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Econ 200: Introduction to Microeconomics

What is Economics?

  • Economics Defined:

    • Alfred Marshall (1890): Study of mankind in the ordinary business of life, focusing on individual and social action related to material wellbeing.

    • Lionel Robbins (1932): The science studying human behavior as a relationship between ends and scarce means which have alternative uses.

    • Jacob Viner (1932): Represents a summary of economists' work.

Scarcity and Choices

  • Scarcity:

    • Defined as a situation where unlimited wants exceed limited resources.

  • Economics as a study of choices:

    • Economists utilize models to analyze real-world economic situations.

Examples of Scarce Resources

  • Money

  • Food

  • Clean air

  • Clean water

  • Farmable land

  • Time

Key Principles of Economics

Principle 1: People are Rational

  • Rationality involves using available information to achieve goals.

  • Consumers and firms weigh costs and benefits to make optimal decisions.

Principle 2: Optimal Decisions

  • Decisions are made by calculating opportunity costs.

  • Opportunity Cost: Value of the next-best alternative foregone when making a choice.

  • Marginal Cost (MC) and Marginal Benefit (MB):

    • MC: Additional cost of a small extra action.

    • MB: Additional benefit from that action.

  • Example 1: Deciding between watching TV or doing homework within a limited time frame.

  • Example 2: Evaluating the desire to get more food at a buffet after feeling full.

Principle 3: People Respond to Incentives

  • Incentives: Factors that influence behavior by altering marginal costs or benefits.

  • Example: Studying for an exam due soon might change one's decision compared to a less imminent exam.

  • Example: Group lending practices where defaults affect borrowing capabilities.

Types of Economic Analysis

  • Positive Analysis: Examines how things are.

  • Normative Analysis: Looks at how things should be.

  • Economists focus predominantly on positive analysis, although understanding human behavior poses challenges.

Economic Questions Example

  • Student Loan Debt Cancelation:

    • Positive Analysis: Costs and benefits of cancellation, impacts on economy and future behaviors.

    • Normative Analysis: Ethical considerations, fairness of prioritizing certain groups.

Areas of Economics

  • Microeconomics: Focus on how households and firms make choices and interact in markets.

  • Macroeconomics: Analysis of the economy as a whole including inflation and unemployment.

  • Econometrics: Application of statistical methods in economic research.