1. Econ 101 Introduction to Microeconomics
Why study Economics?
What’s it all about?
Lorne Priemaza, M.A.

2. What’s it all about? Not: business or finance Not: the stock market
Economics examines issues from a social perspective : Social Science
Analysis of human behavior
Close relative of psychology and sociology
Economics = Social Studies + Math

3. DEFINITION
1. ECONOMICS
The study of how individuals & societies allocate limited resources to satisfy unlimited wants
The study of how choices are made & coordinated

4. What’s it all about? SCOPE
MACROECONOMICS
business cycles
unemployment/ employment
inflation
trade, international markets (global economy)
MICROECONOMICS
scarcity
supply & demand
markets
consumer
producer
changes/impacts
efficiency
technology
resources

5. SCOPE
MACROECONOMICS
The study of the national economy & the global economy, the way that overall economic variables fluctuate & grow, & the effects of government actions on them.
MICROECONOMICS
The study of the decisions and interactions of individual people & businesses, & the effects of government regulation & taxes on prices & quantities of goods & services.

6. DEFINITION
1. ECONOMICS
The study of the problems that arise from scarcity, & of the institutions that resolve the inescapable conflicts over the uses of scarce resources.

7. DEFINITION
2. ECONOMIC RESOURCES:
people or things that possess the ability to help produce commodities (goods & services) that people value.

8. DEFINITION
2. ECONOMIC RESOURCES:
i) LAND (natural resources)
: sites : productive items on or under the earth’s surface

9. DEFINITION
2. ECONOMIC RESOURCES:
ii) LABOUR
:productive people & their efforts to produce goods & services

10. DEFINITION
2. ECONOMIC RESOURCES:
iii) PHYSICAL CAPITAL
all human made items used to produce goods & services.
(produced means of production)
ie: Computers and Factories
not: Money

11. DEFINITION
2. ECONOMIC RESOURCES:
iv) HUMAN CAPITAL
characterization of the education and training of workers
(productivity of workers)
ie: years of university or years of job experience or innate ability

12. DEFINITION
2. ECONOMIC RESOURCES:
v) Other: ENTREPRENEURIAL ABILITY :the innovator, the risk bearer, the initiator

13. RETURNS TO RESOURCES
Rent, Wages, Interest, Profit:
Rent is income earned by land
Wages are income earned by labour
Interest is income earned by capital
Profit is income earned by entrepreneurs

14. DEFINITION 3. Scarcity ‘scarcity’ scarce (limited) resources
Peoples’ wants are greater than the economy’s ability to produce desirable goods & services
‘scarcity’
scarce (limited) resources
unlimited wants (always want more)
Scarce Resources + Unlimited Wants = Choice

15. Scarcity ≠ Poverty
A homeless man who wants to eat but cannot faces scarcity
A university student who wants to own a Mustang convertible but cannot faces scarcity
A millionaire who wants to be Prime Minister but cannot faces scarcity (only one spot available)

16. Scarcity  CHOICES 1.)What do we do with our scarce resources?
2.)How do we make the best use of our resources? (Efficiency)
3.)For Whom will things be produced? (Who will get what is available?) (Equity)

17. Rationing
“Scarcity” necessitates a “rationing device” - which guides choices.
Prices are the “rationing device” in our Economy
Prices direct scarce resources to their most valued uses.

18. Rationing E.g. legal moral social
Sometimes market forces alone do the rationing, sometimes other forces are operating as well;
E.g. legal
moral
social

19. 1.Terminology (definitions) 2.Economic Thinking/Reasoning
The Five Basics
1.Terminology (definitions)
2.Economic Thinking/Reasoning
3.Economic Principles/Theory
4.Economic Policy Options
5.Economic Institutions

20. Basics: 1.) Terminology The language of Economics.
The world through “economics” glasses
You need to learn French to participate in a French literature class
You need to learn chemical notation to succeed in Chemistry
You need economic language to understand Economics

21. Basics 2.) Economic Reasoning
Choices made under conditions of scarcity involve tradeoffs:
advantages and disadvantages: costs and benefits: incentives and disincentives.
Economic reasoning is making decisions by comparing costs and benefits.

22. The Rationality Assumption
An individual makes decisions based on maximizing his or her own self-interest.
Therefore
People do not intentionally make decisions that would leave them worse off

23. Non-Satiation Assumption
More goods are always preferable to fewer goods; people are never satiated
People will always pick a job with the highest wage
People will always eat 10 pieces of pizza instead of 1

24. Costs and Benefits
The relevant costs and benefits to economic reasoning are the expected incremental or additional costs incurred and the expected incremental or additional benefits of a decision
That is only the costs and benefits that will be affected by the decision are considered
ADDITTIONAL costs or ADDITIONAL benefits

25. Marginal Cost, Marginal Benefit
M.C.(marginal cost) is the extra cost associated with the additional activity….
M.B.(marginal benefit) is the extra benefit associated with the additional activity….
$’s are used to measure these in order to facilitate comparisons

26. No Sunk Costs Sunk Costs
Have already been incurred and will not change as a result of the decision you are about to make.
Represent past decisions.
Are therefore not counted in a cost benefit decision
Ie: Cost of factory, rental costs, training costs, membership costs

27. ECONOMIC DECISION MAKING RULE: (COST/BENEFIT)
If the benefits of an action exceed the costs
DO IT
If the costs of an action exceed the benefits
DON’T DO IT
In the case of more than one alternative
CHOOSE THE ACTION WITH THE GREATEST
NET ADVANTAGE

28. Opportunity Cost The basis of economic cost benefit analysis
When a choice is made in favour of one alternative, another alternative is given up
The next best alternative that is given up when a choice is made is called the opportunity cost of the choice.

29. THE OPPORTUNITY COST of an action is the next best foregone alternative.

30. Cost Benefit Exercise: Example of economic decision making in action: Should I Go To University?
Consider the “marginal” costs: and the “marginal” benefits of this decision.
Consider the Opportunity Cost

31. Opportunity Cost Example
Cost of 1 year of University:
Tuition: $5000
Books: $500
Opportunity Cost of 1 year University:
40 hr/week, 50 weeks/year,
$20/hour $40,000
Total University Cost: $45,500

32. Basics: 3.)Theory
Simplified statement/ generalization about some part of the economy, based on assumptions
Assumptions define the circumstances under which a theory is likely to apply
ceteris paribus assumption -everything else held constant
Abstraction from reality
Helps us to understand/explains some part of the economy

33. Theory Assumptions Assumptions  Set the Stage  Simplify
Why make Assumptions?
 Set the Stage
 Simplify
In order you understand a theory, you must understand the assumptions underlying the theory.

34. Theory Method Model: observe patterns in raw data
generalize about the observed pattern
Model:
name for more specific statement of a theory

35. Testing Theories
It is wrong to judge the validity of a theory on the basis of
the “unrealistic” assumptions.
how closely it represents reality.
A model is “good” if it yields usable predictions and explanations of the real world
when a model is no longer supported by factual evidence, it is “no good”
we need a new theory

36. Basics: 4) Policy
In order to carry out effective policy, the policy maker must understand how the economy works
The is called POSITIVE ECONOMICS; The economics of facts & theory
-ie: Minimum wage increase causes unemployment increase

37. Basics: 4) Policy
In order to conduct policy, the policy maker must have some goals in mind
NORMATIVE ECONOMICS is the study of what the goals of the economy should be
-ie: We should lower the minimum wage in order to lower unemployment

38. Basics: 4) Policy
Formulated to achieve the normative GOALS for the economy
Efficiency: use all our resources, (full employment), use them in the best way possible.
Equity in the distribution of income
Economic Growth
Stability: stable prices, stable growth
Full Employment: Everyone looking for a job finds one fairly quickly

39. Basics 5.) Economic Institutions
Economic Institutions emerge from a complicated combination of historical circumstance & economic, cultural, social & political pressures.
Corporations, governments and cultural norms are all economic institutions. They differ significantly among nations
Institutions give models context