Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 1 Deep Thought BA 210 Lesson I.1 Introduction I can picture in my mind a world without war, a world without hate. And I can picture us attacking that.

Similar presentations


Presentation on theme: "1 1 Deep Thought BA 210 Lesson I.1 Introduction I can picture in my mind a world without war, a world without hate. And I can picture us attacking that."— Presentation transcript:

1 1 1 Deep Thought BA 210 Lesson I.1 Introduction I can picture in my mind a world without war, a world without hate. And I can picture us attacking that world, because they’d never expect it. --- by Jack Handey.

2 2 2 Acknowledgements Much of the course content is adapted from the textbook Microeconomics by Paul Krugman, Nobel Laureate (and former teacher of Jon Burke), second edition, published by Worth Publishers © 2009. The PowerPoint slides for the lessons are your primary text. Read the Krugman text for more details as you see fit. Welcome to BA 210 Introduction to Microeconomics BA 210 Lesson I.1 Introduction

3 3 3 Getting acquainted What is Microeconomics? Microeconomics is a list of assumptions and their consequences that helps consumers make satisfying choices, helps managers make profitable decisions, and helps governments make effective public policies. Economists follow the path of pure logic, and leave passions and emotions for the people they try to help. BA 210 Lesson I.1 Introduction Welcome to BA 210 Introduction to Microeconomics

4 4 4 BA 210 Lesson I.1 Introduction Getting started Read and bookmark the online course syllabus. http://faculty.pepperdine.edu/jburke2/ba210/index.htm It serves as a contract specifying our obligations to each other. (You may need Internet Explorer.) In particular, note: High School Algebra is a prerequisite, so review as needed. High School Algebra is a prerequisite, so review as needed. Before each class meeting, download and read the PowerPoint lesson, as presented under the “Schedule” link. Before each class meeting, download and read the PowerPoint lesson, as presented under the “Schedule” link. After each class meeting, answer any assigned homework questions. And answer some of the review questions at the end of the PowerPoint lesson. If you get stuck on some question, review as needed the PowerPoint lesson or the Krugman text or my answers. After each class meeting, answer any assigned homework questions. And answer some of the review questions at the end of the PowerPoint lesson. If you get stuck on some question, review as needed the PowerPoint lesson or the Krugman text or my answers. Welcome to BA 210 Introduction to Microeconomics

5 5 5 Lesson Overview BA 210 Lesson I.1 Introduction Chapter 1 First Principles You may dislike Microeconomics, if … What is Theory? Microeconomic Assumptions Testing Selfishness Revealed Preference Controversy: Who is poor? Summary Review Questions

6 6 6 You may dislike Microeconomics, if … BA 210 Lesson I.1 Introduction You may dislike Microeconomics, if … You hold to economic dogma. Many lifelong Democrats and many lifelong Republicans hold established beliefs about public policies that are not to disputed, doubted, or diverged from. You are a political hack personally identified with a political party, and are driven more by success of the party than by personal conviction about the effectiveness of a particular public policy. Your concern for public policy is driven more by self interest than by personal conviction.

7 7 7 What is Theory? BA 210 Lesson I.1 Introduction Theory helps you understand facts. Economic theorizing is often attempted, but is not always logical. For instance, you might argue the government should reform health care because of the fact that poor people get worse care than rich people. That poor people get worse care is a fact; no theory is needed. But when you conclude that health care should be reformed, you theorize.

8 8 8 What is Theory? BA 210 Lesson I.1 Introduction Common arguments for reforming health care implicitly assume some type of equality among people is socially desirable. But what should be equal? For example, it may seem reasonable to assume that equality of happiness among people is socially desirable. However, it does not seem reasonable that equality of consumption is socially desirable, as if Barack should eat just as many bananas as Bill. So if we treat medical care like bananas, it may not seem reasonable to assume that equality of medical care is socially desirable.

9 9 9 What is Theory? BA 210 Lesson I.1 Introduction Put another way, suppose there were equal health care between rich and poor. What would happen? How would you respond if Bill Gates offered a million dollars for some of your care? For example, would you sell him your place in line for a blood test? to set a broken bone? for an artificial heart? Is equal health care with the rich the best thing you can give the poor? What would the poor prefer?

10 10 Microeconomic Assumptions BA 210 Lesson I.1 Introduction Microeconomic Theory is founded on three Assumptions. Those assumptions are a checklist for when microeconomics can help consumers make satisfying choices, help managers make profitable decisions, and help governments make effective public policies.

11 11 BA 210 Lesson I.1 Introduction To make precise assumptions, we must first speak the same language. In price theory, words like “commodity” and “utility” take more precise definitions than in common usage. Microeconomic Assumptions

12 12 BA 210 Lesson I.1 Introduction The Definition of Commodities and Goods The basic object in economic theory is a commodity, defined to be anything that can be measured and traded between people. Commodities can be physical goods, like apples or Cuban cigars; or services, like haircuts or medical care. Some commodities are undesirable, like smog, but their opposites, like clean air, are desirable. This class mostly considers desirable commodities, which we also call goods. Name some commodities. Are kids commodities? Is time a commodity? How do you measure time? trade time? Microeconomic Assumptions

13 13 BA 210 Lesson I.1 Introduction I don't care too much for money, money can't buy me love --- The Beatles. Assumption 1: Anything that affects happiness or satisfaction is a commodity. Economics thus considers how people’s happiness is effected by cars, kids, and free time. But economics does not directly consider whether kids are loved by their parents, since love is not a commodity. Microeconomic Assumptions

14 14 BA 210 Lesson I.1 Introduction Don’t confuse assumptions with presumptions. You “presume” when you believe a proposition is a fact; you “assume” when you accept a proposition as a fact for a particular purpose. Microeconomists assume anything that affects happiness is a commodity because the microeconomic way of logical thinking does not yield helpful conclusions about non-commodities like love. If you are love sick or sick of love, see a psychologist, not a microeconomist. Microeconomic Assumptions

15 15 BA 210 Lesson I.1 Introduction The Definition of Consumption and Consumer Consumption is when a commodity is used; a consumer does the consumption. A consumer can be an individual, or a household, or a family dynasty (Kennedy’s), or an institution (Pepperdine University), or a country (United States), or all humankind. The default definition of a consumer is a household, which is a person or a group of people living in the same residence. Microeconomic Assumptions

16 16 BA 210 Lesson I.1 Introduction The Definition of Utility Through consumption, a consumer generates happiness and satisfies his needs, wants, and desires. The happiness or satisfaction generated is measured by the quantity of utility. The definition of utility separates microeconomics from psychology, which treats needs, wants, and desires differently. Combining needs, wants, and desires simplifies microeconomics. If your job meets your physical needs but leaves you feeling empty because you have not realized your own maximum potential, see a psychologist, not a microeconomist. Microeconomic Assumptions

17 17 BA 210 Lesson I.1 Introduction The best things in life are free But you can give them to the birds and bees I want money --- The Flying Lizards. http://www.stlyrics.com/lyrics/empirerecords/moneythatswhatiwant.htm Assumption 2: Individual households are perfectly selfish or self-interested, concerned only with the utility they get from their own consumption of commodities.  Parents can care about kids within their own household, but not about kids in other households.  Is that the way households should be?  Is that the way most households are? Microeconomic Assumptions

18 18 BA 210 Lesson I.1 Introduction The assumption of perfect selfishness might, at first, seem harsh and extreme. — Would you care if your neighbor’s car were stolen? But while selfishness rules out benevolence (like concern for the poor), it also rules out malevolence. — Would you care if your neighbor just got a car that is twice as good as yours? Thus, the assumption of perfect selfishness takes a middle ground, with real people on either side. Perhaps, the approximation errors from ignoring benevolence offset the approximation errors from ignoring malevolence. Microeconomic Assumptions

19 19 BA 210 Lesson I.1 Introduction “nosce te ipsum” (know yourself) --- The Oracle from The Matrix Assumption 3: People are rational. They are perfect calculators and flawless followers of those choices that are in their own best interests. Rationality is a debatable assumption:  Do you know what makes you happy?  Ever made a bad choice?  Do you know exactly how much money you have in your pocket? Or how much you could get from your parents? Microeconomic Assumptions

20 20 Testing Selfishness BA 210 Lesson I.1 Introduction To test the assumption of perfect selfishness, ask: do citizens vote in their self interest?  Which American political party favors the rich?  Are Republicans richer than Democrats?

21 21 Testing Selfishness BA 210 Lesson I.1 Introduction Extra Credit: Take a survey of the selfishness of at least 10 random people. Ask what percent of their salary that they donated to charity this year or that they gave to someone outside their household or family. Ignore answers like “I only gave 1 percent, but I would like to have given more” or “next year, I plan to give more”. It is important you measure the selfishness of an entire household or family. Parents giving to children does not count. It is also important you conduct a random survey. Do not, for example, go to church and pole missionaries or pole the Amish. Based on your survey, is the assumption of perfect selfishness realistic? If not 100 percent true, is the assumption of perfect selfishness at least 95 percent true?

22 22 Revealed Preference BA 210 Lesson I.1 Introduction Are Americans happier than Italians? Are Americans happier today than 30 years ago? Of course, any answer is debatable: some may believe that Americans are inherently different from Italians and so cannot be compared. Microeconomics aims to make comparisons through the assumption that commodities are all that matter. Namely, to determine which country or which year is better, compare the consumption of commodities. Even using microeconomics, however, such comparisons may be hard. For example, while Americans have bigger houses than Italians, they may consume less (quality) food. So we need to know whether extra housing is worth sacrificing food. Likewise, while houses are larger today than 30 years ago, there may be less leisure time. The theory of revealed preferences helps make such hard consumption comparisons. The key is to ask whether one consumption item or bundle of items (like 1500 square feet of housing and 3 hours of leisure) was available when the other consumption bundle (like 1400 square feet of housing and 4 hours of leisure) was chosen; if so, then the chosen bundle is preferred.

23 23 Revealed Preference BA 210 Lesson I.1 Introduction Question: Are Americans happier than Italians? Consider typical monthly consumption:

24 24 Revealed Preference BA 210 Lesson I.1 Introduction Answer: Typical Americans consumers spend 1 × 1500 + 2 × 100 = 1700 dollars with which they could afford Italian consumption, since it costs only 1 × 800 + 2 × 200 = 1200 dollars. Conclusion: Americans are happier. Note: Italians cannot afford American consumption. Typical Italian consumers spend 2×800 + 1×200 = 1800 euros, but American consumption would cost 2×1500 + 1×100 = 3100 euros

25 25 Revealed Preference BA 210 Lesson I.1 Introduction Question: Are Americans happier today than 30 years ago? Consider typical monthly consumption:

26 26 Revealed Preference BA 210 Lesson I.1 Introduction Answer: Today’s consumers spend 1 × 1500 + 2 × 100 + 30 × 2 = 1760 dollars with which they cannot afford the consumption of 30 years ago, since it would cost (at today’s prices) 1 × 1400 + 2 × 150 + 30 × 3 = 1790 dollars. 30-years-ago consumers spend (at prices from 30 years ago) 2 × 1400 + 1 × 150 + 30 × 3 = 3040 dollars with which they cannot afford the consumption of today’s consumers, since it would cost (at prices from 30 years ago) 2 × 1500 + 1 × 100 + 30 × 2 = 3160 dollars. Revealed preference is inconclusive in this case.

27 27 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Controversy: Who is Poor?

28 28 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Controversy: Who is Poor? The standard definition of “poor” in the U.S increases with the size of a family.

29 29 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction In particular, two adults are “poor” if their yearly income is $14,570 or less. Make sense?

30 30 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Question: Compare two families. A small family of two adults with an income of $15,000 per year; they are not considered “poor”. A big family of two adults and 3 small kids with an income of $16,220; they are considered “poor”. Is the “poor” big family happier than the non-“poor” small family?

31 31 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Answer: The “poor” big family is happier if you treat kids as a consumption commodity; the two adults in the “poor” big family could have used birth control and, with their higher income, chosen the consumption of the non-“poor” small family but rejected it.

32 32 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Even if policymakers did not adjust for family size, measuring poverty by income is still controversial because it does not account for the consumption of leisure, or free time. Many people have low incomes because they are unemployed, meaning they have more leisure. Some “poor” families can be happier than non-“poor” families if you treat leisure as a consumption commodity.

33 33 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Question: Compare two single-adult households. Adult A is unemployed with an income of $0 per year; he is considered “poor”. Adult B works 8 hours every day at $10 per hour; his income is $29,200 per year; he is not considered “poor”. Who is happier?

34 34 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Answer: Revealed preference can determine who is happier if we knew how much money the unemployed Adult A would earn if he chose to work, and we knew the prices each adult has to pay for consumption goods.

35 35 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction To keep the problem simple, suppose Adult A could make $12 per hour. Consider the hypothetical case where the only two goods are leisure and housing. Measure the consumption of those two goods daily. Suppose Adult A lives in Los Angeles and faces a housing price of $0.11 per square foot, and Adult B lives in Chicago and faces a housing price of $0.10 per square foot. Here is the price and consumption data of the two adults, where the price of each hour of leisure is dollars lost from not working that hour:

36 36 Controversy: Who is Poor? BA 210 Lesson I.1 Introduction Adult A has 24 hours of leisure since he does not work. He has zero income, and so cannot afford any housing. Adult B has 16 hours of leisure since he works 8 hours per day. He has income $80, and so can afford 800 square feet of housing. Can Adult A afford the consumption of Adult B? Adult A spends $0.11 x 0 + $12 x 24 = $288 per day. And to consume like Adult B would cost Adult A $0.11 x 800 + $12 x 16 = $280 per day. So, yes, Adult A can afford the consumption of Adult B. The fact that Adult A rejects the consumption of B means Adult A is happier.

37 37 Summary 1.The basic object in economic theory is a commodity, defined to be anything that can be measured and traded between people. 2.Microeconomic Theory is founded on three Assumptions. Those assumptions are a checklist for when microeconomics can help consumers, managers, or policymakers. 3.Assumption 1: Anything that affects happiness or satisfaction is a commodity. 4.The default definition of a consumer is a household, which is a person or a group of people living in the same residence. BA 210 Lesson I.1 IntroductionSummary

38 38 Summary (continued) 5.Through consumption, a consumer generates happiness and satisfies his needs, wants, and desires. The happiness or satisfaction generated is measured by the quantity of utility. 6.Assumption 2: Individual households are perfectly selfish or self-interested, concerned only with the utility they get from their own consumption of commodities. 7.Assumption 3: People are rational. They are perfect calculators and flawless followers of those choices that are in their own best interests. 8.Revealed preferences asks whether one consumption item or bundle of items was available when another consumption bundle was chosen; if so, then the chosen bundle is preferred. BA 210 Lesson I.1 IntroductionSummary

39 39 Review Questions BA 210 Lesson I.1 Introduction Review Questions  You should try to answer some of the following questions before the next class.  You will not turn in your answers, but students may request to discuss their answers to begin the next class.  Your upcoming Exam 1 and cumulative Final Exam will contain some similar questions, so you should eventually consider every review question before taking your exams.

40 40 Review Questions BA 210 Lesson I.1 Introduction Each of the following 4 questions about revealed preference assumes there are only three goods that matter: computers, food and movies. The first question is so simple that you do not need to use revealed-preference theory. And the final question is so hard that revealed-preference theory gives no conclusions.

41 41 Review Questions BA 210 Lesson I.1 Introduction Question 1: Consider the following price and consumption information for the typical Japanese consumer:

42 42 Review Questions BA 210 Lesson I.1 Introduction Answer 1: Step 1: Compare consumptions. Here, the two year’s consumptions, (1, 2, 3) and (1, 2, 3), are identical. [In vector notation, consumption (1, 2, 3) denotes consumption of 1 computer, 2 units of food, and 3 movies.] Hence, since microeconomics assumes that consumption alone determines utility, that utility is the same in either year; that is, neither year is preferred to the other.

43 43 Review Questions BA 210 Lesson I.1 Introduction Question 2: Consider the following price and consumption information for the typical English consumer:

44 44 Review Questions BA 210 Lesson I.1 Introduction Answer 2: Step 1: Compare consumptions. Here, the two year’s consumptions, (1, 2, 3) and (2, 2, 2), are incomparable: the former has less of good 1; the latter, less of good 3. Hence, continue the analysis. Step 2: Ask whether 1980’s consumption, (1, 2, 3), was affordable in 2010? Answer: In 2010 you had income determined by the budget equation, y = p 1 x 1 + p 2 x 2 + p 3 x 3 = 2 × 2 + 2 × 2 + 2 × 2 = 12 while the cost of 1980’s consumption would have been p 1 x 1 + p 2 x 2 + p 3 x 3 = 2 × 1 + 2 × 2 + 2 × 3 = 12 Thus you could have had 1965’s consumption in 1990. Hence: Stop the analysis. Conclusion: 2010 is preferred to 1980.

45 45 Review Questions BA 210 Lesson I.1 Introduction Question 3: Consider the following price and consumption information for the typical Vietnamese consumer:

46 46 Review Questions BA 210 Lesson I.1 Introduction Answer 3: Step 1: Compare consumptions. Here, the two year’s consumptions, (1, 2, 9) and (2, 2, 2), are incomparable: the former has less of good 1; the latter, less of good 3. Hence, continue the analysis. Step 2: Ask whether 1980’s consumption, (1, 2, 9), was affordable in 2010? Answer: In 2010 you had income determined by the budget equation, y = p 1 x 1 + p 2 x 2 + p 3 x 3 = 2 × 2 + 2 × 2 + 2 × 2 = 12 while the cost of 1980’s consumption would have been p 1 x 1 + p 2 x 2 + p 3 x 3 = 2 × 1 + 2 × 2 + 2 × 9 = 24 Thus you could not have had 1980’s consumption in 2010. Hence: Continue the analysis.

47 47 Review Questions BA 210 Lesson I.1 Introduction Step 3: Ask whether 2010’s consumption, (2, 2, 2), was affordable in 1980? Answer: In 1980 you had income determined by the budget equation, y = p 1 x 1 + p 2 x 2 + p 3 x 3 = 4 × 1 + 2 × 2 + 1 × 9 = 17 while the cost of 1980’s consumption would have been p 1 x 1 + p 2 x 2 + p 3 x 3 = 4 × 2 + 2 × 2 + 1 × 2 = 14 Thus you could have had 2010’s consumption in 1980. Conclusion: 1980 is preferred to 2010.

48 48 Review Questions BA 210 Lesson I.1 Introduction Question 4: Consider the following price and consumption information for the typical Korean consumer:

49 49 Review Questions BA 210 Lesson I.1 Introduction Answer 4: Step 1: Compare consumptions. Here, the two year’s consumptions, (1, 2, 4) and (2, 2, 2), are incomparable: the former has less of good 1; the latter, less of good 3. Hence, continue the analysis. Step 2: Ask whether 1980’s consumption, (1, 2, 9), was affordable in 2010? Answer: In 2010 you had income y = p 1 x 1 + p 2 x 2 + p 3 x 3 = 2 × 2 + 2 × 2 + 2 × 2 = 12 while the cost of 1980’s consumption would have been p 1 x 1 + p 2 x 2 + p 3 x 3 = 2 × 1 + 2 × 2 + 2 × 4 = 14 Thus you could not have had 1980’s consumption in 2010. Hence: Continue the analysis.

50 50 Review Questions BA 210 Lesson I.1 Introduction Step 3: Ask whether 2010’s consumption, (2, 2, 2), was affordable in 1980? Answer: In 1980 you had income y = p 1 x 1 + p 2 x 2 + p 3 x 3 = 4 × 1 + 2 × 2 + 1 × 4 = 12 while the cost of 1980’s consumption would have been p 1 x 1 + p 2 x 2 + p 3 x 3 = 4 × 2 + 2 × 2 + 1 × 2 = 14 Thus you could not have had 2010’s consumption in 1980. Hence, no preference is revealed.

51 51 Review Questions BA 210 Lesson I.1 Introduction Follow the link http://faculty.pepperdine.edu/jburke2/ba210/PowerP1/Set1Answers.pdf for review questions for Lessons I.1 and I.2 (next time) that practice these skills: Identify and compute opportunity costs. Identify and compute opportunity costs. Use marginal analysis to make a decision by comparing the marginal benefit to the marginal cost: increase quantity as long as the marginal benefit is greater than marginal cost. Use marginal analysis to make a decision by comparing the marginal benefit to the marginal cost: increase quantity as long as the marginal benefit is greater than marginal cost. Describe how a voluntary trade makes a rational person better off (happier, more satisfied, …) Describe how a voluntary trade makes a rational person better off (happier, more satisfied, …) Describe trade when one party is relatively better at producing Good X than another party, and relatively worse at producing Good Y. Describe trade when one party is relatively better at producing Good X than another party, and relatively worse at producing Good Y. Describe and identify an equilibrium as a rest point, or stationary point. Describe and identify an equilibrium as a rest point, or stationary point. Describe and identify efficiency as when all opportunities for improvement without hurt are exhausted. Describe and identify efficiency as when all opportunities for improvement without hurt are exhausted. Show how incentives affect decisions. Show how incentives affect decisions. Describe how incentives can restore efficiency. Describe how incentives can restore efficiency.

52 52 End of Lesson I.1 BA 210 Lesson I.1 Introduction BA 210 Introduction to Microeconomics


Download ppt "1 1 Deep Thought BA 210 Lesson I.1 Introduction I can picture in my mind a world without war, a world without hate. And I can picture us attacking that."

Similar presentations


Ads by Google