Introduction to Microeconomics

Define economics

Economics is the study of how people interact with each other (buyers-sellers) and their natural environments (extracting fossil fuels) in producing their livelihoods (acquiring things like food and shelter), and how this changes over time (advent the industrial revolution)/

Define microeconomics

Studying interactions between individual economic agents. Focus on a particular aspect of individual economic behaviour and ignoring interactions with rest of economy. Indirect effects ignored for simplicity of analysis.

Define macroeconomics

All interactions that take place in the eocnomy. Done by aggregating behaviour of individuals and analysis economy as a whole.

Define positive economics

Explaining how economy works without any recourse to personal value judgement. If that happens, then this will happen too. Whether or not 'this' is desirable is the domain of positive economics.

Define normative economics

Explains how the economy should work so involves ethical or moral judgment. Can relate to economic fairness or goals or public policy.

What does the standard neo-classical model describe?

Profit-maximising firms interact with self-interested customers through perfectly competitive markets.

What are some criticisms of the neo-classical model?

Rationality is at the heart of the model.

The model grew out of the need for economics to be value-free and purely deductive.

Assertion that everything in economics can be deduced from a basic assumption (e.g. maximisation of self interest) has been heavily criticised by the following:

- Availability heuristic - undue importance on readily avialable information.

- Framing effect - changing the way information is presented.

- Anchoring effect - overreliance on a piece of information as a reference point.

Economic models oversimplify reality?

The issue of distribution hasn't received enough attention

Limits on information, time or cognitive abilities leads to bounded rationality (E.g. satisficing and meliorating)

Define efficiency

Efficient use of resources in terms of cost of production and wants of consumers. -Alternatively, the price that consumers in the economy are willing to pay is equivalent to the marginal utility they get.

Define equity

Concept of fairness in the economy, primarily dealt through social welfare and taxation.

Define growth

Increase in total output of an economy (GDP).

Define stability

Lower volatility in key economic indicators such as interest rates, investments, prices.