Microeconomics

What is economics?

The study/practice of how a financial system or economy operates

Economics is the scientific study of rational choice in the face of scarcity, and the social consequences of such choices.

Microeconomics: The study of the behavior and interaction of individuals, households, firms, and other decision making units in our economy. Markets, choices, costs, benefits, supply, demand, price, production

Macroeconomics: The study of the relations among aggregates such as the economy’s total output, employment, price level, and growth. Study of the major economic policy tools such as fiscal policy and monetary policy.

Basic economic assumptions:

  1. Human wants are insatiable, we all want more of something

  2. Scarcity, we have limited resources

  3. Optimization is our goal, maximize our well being within limits

  4. People engage in voluntary transactions that they believe make them better off

  5. We want the benefits of our choices to be greater than the costs

  6. All choices involve costs, opportunity costs

  7. TANSTAAFL Principle (There ain’t no such thing as a free lunch)


FIVE ECONOMIC PRINCIPLES

INCENTIVES

TRADE OFFS

OPPORTUNITY COST

MARGINAL THINKING

TRADE CREATES VALUE


Positive economic statements: can be proven one way or another

Normative economic statements: What ought to be, opinion


Three basic economic questions:

What to produce?

How to produce?

For whom to produce?


Allocation of goods and services:

scarcity, discrimination, competition


Goals of models:

Forecast predictions



Economic models:

Supply and demand

Production possibilities curve: a model that illustrates the combinations of outputs a society can produce if all of its resources are being used efficiently.


Factors of production: labor (workers), capital (goods) , land (natural resources)

What else matters? Technology


Absolute advantage: Ability to produce a good with lesser input than another producer.

Comparative advantage: Ability to produce a good with a lower opportunity cost than another producer


LAW OF SUPPLY: As supply increases or decreases, the labor or demand also increases or decreases


Ceteris Peribus: Nothing else changes


Substitutes in consumption NOT the same as substitutes in production

Consumption effects demand curve, production effects supply curve


Input prices

Number of suppliers

Expectations

Prices of related goods

Technology


ELASTICITY:

Consumers are responsive to price changes


INELASTICITY:

Consumers not very responsive to price changes