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.