1. Microeconomics ECON 2302 May 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapters 1 & 2

2. Please fill out and return index card - PRINT LEGIBLY: 1. Your name 2. year in college (1st, 2nd, etc.) 3. major - or “deciding” 4. ECON course in high school - “yes” or “no” 5. If you’re working this semester, whether as volunteer or for pay, approx. # of hours/week, - or “N/A” 6. Last math class successfully completed in college - or “N/A” 7. Last economics class successfully completed in college - or “N/A” 8. Usual source of local & national news 9. Any particular topic you’d like us to consider as part of this course 10. Career goal(s)

3. Today’s topics: 4 Introduction to course 4 Introduction to/review of basic economics concepts 4 Introduction to/review of basic microeconomics concepts and models

4. Syllabus - http://www.cob.tamucc.edu/mspencer/ http://www.cob.tamucc.edu/mspencer/ 4 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

5. Chapters 1 & 2 Introduction to Economics 4 Basic definitions 4 Basic assumptions 4 Hubbard chapters

6. 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 1 2 3 4 5

7. 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.

8. 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

9. 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)

10. 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

11. 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

12. 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?

13. 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

14. 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:

15. 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.

16. 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.

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

18. Mid-class topics review: 4 Syllabus 4 Definitions: Ü economics Ümicroeconomics/macroeconomics Ü resources Ü allocation Ü distribution Ü scarcity Ü opportunity cost Ü market Üefficiency Üequity

19. Quiz 1 Before class on Monday, May 18, send me an email from the email address you’ll be using regularly during this course. My email address is marilyn.spencer@tamucc.edu. marilyn.spencer@tamucc.edu 4 points

20. Questions?

21. Additional topics: 4 Construction of models 4 Positive & normative analysis 4 Role of assumptions 4 Two models ÜCircular flow ÜProduction possibilities

22. After studying this chapter, you should be able to: Use a production possibilities frontier to analyze opportunity cost and trade-offs. Understand comparative advantage and explain how it is the basis for trade. Explain the basic idea of how a market system works. LEARNING OBJECTIVES 1 2 3

23. Economists generally use a scientific approach: 4 Scientific method 4 Making assumptions 4 Constructing economic models ÜAbstract ÜSimplified

24. Why economists don’t all agree: Different assumptions, which lead to and/or arise from: 4 Different models (positive analysis) 4 Different values (normative analysis)

25. Review of Positive v. Normative Analysis:  Positive statements are statements that describe the world as it is. ÜCalled descriptive analysis  Normative statements are statements about how the world should be. ÜCalled prescriptive analysis

26. The Role of Assumptions 4 Economists make assumptions in order to make the world easier to understand. 4 The art in scientific thinking is deciding which assumptions to make. 4 Economists use different assumptions to answer different questions.

27. Production Possibilities Frontier The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology.

28. Production Possibilities Frontiers and Real-world Trade-offs Graphing the Production Possibilities Frontier 2 - 1 BMW’s Production Possibilities Frontier

29.  Drawing a Production Possibilities Frontier for Rosie ’ s Boston Bakery 2 - 1 LEARNING OBJECTIVE 1 Hours Spent MakingQuantity Made ChoiceCakesPiesCakesPies A5050 B4142 C3234 D2326 E1418 F05010

30. Production Possibilities Frontiers and Real-world Trade-offs Increasing Marginal Opportunity Costs 2 - 2 As the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in aircraft carrier production. More funds for tsunami relief meant less funds for other charities. Trade-offs and Tsunami Relief 2 - 1

31. Review: Why is the PPF drawn with this particular shape? What would be the implications of a different shape?

32. Production Possibilities Frontiers and Real-world Trade-offs Economic Growth Economic Growth The ability of the economy to produce increasing quantities of goods and services. 2 - 3 Economic Growth

33. Concepts Illustrated by the Production Possibilities Frontier 4 Efficiency 4 Fixed technology 4 Tradeoffs 4 Opportunity Cost 4 Economic Growth

34. What would it look like if…? 4 Not all resources were being used? 4 A new, better technology was adopted? 4 A war, hurricane or earthquake destroyed some of the resources? 4 People decided they wanted to drive bigger cars? 4 More resources were discovered? 4 A percentage of the workers became infected with AIDS?

35. Trade LEARNING OBJECTIVE 2 Trade The act of buying or selling. Specialization and Gains from Trade 2 - 4 Production Possibilities for You and Your Neighbor, Without Trade

36. Trade Specialization and Gains from Trade 2 - 5 Gains from Trade

37. Trade Absolute Advantage Versus Comparative Advantage Absolute advantage The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources. Comparative advantage The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers. Don’t Confuse Absolute Advantage and Comparative Advantage

38. Opportunity cost of picking 1 pound of apples Opportunity cost of picking 1 pound of cherries You1 pound of cherries 1 pound of apples Your neighbor 2 pounds of cherries.5 pound of apples Trade

39. Comparative Advantage and the Gains from Trade The basis for trade is comparative advantage, not absolute advantage. A country has a comparative advantage in the production of the good for which it has a lower opportunity cost. To enjoy the gains from trade, a country should specialize in the production of the good for which it has a comparative advantage.

40. The Market System LEARNING OBJECTIVE 3 Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Product Markets Markets for good—such as computers—and services—such as medical treatment. Factor markets Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.

41. The Market System The Circular-Flow Diagram 2 - 6 The Circular-Flow Diagram Households and firms are linked together in a circular flow of production, income, and spending. Circular-flow diagram A model that illustrates how participants in markets are linked.

42. The Market System The Circular Flow Diagram Two key groups participate in markets:  A household is all the individuals in a home.  Firms are suppliers of goods and services.

43. The Market System The Gains from Free Markets Free market A market with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed. The Market Mechanism Individuals usually act in a rational, self-interested way. Adam Smith understood that people’s motives can be complex. In a famous phrase, Smith said that firms would be led by the “invisible hand” of the market to provide consumers with what they wanted.

44. The Market System The Role of the Entrepreneur Entrepreneur Someone who operates a business, bringing together the factors of production—labor, capital, and natural resources—in order to produce goods and services.

45. The Market System The Legal Basis of a Successful Market System Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. PROTECTION OF PRIVATE PROPERTY Metallica sued to stop copyright infringement of their songs on the Internet. Property Right in Cyberspace: Napster, Kazaa, iTunes 2 - 3

46. Second half of class review 4 Positive v. normative analysis 4 Role of assumptions 4 Circular-Flow Model 4 Production Possibilities Frontier ÜTrade-offs Ü Known amount of resources Ü Given level of technology Ü Changes in the amount of resources or technology

47. Review, continued 4 Definitions: Üfree market Üentrepreneur Üproperty rights

48. Reminder: Quiz 1 Before class Monday, May 18, send me an email from the email address you’ll be using regularly during this course. My email address is marilyn.spencer@tamucc.edu. marilyn.spencer@tamucc.edu 4 points

49. Reality check to be completed before class May 15: 4Read Chapters 1, 2, 3 & 4 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. 56-57). ÜProblems and Applications p. 60-61, 1.4 & 1.8; p. 62, 2.4 (1 st edition: 1, 5 and 11 on pp. 57 & 59).

50. Reality check to be completed before class May 15:  From Chapter 3: ÜRead chapter introduction and major topic headings. ÜRead Review Questions #1 “In a market system, who ultimately decides which goods and services will be produced? And also p. 92, 1.2, 1.3, 1.4; p. 93, 2.2; p. 94, 3.1, 3.2, and also: What happens to the equilibrium price in a market if the demand curve shifts to the right? Draw a demand and supply graph to illustrate your answer. (1 st edition: 1-8 on pp. 90-91). ÜRead Problems and Applications: Is it possible for a good to be an inferior good for one person and a normal good for another? If yes, cite some examples, and p. 92, 1.7; p. 93, 2.3; p. 96, 4.15 (1 st edition: 3, 4, 7, 14 & 21 on pp. 91-93).

51. Reality check to be completed before class, May 15:  From Ch. 4: ÜReview Questions:  Consumer surplus is used as a measure of a consumer’s net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit.  Why would economists use a term like “deadweight loss” to describe the impact on consumer and producer surplus from a price control?”) ÜProblems and Applications, p. 134, 4A.5, 4A.6, 4A.7 & 4A.8 (1 st edition: 1-4 on p. 129).