equilibrium price in a market if the demand curve shifts to the right? Draw a demand and supply graph to illustrate your answer. (2nd ed. p. 92, 1.2, 1.3, 1.4; p. 93, 2.2; p. 94, 3.1, 3.2,; 1st edition: 1-8 on pp. 90-91).

Read Problems and Applications, 3rd ed.:

“Is it possible for a good to be an inferior good for one person and a normal good for another? If yes, cite some examples;” and p. 90, 1.7; p 91, 2.3; p. 95, 4.15 (2nd ed., p. 92, 1.7; p. 93, 2.3; p. 96, 4.15; 1st edition: 3, 4, 7, 14 & 21 on pp. 91-93).

Reality check to have been completed before we begin Ch. 4: Pre-read Ch. 4, including:

Review Questions:Consumer surplus is used as a measure of a consumer’s net

benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit.

Why would economists use a term like “deadweight loss” to describe the impact on consumer and producer surplus from a price control?”

Problems and Applications:3rd ed., p. 130, 4A.5, 4A.6, 4A.7 & 4A.8; (2nd ed., p. 134,

4A.5, 4A.6, 4A.7 & 4A.8; 1st edition: 1-4 on p. 129).