Microeconomics ECON 2302 Spring 2010 Marilyn Spencer, Ph.D. Professor of Economics Introduction to course & Chapter 1

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Today’s topics: 4 Introduction to course 4 Introduction to/review of basic economics concepts

Syllabus Contact information 4 Texts 4 Course description 4 Course outline 4 Role of course in you undergraduate curriculum 4 Course methodology 4 Course content 4 Grades

Chapter 1: Introduction to Economics

After studying this chapter, you should be able to: Discuss these three important economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services? Understand the role of models in economic analysis. Distinguish between microeconomics and macroeconomics. Become familiar with important economic terms. LEARNING OBJECTIVES

Economics: Foundations and Models Scarcity The situation where unlimited wants exceed the limited resources available to fulfill those wants. Economics The study of the choices people make to attain their goals, given their scarce resources.

Basic definitions: 4 resources - anything that can be used to produce something - labor, equipment, raw materials, etc. 4 allocation - what’s produced with resources 4 distribution - who gets whatever is produced 4 opportunity cost - what you have to give up in order to gain something else

Scarcity and Choice 4 Scarcity necessitates making choices. 4 Economics is the study of how people choose to use their resources in attempts to satisfy their unlimited wants. ÜWhich goods do we create? (Which goods do we allocate our scarce resources to the production of?) ÜHow do we produce them at the lowest cost (efficiency)? ÜHow do we decide who gets the goods once they are produced? (distribution)

Basic definitions continued: 4 macroeconomics - area of economics concerning aggregate measures and decisions made on a large scale, including the interaction of markets with governments/government policies 4 microeconomics - area of economics that concerns individual decisions - such as by a person, a family, or a company

Building a Foundation: Economics and Individual Decisions LEARNING OBJECTIVE 1 Market An arrangement or institution that brings together buyers and sellers of a good or service. 4 Marginal analysis Analysis that involves comparing marginal benefits and marginal costs. Three important ideas:  People are rational  People respond to economic incentives  Optimal decisions are made at the margin

The Economic Problem That Every Society Must Solve LEARNING OBJECTIVE 2 Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service. Three fundamental questions:  What goods and services will be produced?  How will the goods and services be produced?  Who will receive the goods and services produced?

What economic agents are involved in a real, “mixed” economy? 4 Buyers and sellers 4 Federal, state and local governments 4 Private non-profit agencies 4 Foreign governments

The Modern “Mixed” Economy Productive efficiency Occurs when a good or service is produced at the lowest possible cost. Allocative efficiency A state of the economy in which production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. Voluntary exchange The situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction. Equity The fair distribution of economic benefits. 4 Terms used in describing Efficiency and Equity:

Basic economic assumptions: 1. People behave rationally. That is, we make rational choices. 2. More is better than less. 3. People strive to do what will make them better off, given the information they have. 4. People respond to incentives, whether positive or negative incentives.

Implications 4 Being self-interested, people will weigh the costs and benefits of various alternatives, choosing that alternative that makes them best off. ÜThis behavior is called “economic decision making”. 4 Costs and benefits are sometimes referred to as negative and positive incentives. Hence, according to the economic reasoning, incentives matter.

If you had to choose only one word to tell someone what economics is all about, what would that one word be? ?

Introduction/Chapter 1 definitions: 4 Syllabus 4 Definitions: Ü economics Ümicroeconomics/macroeconomics Ü resources Ü allocation Ü distribution Ü scarcity Ü opportunity cost Ü market Üefficiency Üequity

The Role of Models 4 Construction of models – why we do it 4 What’s important to include? 4 Role of assumptions in building a model

Quiz 1 Before class on Tuesday, January 26, send me an from the address you’ll be using regularly during this course. My address is 4 points

Questions?

Reality check, to be completed before class January 21: 4Read Chapters 1 & 2 of Hubbard & O’Brien and be able to answer  From Chapter 1: ÜReview Questions p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 (1 st edition: 1, 3, 5, 6 & 8 on p. 19). ÜProblems and Applications p. 22, 2.7; p. 23, 3.8 (1 st edition: 13 and 15 on p. 20).  From Chapter 2: ÜReview Questions p. 60, 1.2, 1.3; p. 62, 2.2; p. 63, 3.1 (1 st edition: 2, 3, 5, 6 & 11 on pp ). ÜProblems and Applications p , 1.4 & 1.8; p. 62, 2.4 (1 st edition: 1, 5 and 11 on pp. 57 & 59).