ECN 104 Week 1 Lecture 1

Exploration of questions regarding the economic system:
- How does it work?
- How does it manage to deliver goods?
- Who’s in charge?
- Does it lead to efficient/fair outcomes?
Definition of Microeconomics:
- Microeconomics studies individual decisions and interactions.
- Quote: "Economics is the study of humanity in the ordinary business of life" - Alfred Marshall.

Microeconomic principles offer a framework for:
- Understanding how individuals make choices.
- Understanding how those individual choices interact with each other.
Exclusion:
- Will not cover principles related to economy-wide interactions.

Definition:
- Individual choice is the decision made by a person regarding what to do, which simultaneously involves a decision of what not to do.
Four basic principles behind individual choices:
1. Resources are scarce.
2. The real cost of something is what you must give up to get it.
3. The question of "How much?" is a decision at the margin.
4. People generally take advantage of opportunities to enhance their well-being.

Scarcity defined:
- A resource is anything that can be utilized to produce something else.
- Examples of resources: land, labor, physical capital, and time.
Key concept:
- Resources are scarce; the available quantity is insufficient to meet all productive uses.

Definition of Opportunity Cost:
- The true cost of a decision is represented by its opportunity cost, which is the value of what must be foregone to obtain it.
Example of opportunity cost:
- Attending an economics class means giving up alternatives such as sleep, watching television, climbing, or work.
Insight:
- Trade-offs are made by weighing the benefits against the opportunity costs of actions.
- Example of poor indicators of opportunity costs:
- If tuition and housing costs were zero, would attending school have no opportunity cost?

Common thought process regarding opportunity costs:
- Choosing movie A versus movie B at a cinema:
- What is the opportunity cost of choosing movie A?
- If ticket prices are equal, is the cost simply monetary?
- If ticket A is $20 and ticket B is $12, how does this affect choice?
Metaphor:
- “I would rather be surfing the internet.”

Historical context:
- In 1900, only 6% of married women were employed outside the home.
- By the early 21st century, this percentage rose to 65%.
Contributing factors:
- Changing societal attitudes.
- Availability of home appliances like washing machines.
Pre-appliance scenario:
- High opportunity cost for women to work outside due to domestic responsibilities.
Conclusion:
- Modern appliances changed women's opportunities and societal norms.

Understanding marginal decisions:
- Not all choices are binary; many involve degrees.
Examples of marginal decisions:
- How many hours to study?
- How many workers to hire?
- How many units of a product to consume?
Explanation of marginal analysis:
- Evaluating the costs and benefits of slightly increasing or decreasing an activity.

Definition of incentives:
- Incentives are rewards prompting individuals to change behavior.
Responses to incentives:
- Example 1: Rise in gasoline prices leads to increased purchases of fuel-efficient vehicles.
- Example 2: Higher pay for economics graduates increases majors in economics.

Concept of choice interaction:
- Individual decisions affect one another in various economic situations.
Underlying principles of choice interaction:
1. There are gains from trade.
2. Markets trend toward equilibrium.
3. Efficient resource use achieves societal goals.
4. Markets typically lead to efficient outcomes.
5. Government intervention can improve welfare in cases of inefficiency.

Functioning of trade in market economies:
- Individuals engage in trade to obtain goods/services.
Benefits of trade:
- Trade enables individuals to acquire more than they could through self-sufficiency.
Explanation of specialization:
- Individuals specialize in particular tasks, enhancing productivity and providing mutual benefits.
Historical example:
- Adam Smith's observation on pin manufacturing illustrates the effects of division of labor.
- Specialized labor allows greater production compared to independent efforts.

Definition of equilibrium:
- Market equilibrium occurs when no individual can be better off by doing something different.
Response to changes:
- The economy shifts to new equilibria when faced with changes.
Role of incentives:
- Changes in prices and quantities drive the movement toward equilibrium.

Definition of efficiency:
- An economy is efficient if one cannot improve someone's welfare without harming another.
Economic policy concern:
- Should efficiency be prioritized over equity?
- Equity refers to fair distribution, but its definition can be subjective.

Example of conflicting principles:
- Handicapped-designated parking spaces illustrate the trade-off between equity (fairness for handicapped individuals) and efficiency (utilization of resources).
Question for policymakers:
- To what extent should equity be prioritized over efficiency?

Market assumptions:
- Market incentives lead to efficient resource usage.
Recognition of exceptions:
- Market failures occur when self-interest results in societal detriment.
- Outcomes can be inefficient in such instances.

Reasons for market failure:
- Externalities lead to unintended consequences not accounted for by the market.
- Some services, like national security, cannot be effectively managed through market mechanisms.

Economic analysis is founded on fundamental principles applied across three levels:
- Individual choices.
- Interactions among choices.
- Overall economic functioning.
Individual choice underlies economic theory, necessitated by scarcity.
Opportunity cost defined as the true cost of choices determined by what must be sacrificed.
Economic decisions often involve the concept of marginal analysis, comparing benefits and costs of incremental changes.
Insights into human behavior can be derived from the study of decision-making processes, emphasizing the role of incentives.
Understanding interaction reveals how choices are interconnected, often yielding unintended results.
Trade promotes efficiency and individual well-being through specialization.
Markets are dynamic, typically moving toward equilibrium.
Efficiency, avoidance of harm to others, and the concept of equity guide economic evaluation, often presenting trade-offs.
Government interventions warrant consideration when market failures arise.