Unit 1 - Introduction to Microeconomics
• Economics is broken up into 2 Segments:
• 1) Microeconomics - studies the behavior of
individual economic entities such as the
Consumer, Firm, and Worker, households.
• 2) Macroeconomics - studies the behavior of the
SUM TOTAL of all individuals in society;
Consumer Sector, Business Sector, Labor Force,
Nations.
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Unit 1
COVERING SOME OF THE
BASICS
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Why Study Economics?
• 1) To Learn a Way of Thinking about Society and
our World.
• 2) To Understand Global Issues.
• 3) To Be an Informed Voter.
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Terminology
• 1) Economic Theory - a statement about the
cause and effect of a given occurrence.
• Example: An increase in the price of gas will
cause people to drive less.
• Other Examples?
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Examples of Economic Theories
• Increase in the number of fast-food restaurants
results in lower prices and higher quality
• Increase in the interest rates results in increase in
savings
• If consumer spending increases, GDP increases.
• If the price of beef goes up, consumer demand for
poultry increases.
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“You can’t always get what you want”
• 2) Scarcity - this occurs when there is a finite
amount of something available.
• All resources (land, labor, capital) are considered
to be scarce.
• Examples: trees, oil, income, time, books in the
library, etc.
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Economics Studies Best
Decisions with Scarce Resources
• Scarcity drives all our decision-making and
our behavior because we have to CHOOSE
– A new pair of shoes or books for class
– Should the govt. product more submarines or
build space ships to go to Mars
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Terminology cont.
• 3)Economic Resources – anything provided by
nature or previous generations that can be used to
satisfy human wants.
• In economics, we classify resources as to fitting
into one of 4 types:
– Land
– Labor
– Capital
– Entrepreneurship
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Resource -Labor (L)
• Collective size and effort of a nation
• Labor Force
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Resource- Capital (k)
• This is different than capital - $
• Manufactured productive assets in a nation
– Buildings
– Tools
– Machinery
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Resource – Land (l)
• A nations stock of minerals, timber,
fisheries, water
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Entrepreneurship (or
technology:A)
• Nations ability to creatively combine land,
labor, and capital to produce goods and
services
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Resources cont.
• Example: Lemonade Stand
• Output – Lemonade
• Resources (Inputs) – lemons, water, pitcher,
sugar, water, sign.
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Resources cont.
• How are the resources for the Lemonade Stand
classified into Land, Labor, and Capital?
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Is Cash a Resource?
• No. Why?
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Terminology cont.
• 4) Explicit Cost - money spent on a good or
service.
• Example: You spend $1.00 to purchase an Ice
Tea.
• 8) Opportunity Cost – the highest valued
alternative that must be forgone when another
alternative is chosen.
• Example: The opportunity cost of studying is the
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fun you can have going out with friends.
Opportunity Cost
• 5) Opportunity Cost – the highest valued
alternative that must be forgone when
another alternative is chosen.
• Example: The opportunity cost of studying
is the fun you can have going out with
friends.
• You measure opportunity cost the price of
the product or experience – ie. Explicit cost
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Opportunity Cost cont.
• Example: The opportunity cost of going to
college is the income you could have earned by
working.
• Other Examples?
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Terminology cont.
• 6) Economic Cost – the sum of Explicit Costs and
Opportunity Costs.
• Example: What is the Economic Cost of going to
Aruba over Spring Break?
• Explicit Costs:
• Opportunity Costs:
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Terminology cont.
• 7) Rationality - this is a major assumption in
economics.
• This occurs if you act in a manner which
maximizes your own self interest or “utility”
– Utility describes happiness, usefulness, or economic
benefits
• Benefits > Costs.
– Provides most happiness > Provides unhappiness
• Every decision you make is rational because you
would never do something if the costs outweighed20
the benefits. Always looking for net benefit
Rationality cont.
• Example: Buying a new car:
• Benefit - It runs well, you like how it looks.
• Cost - Money spent.
• Example: Attending class:
• Benefit - Learn something, getting notes.
• Cost - Being bored, the opportunity cost of what
else you could be doing; spending time with
friends, sleeping, etc.
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Rationality cont.
• In economics we assume everyone is rational.
• You would never choose to do something unless
the benefits of doing so were at least as great as
the costs.
• You are always weighing the benefits and costs of
every decision you make whether you realize it or
not!
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When does a consumer make an
irrational decision?
• If the information they have is incomplete
or flawed
– Smoking cigarettes
– Spraying DTC in your garden
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Marginal Analysis
• Assume people make decision to maximize
their net benefit
– Ie. Benefit > Cost
• This is not done all at once but in steps.
• Each step is an additional benefit from the
step before
• In economics, we count each step as a unit
and apply a value
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Marginal Analysis cont.
• The next unit is referred to as the “marginal
benefit”
• A unit could also be a cost or a “marginal
cost”
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Marginal Benefit and Marginal
Cost of buying a Porsche
# of Porsche’s Marginal
bought
Benefit
Marginal
Cost
Net Benefit
Should I buy
it?
1
$100,000
$50,000
$50,000
Yes
2
$80,000
$50,000
$30,000
Yes
3
$50,000
$50,000
-0-
Yes
4
$30,000
$50,000
-$20,000
No
5
$10,000
$50,000
-$40,000
No
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At the Margin
• At the third Porsche, I’ve bought “at the
margin”
• My total benefit is maximized
• Why do you think this is an important
concept?
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Terminology cont.
• 9) Ceteris Paribus - all else is held constant.
Usually this is stated after an economic theory is
proposed.
• Example: An increase in the Price of gas causes
people to drive less, holding all other variables
that could affect driving constant.
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Efficiency
• 10) Efficiency - in economics, this occurs when
firms and/or the economy produce what people
want at the lowest cost possible.
• Example: Suppose Jake owns an Ipad but wants a
Mini Ipad and John owns a Mini Ipad but wants a
regular Ipad.
• If they engage in trade, the outcome is efficient.
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Efficiency cont.
• Example: Suppose Idaho was better suited to
produce potatoes and Kansas was better suited to
produce corn.
• What if there was a law stating Idaho can only
produce corn and Kansas can only produce
potatoes, the result would be inefficient.
• Example: If a town’s population were all
vegetarians and half of the town’s resources were
used to produce meat, the end result is inefficient.30
Terminology cont.
• 11) Sunk Costs - costs that can not be recovered
once they have been incurred.
• Example: Suppose you spend $10 on a Pizza.
You take a bite and it has a bad taste.
• Should you eat it since you spent $10?
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Sunk Costs cont.
• That $10 is Sunk and should be ignored when
making a decision.
• What matters now are the future costs you will
incur from continuing to eat the Pizza.
• Example: You have tickets to a football game that
is a 1 hour drive away. There is a terrible blizzard
outside.
• Do you go to the game since you already spent
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money on the tickets?