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 ‘Economic’ variables and behavior -- prices, employment, production, profits, labor supply, consumption and savings  ‘Non Economic’ variables behavior -- marriage, fertility, crime, discrimination, health, politics and voting  Institutions and Social Norms All rights reserved by

 “The study of economies, at both the level of the individual and the society as a whole”  Economies -- “the system of coordinating society’s productive activities”  Market economies -- decentralized decision making coordinated through prices  Command Economies -- centralized decision making All rights reserved by

 The study of the effect of scarcity on society  The study of how society answers the following questions:  What goods and activities will be produced in society  How will the goods be produced  Who will produce the goods  Who gets to consume the goods All rights reserved by

 Micro -- study of how individuals make decisions and interact with others in society  Macro -- study of aggregate behavior of the economy (inflation, unemployment, growth) All rights reserved by

This Course is Required  Business School and Economic Major  Way to Complete Social Science Requirement  Parents  To Understand How the Economy Works  For the Pure Purpose of Gaining Knowledge  Personal Gain  To Better Society All rights reserved by

But will it be hard? All rights reserved by

But how you study can make a difference ! All rights reserved by

 Previous quote written in “Economics of Welfare”  Professor at Cambridge  Friend of Keynes  Pigovian Solution to the problem of externalities All rights reserved by

 Do Reading Assignment (once is not always enough)  On Student CD-ROM  Go through Student PowerPoint Slides for Review  Do Student Quiz  Download Lecture Slides from Web  Attend Lecture  Do Graded Homework on ‘Homework Advantage’ Ask questions in class, , office hours  Start a Study Group All rights reserved by

1.What is microeconomics & how are economic models constructed? 2.Buyers, Sellers, & Markets All rights reserved by

 Microeconomics examines small economic units, the components of the economy.  For example: individuals, households, firms, industries  Macroeconomics looks at aggregates.  For example: national output, overall price level, aggregate unemployment All rights reserved by

 The current course goes into more depth and adds details to the groundwork laid in the introductory course. All rights reserved by

1. Define the problem and phenomena to be investigated. 2. Formulate a hypothesis about the relationships among the relevant variables. 3. Determine testable predictions from the hypothesis. 4. Test the accuracy of the predictions using real world data. 5. Accept or revise the theory on the basis of the tests conducted. All rights reserved by

 The assumptions should be easy to handle, sufficiently realistic, and not overly restrictive.  Without the simplifying assumptions, the analysis can be unmanageable.  If the assumptions are overly simplistic, the model may fail to explain real-life behavior.  The test of a theory is whether it explains what it is designed to explain. The predictions should be consistent with reality.  The world acts as if the assumptions held.  The assumptions need not hold precisely. All rights reserved by

 The interaction of buyers & sellers of a good or service All rights reserved by

1. What goods & services should be produced and how much? 2. How should the goods & services be produced? 3. Who gets the goods & services? 4. How do changes in the production & distribution mixes take place? All rights reserved by

 What & how much to produce: determined by demand & supply conditions, individual choices, & pursuit of profit.  How to produce: determined by technology & resource costs.  Distribution: based on ability & willingness to pay the price.  What if consumer wants or technology change? Those changes alter demand & supply, which changes prices, profits, & consequently output levels & distribution. All rights reserved by

Households & Resource Owners Firms Product Markets Resource or Factor Markets money to pay for goods & services goods & services labor & other resources resource payments such as wages, rents, & interest All rights reserved by

 In some less developed nations, a traditional economic system is used.  Custom & tradition determine the answers.  Social arrangements & culture dictate the solutions.  Change occurs only very gradually. All rights reserved by

 Resources are government/publicly owned and centralized control is used to determine what is produced, how it is produced, and how it is distributed. All rights reserved by

 They have mixed economies with both market and government sectors.  In this course, we will deal primarily with the market system. All rights reserved by

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 The lower the price of a good, the larger the quantity consumers will buy.  So the demand curve slopes downward from left to right. All rights reserved by

 Demand is the entire curve that shows the relation between price & quantity purchased.  Quantity demanded is one particular quantity on the demand curve. All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) D $ The demand for apples is the curve D. The quantity demanded of apples when the price is 25 cents is 6 thousand bushels. All rights reserved by

1. Consumer income 2. Prices of substitutes and complements 3. Tastes 4. Consumer expectations All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) D1D1 If income increases, people will buy more apples at every price & the entire curve will shift to the right. D2D2 All rights reserved by

 In other words, what causes a movement along the demand curve for apples?  A change in the price of apples.  That’s it, only a change in the price of apples. All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) D $ Suppose the price of apples falls from 25 cents to 20 cents. Then the quantity demanded of apples rises from 6 thousand bushels to 8 thousand bushels. 8 $ 0.20 All rights reserved by

 The higher the price of a good, the larger the quantity firms will be willing to produce and sell.  So the supply curve slopes upward from left to right. All rights reserved by

 Supply is the entire curve that shows the relation between price & quantity provided.  Quantity supplied is one particular quantity on the supply curve. All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) S $ The supply of apples is the curve S. The quantity supplied of apples when the price is 22 cents is 7 thousand bushels. All rights reserved by

1. Technology 2. Prices of inputs (for example: land, labor, machinery, raw materials) 3. Weather (in the case of agriculture) All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) S1S1 If rainfall is low, the supply of apples will be reduced. At each price, there will be fewer apples provided. S2S2 All rights reserved by

 What causes a movement along the supply curve for apples?  Just a change in the price of apples. All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) S $ When the price of apples falls from 22 cents to 20 cents, the amount provided falls from 7 thousand bushels to 6 thousand bushels. $ All rights reserved by

 It is a state of balance, where there is no tendency for things to change. All rights reserved by

PQDQD QSQS condition price pressure excess supply Q D = Q S excess demand Equilibrium occurs where the quantity demanded equals the quantity supplied, which is at the intersection of the supply and demand curves. All rights reserved by

Price of apples (in dollars) Quantity of apples (in thousands of bushels) D Here the equilibrium price is 22 cents & the equilibrium quantity is 7 thousand bushels. 7 $ 0.22 S All rights reserved by

quantity D1D1 Suppose there is an increase in the price of pears (a substitute for apples). Then the demand for apples will increase. Equilibrium price increases & equilibrium quantity increases. price S Q 1 Q2Q2 P2P2 P 1 D2D2 All rights reserved by

quantity D price S1S1 Q 1 Q2Q2 P2P2 P 1 S2S2 Suppose there is a long spell of bad weather for apple growing. Then the supply of apples will decrease. Equilibrium price increases & equilibrium quantity decreases. All rights reserved by

Suppose that the surgeon general comes out with stronger health warnings. That will reduce the demand for cigarettes. Simultaneously, there is a year of bad weather. That decreases the supply of cigarettes. Example: cigarette market All rights reserved by

price quantity D1D1 S2S2 S1S1 Q1Q1 D2 D2 So S & D both decrease. The equilibrium quantity decreases. Equilibrium price may increase, decrease or stay the same. In this example, the price remained the same. P1P1 P 2 = Q2Q2 All rights reserved by