microeconomics

Economics and Example

→ The study of choices people make and the actions they take in order to make the best use of scarce resources in meeting their wants and needs

• Study of people

• Everything and everybody face scarcity

  • Tuition is a reflection of scarce resource

If Benefits (Z) > Costs (X) =

do activity Z

If Costs (Z) > Benefits (X)

do not do activity X

If Marginal Benefits (Z) >

Marginal Costs (X) = do Z

If marginal benefits (Z) <

Marginal Costs (X) = do not do Z

Warm Glow Bias

giving the answer you think people want to hear

Microeconomics

study of choices and actions of individuals economic units such as households, firms, consumers, etc.

Macroeconomics

study of the behaviours of the entire economy, including issues like unemployment, inflation, and changes in level of national income

Efficiency

Allocative efficiency is present when society’s resources are so organized that the present value of net benefits (benefits - cost ) are maximized

Equity

Distributing goods and services in a manner considered by society to be fair

What are the Judging Economic Allocations?

Efficiency, Equity, Moral and Political Consequences

Positive Economics

→ Involves statements about what is and can be tested by checking the statement agaisnt the observed facts

• Ex. “If the price of coffee rises, people will buy less coffee.”

• “What is”

Normative Economics

→ Involves statements about what ought to be (belief, ethical)

→ Depends upon values and beliefs and cannot be tested

• Ex. Taxes should be used to redistribute income from high income groups to low income groups.

economics as a science

• Economics is a social sciences that seeks to explain how people act

• Like any other science, it uses models, theories, and assumptions to describe how people behave

What are these theories and models meant to provide?

Understanding and explanation. Should be useful in predicting behaviour

What are models in terms of economics?

• A model is a simplified description of the way things work

• It’s not complete description of every detail but a simple description that covers a wide range of possibilities

Economics is a …. science

Empirical

Meaning you can test your models against observed information

Correlation Fallacy

incorrect belief that correlation implies causation

Post Hoc Fallacy

• is a special case of correlation fallacy

• An error of reasoning, that the first event causes the second event, because the first occurred before the second

  Ex. "I ate ice cream yesterday, and today I have a terrible stomach ache. The ice cream must have caused my stomach ache"

Fallacy of Composition

incorrect believe that what is true for the individual is also true for the group

Productive Possibilities Frontier

graph that shows what we’re fully capable of

Mixed Economy

→ While private entities own most resources and make many economic decisions, the government intervenes to provide public goods, regulate markets, and address social inequalities

Rationality Assumption

Individuals do not intentionally make decisions that will leave them worse off

The players in the market belong in 3 groups:

1. Households

2. Firms

3. Government

explain the 3 groups in the market

1. Households

   • Consumers of goods and services and the sellers of factors of production

Objective: maximize their satisfaction

2. Firms

   • Producers of goods and services. There are the demanders of factors and production.

Objective: maximize their profits

3. Government

   • Includes all public officials

Objective: ?

Main Characteristics of Market Economics

Self-interest, incentives, market prices and quantities, institutions

Explain the 4 characteristics of market economies

1. Self-Interest

   • Individuals pursue their own self-interest, buying, and selling what seems best for them and their families

2. Incentives

   • People respond to incentives

3. Market Prices and Quantities

   • Prices and quantities are determined in open markets where sellers would compete to sell their products to would be buyers

4. Institutions

   • All these activities are governed by a set of institutions largely created by gov’t.

     a. Individualist Institutions of Property and Decision Making.

     b. Social institutions of trust

     c. Infrastructure - transportation and storage

     d. Money as exchange

Demand

→ the demand function shows the quantity demanded of a good for different levels of the goods price, given other variables

• quantity demanded is the amount consumers are willing to buy

Law of demand

→ as a goods price increases, the quantity demanded decreases

→ As a goods price decreases, the quantity demanded increases

Changes in the commodity’s price correspond to movements along the demand curve….

Which are referred to as changed in quantity demanded

What is the one variable that causes change in quantity demanded?

The price

what is the supply?

shows the quantity supplied at different price levels given other variables

law of supply 

As price increases, the quantity supplied increases

As price decreases, the quantity supplied decreases

what are the variables that influence supply?

1. Technology - a better technology increases supply corresponding to the supply curve shifting out

2. Costs of inputs - wages, interest rates, opportunity costs, etc. As costs increase, supply decreases

3. Taxes - as taxes increases, supply decreases

4. Number of firms - as number of firms increases, supply decreases

5. Expectations - expectations of producers change, supply changes

6. Changes in weather

Equilibrium

→ is achieved when supply curve intersects the demand curve

→ quantity supplied = quantity demanded

Why do we need gov’t in the economy?

1. There are information problems

   → consumers and producers do not possess perfect information

2. There are other forces acting in society

   → Social and Historical forces - Invisible Handshake

   → Political and Legal forces - Invisible Foot (prevents market from operating)

3. Sometimes markets simply fail

Price Floors

gov’t sets the minimum price:

Price Ceiling

gov’t sets the maximum price

Quota

gov’t sets the maximum quantity

Consumers surplus

→ the difference between what the consumers is willing to pay and what the consumer has to pay

Producer’s surplus

is the difference between what the producers are paid and what they are willing to accept benefit to producers.